Department of Labor: 2003033101

Monday,
March 31, 2003
Part II
Department of Labor
Wage and Hour Division
29 CFR Part 541

Defining and Delimiting the Exemptions
for Executive, Administrative,
Professional, Outside Sales and Computer
Employees; Proposed Rule
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15560 Federal Register / Vol. 68, No. 61 / Monday, March 31, 2003 / Proposed Rules
DEPARTMENT OF LABOR ADDRESSES: Address written comments 516, which were approved by the Office
to Tammy D. McCutchen, of Management and Budget under OMB
Wage and Hour Division Administrator, Wage and Hour Division, Control number 1215–0017. See 29 CFR
Employment Standards Administration, 516.0 and 516.3.
29 CFR Part 541 U.S. Department of Labor, Room S–
II. Background
3502, 200 Constitution Avenue, NW.,
RIN 1215–AA14 Washington, DC 20210. Commenters The FLSA generally requires covered
who would like to be notified that their employers to pay their employees at
Defining and Delimiting the least the federal minimum wage (which
comments were received should include
Exemptions for Executive, is currently $5.15 an hour), and
with their comments a self-addressed,
Administrative, Professional, Outside overtime premium pay of time-and-one-
stamped postcard or submit them
Sales and Computer Employees half the regular rate of pay for all hours
certified mail, return receipt requested.
AGENCY: Wage and Hour Division, As a convenience, comments of 20 worked over 40 in a work week.
Employment Standards Administration, pages or less may be submitted by However, the FLSA includes a number
Labor. facsimile (‘‘FAX’’) machine to (202) of exemptions from the minimum wage
693–1432, which is not a toll-free and overtime requirements. Section
ACTION: Proposed rule and request for
number, or by e-mail to: whd- 13(a)(1) of the FLSA, codified at 29
comments.
reg@fenix2.dol-esa.gov. Because we U.S.C. 213(a)(1), exempts from both
SUMMARY: The Department of Labor continue to experience delays in minimum wage and overtime pay ‘‘any
proposes to update and revise the receiving mail in our area, commenters employee employed in a bona fide
regulations issued under the Fair Labor are encouraged to submit any comments executive, administrative, or
Standards Act (FLSA) implementing the by mail early, or to transmit them professional capacity * * * or in the
exemption from minimum wage and electronically by FAX or e-mail. capacity of outside salesman (as such
overtime pay for executive, FOR FURTHER INFORMATION CONTACT: terms are defined and delimited from
administrative, professional, outside Richard M. Brennan, Deputy Director, time to time by regulations of the
sales and computer employees. These Office of Enforcement Policy, Wage and Secretary, subject to the provisions of
exemptions are often referred to as the Hour Division, Employment Standards the Administrative Procedure Act
FLSA’s ‘‘white collar’’ exemptions. To Administration, U.S. Department of * * *.)’’
be considered exempt, employees must Labor, Room S–3506, 200 Constitution The FLSA does not define the terms
meet certain minimum tests related to Avenue, NW., Washington, DC 20210. ‘‘executive,’’ ‘‘administrative,’’
their primary job duties and be paid on Telephone: (202) 693–0745 (this is not ‘‘professional,’’ or ‘‘outside salesman.’’
a salary basis at not less than specified a toll-free number). Copies of this However, pursuant to Congress’ grant of
minimum amounts. The basic ‘‘duties’’ proposed rule may be obtained in rulemaking authority, implementing
tests were originally established in 1938 alternative formats (Large Print, Braille, regulations have been issued, at 29 CFR
and revised in 1940. The duties tests Audio Tape or Disc), upon request, by part 541, defining the scope of the
were last modified in 1949 and have calling (202) 693–0023 (not a toll-free section 13(a)(1) exemptions. Because the
remained essentially unchanged since number). TTY/TDD callers may dial FLSA delegates to the Secretary of Labor
that time. The ‘‘salary basis’’ test has toll-free 1–877–889–5627 to obtain the power to define and delimit the
remained essentially unchanged since information or request materials in specific terms of the exemptions
1954. The salary levels required for alternative formats. through notice-and-comment
exemption were last updated in 1975, Questions of interpretation and/or rulemaking, the regulations so issued
and the amounts adopted at that time enforcement of regulations issued by have the binding effect of law.1
were intended as an interim adjustment. this agency or referenced in this notice These exemptions have engendered
Suggested changes to the part 541 may be directed to the nearest Wage and considerable confusion over the years
regulations have been the subject of Hour Division District Office. Locate the regarding who is, and who is not,
public commentary for years, including nearest office by calling our toll-free exempt. The implementing regulations
a review of the regulations by the U.S. help line at 1–866–4USWAGE (1–866– generally require each of three tests to
General Accounting Office (GAO) in 487–9243) between 8 a.m. and 5 p.m. in be met for the exemption to apply: (1)
1999. GAO recommended that the your local time zone, or log onto the The employee must be paid a
Secretary of Labor comprehensively Wage and Hour Division’s Web site for predetermined and fixed salary, not an
review and make necessary changes to a nationwide listing of Wage and Hour hourly wage that is subject to reductions
the part 541 regulations to better meet District and Area Offices at: http:// because of variations in the quality or
the needs of both employers and www.dol.gov/esa/contacts/whd/ quantity of work performed (the ‘‘salary
employees in the modern work place, america2.htm. basis test’’); (2) the amount of salary
and to anticipate future work place paid must meet minimum specified
SUPPLEMENTARY INFORMATION: amounts (the ‘‘salary level test’’); and (3)
trends. During 2002, the Department of
Labor convened a series of stakeholder I. Paperwork Reduction Act the employee’s job duties must
meetings, and heard suggestions for primarily involve managerial,
This proposed rule contains no new administrative or professional skills as
changes from over 40 interest groups information collection requirements
representing employees and employers. defined by the regulations (the ‘‘duties
subject to review and approval by the tests’’).
The Department of Labor has carefully Office of Management and Budget under
examined issues of concern raised by the Paperwork Reduction Act of 1995 Legislative History
various interested parties in developing (44 U.S.C. 3501, et seq.). The Section 13(a)(1) was included in the
this proposed rule. The Department now information collection requirements for original FLSA of 1938, and was based
invites public comment on all aspects of employers who claim exemption under on provisions contained in the earlier
the proposed rule. 29 CFR part 541 are contained in the
DATES: Submit written comments on or general FLSA recordkeeping 1 See Batterton v. Francis, 432 U.S. 416, 425 n.
before June 30, 2003. requirements codified at 29 CFR part 9 (1977).
Federal Register / Vol. 68, No. 61 / Monday, March 31, 2003 / Proposed Rules 15561
National Industrial Recovery Act and employees as part of the 1996 FLSA Department began a more
state law precedents. Specific references Amendments.6 comprehensive review leading to a 1985
in the legislative history to the Advance Notice of Proposed
Regulatory History
employee exemptions contained in Rulemaking (ANPRM) that reopened the
section 13(a)(1) are scant. However, the The FLSA became law on June 25, public comment period and broadened
exemptions were premised on the belief 1938, and the first version of part 541 the review to all aspects of the
that the workers exempted typically was issued later that year in October (3 regulations (50 FR 47696; Nov. 11,
earned salaries well above the minimum FR 2518; Oct. 20, 1938). In 1940, after 1985).
wage, and they were presumed to enjoy receiving many comments on the The Department revised these
other compensatory privileges such as original regulations, the Wage and Hour regulations in the early 1990s to address
above average fringe benefits, greater job Division convened a series of public two specific issues. A 1990 law (Pub. L.
security and better opportunities for hearings for interested parties to express 101–583; Nov. 15, 1990) required
advancement, setting them apart from views on the regulations and to propose regulations to be issued permitting
the nonexempt workers entitled to amendments. Revised regulations were computer systems analysts, computer
overtime pay.2 Further, the type of work issued in October 1940 (5 FR 4077; Oct. programmers, software engineers, and
15, 1940).7 Further hearings were other similarly-skilled workers in the
they performed was difficult to
initiated in 1947, leading to revised computer field to be exempt, including
standardize to any time frame and could
regulations that were issued in those paid on an hourly basis if the
not be easily spread to other workers
December 1949 (14 FR 7705; Dec. 24, hourly rate exceeded 61⁄2 times the
after 40 hours in a week, making
1949).8 An explanatory bulletin applicable minimum wage. (57 FR
enforcement of the overtime provisions interpreting some of the terms used in 46744; Oct. 9, 1992). Also, in 1992, the
difficult and generally precluding the the regulations was published as Department issued a final rule to modify
potential job expansion intended by the subpart B of part 541 on December 28, the exemption’s requirement for
FLSA’s time-and-a-half overtime 1949 (14 FR 7730), and became effective payment on a ‘‘salary basis’’ as applied
premium.3 on January 25, 1950. On March 9, 1954, in the public sector for otherwise
Initially, persons employed in a ‘‘local the Department issued proposed exempt employees paid according to
retailing capacity’’ were also exempt, revisions to the regulatory pay and leave systems based on
but Congress eliminated that language interpretations of ‘‘salary basis’’ (19 FR principles of public accountability.
from the section 13(a)(1) exemptions in 1321), followed by a final rule issued on Under 29 CFR 541.5d (57 FR 37677;
1961 when the FLSA was expanded to July 17, 1954 (19 FR 4405). The Aug. 19, 1992), an otherwise exempt
cover retail and service enterprises.4 regulations were revised in 1958 to public sector employee does not lose
Teachers and academic administrative adjust the salary levels (23 FR 8962; exempt status under a regulated public
personnel were added to the exemption Nov. 18, 1958).9 Further changes were sector pay and leave system that
when elementary and secondary schools made to accommodate statutory requires partial-day (or hourly)
were made subject to the FLSA in 1966. amendments to the FLSA and/or to deductions from pay for employee
The Education Amendments of 1972 increase the salary levels in 1961, 1963, absences not covered by accrued leave,
made the Equal Pay provisions, section 1967, 1970, 1973, and 1975.10 The or for budget-driven furloughs.
6(d) of the FLSA, expressly applicable existing salary rates were last revised on
an interim basis in 1975 (see 40 FR Overview of Existing Requirements
to employees who were otherwise
exempt from the FLSA under section 7092; Feb. 19, 1975). Revisions to The implementing regulations in part
13(a)(1). A 1990 enactment expanded increase the salary rates in January 1981 541 contain specific criteria that define
the exemption to include computer (issued at the end of the Carter each category of exemption provided by
systems analysts, computer Administration) were stayed section 13(a)(1). The applicability of any
programmers, software engineers, and indefinitely by the incoming Reagan particular exemption is not presumed
similarly skilled professional workers, Administration (46 FR 11972; Feb. 12, under the FLSA, but must be
including those paid on an hourly basis 1981). Based on petitions from industry affirmatively established. Job titles,
if paid at least 61⁄2 times the minimum groups to address other parts of the nomenclature, or job descriptions do not
wage.5 The compensation test for rules, and developing case law, the determine the exemptions, nor does
computer-related occupations was paying a ‘‘salary’’ rather than an hourly
subsequently capped at $27.63 an hour 6 29 U.S.C. 213(a)(17), as added by the 1996 FLSA rate. Rather, whether an exemption
(61⁄2 times the former $4.25 minimum Amendments (sec. 2105(a), Public Law 104–188, applies depends on the specific duties
110 Stat. 1755 (Aug. 20, 1996)). and responsibilities of each employee’s
wage) when Congress increased the 7 See, ‘‘Executive, Administrative, Professional
minimum wage to its current $5.15 rate * * * Outside Salesman’’ Redefined, Wage and
job, how much salary the employee is
and enacted the new section 13(a)(17) Hour Division, U.S. Department of Labor, Report paid, and whether the salary is
exemption for such computer and Recommendations of the Presiding Officer guaranteed without regard to the quality
(Harold Stein) at Hearings Preliminary to or quantity of work performed, as
Redefinition (Oct. 10, 1940) (‘‘Stein Report’’).
2 Report of the Minimum Wage Study 8 See, Report and Recommendations on Proposed
defined by the regulations.
Commission, Volume IV, pp. 236 and 240 (June Revisions of Regulations, part 541, by Harry Weiss,
The duties tests differ for each
1981). Presiding Officer, Wage and Hour and Public category of exemption. Two different
3 Id. Contracts Divisions, U.S. Department of Labor (June salary (or fee) levels exist for each of the
4 Public Law 87–30, 75 Stat. 65 (May 5, 1961). 30, 1949) (‘‘Weiss Report’’). exemptions for executive,
Although Congress eliminated the separate, broad 9 See, Report and Recommendations on Proposed
administrative, and professional
exemption for retail employees in 1961, such Revisions of Regulations, part 541, under the Fair
employees could still qualify as exempt executive, Labor Standards Act, by Harry S. Kantor, Presiding employees. The salary requirements do
administrative or professional employees if they Officer, Wage and Hour and Public Contracts not apply to certain licensed or certified
met the requirements for these exemptions, and Divisions, U.S. Department of Labor (March 3, doctors, lawyers and teachers, or to
Congress relaxed the duties tests solely to make it 1958) (‘‘Kantor Report’’). outside sales employees. Employees
easier for such firms to meet the exemption 10 See, 26 FR 8635 (Sept. 15, 1961); 28 FR 9505
requirements. (Aug. 30, 1963); 32 FR 7823 (May 30, 1967); 35 FR
paid below the applicable lower salary
5 Public Law 101–583, 104 Stat. 2871 (Nov. 15, 883 (Jan. 22, 1970); 38 FR 11390 (May 7, 1973); and rate are not exempt regardless of their
1990). 40 FR 7091 (Feb. 15, 1975). duties. Those paid above the higher (or
‘‘upset’’) salary rate are exempt if they or learning customarily acquired by include ‘‘discretion and independent
meet a ‘‘short’’ duties test. Those paid prolonged, specialized, intellectual judgment’’ or decision-making
between the higher and lower salary instruction and study, or (2) work that responsibilities on important matters in
rates must meet a more detailed ‘‘long’’ is original and creative in a recognized managing the employer’s general
duties test. field of artistic endeavor, or (3) teaching business operations (e.g., if they
The salary tests were originally in a school system or educational primarily determine or affect
designed to operate as a ready guide to institution, or (4) work as a computer management policies in a particular
assist employers in deciding which systems analyst, computer programmer, area, such as credit, personnel, or labor
employees were more likely to meet the software engineer, or other similarly- relations). Executive assistants
duties tests in the exemptions. In fact, skilled worker in the computer software delegated decision-making authority to
the salary levels specified in the field; and perform work requiring the carry out parts of an exempt executive
regulations were once viewed as the consistent exercise of discretion and or administrative employee’s
best indicator of exempt status. As last judgment, or work requiring invention, management responsibilities may also
revised effective April 1, 1975, the imagination, or talent in a recognized qualify as exempt administrative
salary required for executive and field of artistic endeavor. Under the employees.
administrative employees under the professional exemption, the salary or fee The professional exemption (aside
current ‘‘long’’ test is $155 per week; requirement does not apply to certain from the artistic, teaching, and
professional employees are exempt at licensed or certified doctors, lawyers computer-related categories) applies to
$170 per week. The short test salary and teachers; or to certain computer- the recognized professions requiring
level (requiring fewer duties to be related occupations if paid on an hourly advanced knowledge in a field of
satisfied) for all three exemptions is basis at $27.63 or more per hour. An science or learning customarily acquired
$250 per week. Because these salary ‘‘outside sales’’ employee who is by a prolonged course of specialized
levels have not been raised in 28 years, customarily and regularly engaged away intellectual instruction and study (i.e.,
virtually all employees are tested for from the employer’s places of business the ‘‘learned’’ professions, such as
exemption today under the ‘‘short’’ making sales or obtaining orders or doctor, lawyer, architect, engineer, etc.),
duties tests. Moreover, while the contracts for services or use of facilities, and is typically characterized by
existing salary tests ($155, $170, and and who does not exceed a twenty possession of the appropriate academic
$250 per week) still reflect the interim percent tolerance per work week degree for the particular profession.
1975 rates, a full-time minimum wage performing duties unrelated to his or Outside sales employees must regularly
worker today earns $206 per week for a her own outside sales or solicitations, is work away from their employer’s place
40-hour work week. Consequently, the exempt. There are no salary or fee of business making sales or obtaining
existing salary tests no longer provide requirements for outside sales orders or contracts; they may not exceed
employees or employers any help in employees. a 20 percent tolerance for performing
distinguishing between bona fide Employees meeting the foregoing duties unrelated to their own outside
executive, administrative, and requirements are excluded from the sales work. ‘‘Inside sales’’ employees are
professional employees and those who Act’s minimum wage and overtime not included within the scope of the
should not be considered for exemption. protections. Thus, they may work any exemption for ‘‘outside sales’’
Moreover, the outdated salary tests and number of hours in the work week and employees.
complex duties tests in the current are not subject to the Federal law’s Under the regulatory ‘‘salary basis’’
regulation cause employees to be overtime pay requirements. Some state test codified at 29 CFR 541.118, partial-
erroneously misclassified as exempt and laws have stricter exemption standards day deductions from pay based on the
thus not paid properly. than those just described. The FLSA number of hours worked (‘‘pay-
Under the currently applicable does not preempt any such stricter State docking’’) are generally not allowed in
‘‘short’’ test exemption requirements, an standards. If a State or local law the private sector (unless made in the
exempt ‘‘executive’’ employee must be establishes a higher standard than the first or last weeks of employment or due
paid at least $250 per week on a salary provisions of the FLSA, the higher to unpaid leave taken pursuant to the
basis, have a primary duty to manage standard applies. See section 18 of the Family and Medical Leave Act, 29
the enterprise or a customarily FLSA, 29 U.S.C. 218. U.S.C. 2601 et seq.). Disciplinary
recognized department or subdivision The executive and administrative
deductions from pay also violate the
thereof, and regularly direct the work of exemptions apply generally to certain
‘‘salary basis’’ test (except for safety
two or more other employees. An management and staff-level positions
rules of major significance, such as no-
exempt ‘‘administrative’’ employee within an employer’s organization. For
must be paid at least $250 per week on example, department heads with smoking rules in oil refineries and coal
a salary or fee basis, have a primary management as their primary duty, who mines). These concepts clarify the
duty of office or non-manual work regularly supervise two or more full intended meaning of the requirements
directly related to management policies time employees in their department, for payment of a guaranteed salary—i.e.,
or general business operations of the may qualify as executives if they are the predetermined salary amount may
employer or the employer’s customers paid a predetermined salary of $250 or not be reduced because of variations in
(or similar functions in the more per week. An administrative either the quality or quantity of the
administration of a school system or employee must primarily perform office work performed by the employee. Pay
educational institution in work directly or nonmanual work of substantial practices not meeting the guaranteed
related to academic instruction), and importance to the management of the ‘‘salary basis’’ requirements cause the
perform work requiring the exercise of business, but is not required to exemption to be declared inapplicable,
discretion and independent judgment. supervise other employees. Persons in some cases for entire classes of
An exempt ‘‘professional’’ employee with functional (rather than employees.11
must be paid at least $250 per week on departmental) management authority, or 11 As noted, a special rule applies to employees
a salary or fee basis; have a primary who perform ‘‘staff’’ rather than of public agencies paid according to regulated pay
duty of (1) work requiring knowledge of production or sales work, may qualify as and leave systems that require deductions for
an advanced type in a field of science administrative employees if their duties partial-day absences not covered by accrued leave,
Public Commentary and the GAO have to follow precise written review the regulations and restructure
Report guidelines to perform their work, the exemptions to better accommodate
Suggested changes to the part 541 prescribed procedures were important today’s workplace and to anticipate
regulations have been the subject of to modern quality control. Employers future work place trends.
extensive public commentary for years, also believed adherence to precise The House Subcommittee on
including a report issued by the General written guidelines—one major Workforce Protections of the Committee
Accounting Office (GAO) in September distinction between exempt and on Education and the Workforce held a
1999.12 In this report, GAO chronicled nonexempt workers under the existing hearing in May 2000 to receive
the background and history of the regulations—is necessary in a modern, testimony from GAO and other
exemptions, estimated the number of efficient work place. Employers also interested parties on GAO’s September
workers who might be included within complained that the discretion and 1999 report. Testimony provided by the
the scope of the exemptions, identified independent judgment requirements for GAO, representatives of business and
the major concerns of employers and administrative and professional labor organizations, and the Department
employees regarding the exemptions, employees are confusing and applied of Labor confirmed GAO’s assessment of
and suggested possible solutions to the inconsistently by Wage and Hour the issues and the difficulty in moving
issues of concern raised by the affected Division investigators in classifying forward with constructive changes due
interests. In general, the employers similarly-situated employees, and are to the differing views of the many
contacted by GAO were concerned that particularly difficult to apply. Thus, affected and interested parties, and the
the regulatory tests are too complicated, employers were unsure how to classify potential impact of possible changes.
confusing, and outdated for the modern administrative personnel. GAO’s Representatives of worker interests
work place, and create potential liability discussions with employers and Wage opposed making changes that would
for violations when errors in and Hour Division investigators, and its remove overtime protections for workers
classification occur.13 review of compliance cases, confirmed now covered, while business interests
Employers were particularly that this part of the duties test involved and employer groups advocated
concerned about potential liability for particularly difficult and subjective modernizing the regulations to exempt
violations of the complex ‘‘salary basis’’ determinations, for both the employers more classifications of workers from
test and the exacting requirements of the and the investigators, and that it was a overtime pay.
so-called ‘‘no-docking’’ rule, which has source of contention in Department
audits. III. Summary of Current Regulatory
been the focus of lawsuits against Proposal
employers in recent years brought Employee representatives contacted
collectively by groups of highly paid by GAO, in contrast, were most Structure and Organization
managerial and professional employees. concerned that the use of the
exemptions be limited to preserve Part 541 presently contains two
This test in effect limits employers’ subparts. Subpart A provides the
existing overtime work hour limits and
ability to ‘‘dock’’ exempt employees’’ regulatory tests that define each
the 40-hour standard work week for as
pay for partial-day personal absences category of the exemption (executive,
many employees as possible. They
and disciplinary violations, which administrative, professional, and
believed the tests have become
limits employers’ ability to hold exempt outside sales). Subpart B provides
weakened as applied today by judicial
employees accountable for their time interpretations of the terms used in the
rulings and do not adequately restrict
and actions. In addition, employers exemptions. Subpart B was first issued
employers’ use of the exemptions. When
believed that limiting the administrative as an explanatory bulletin effective in
combined with the low salary test
and professional exemptions to January 1950 to provide guidance to the
levels, the employee representatives felt
‘‘nonproduction’’ employees did not public on how the Wage and Hour
that few protections remain, particularly
account for the effects of modern for low-income supervisory employees. Division interpreted and applied the
technology on employment today. They They believed that inflation has severely exemption criteria when enforcing the
also noted the traditional limits of the eroded the salary-level limitations FLSA. The Department proposes to
exemptions have blurred in the modern originally envisioned by the regulations. eliminate the current distinction
work place, citing highly skilled and Because of inflation, according to the between the ‘‘regulations’’ in subpart A
highly paid technical workers without employee representatives, the current and the ‘‘interpretations’’ in subpart B.
college degrees who do not qualify as salary test levels are now near the This will consolidate and streamline the
exempt professionals but who perform minimum wage level, rendering regulatory text, reduce redundancies,
essentially the same job as exempt application of the regulations to the and make the regulations more
engineers who have the required current work force virtually understandable and easier to decipher
academic degrees. Manufacturing meaningless. when applying them to particular
employers pointed to new technology GAO’s report noted that the factual situations, providing much-
used in factories, which requires conflicting interests affected by these requested simplification. In addition,
advanced technical skills but far less rules have made consensus difficult and eliminating the distinction between the
traditional ‘‘manual’’ labor. They also that, since the FLSA was enacted, the subpart A ‘‘regulations’’ and the subpart
told GAO that, while these workers may interests of employers to expand the B ‘‘interpretations’’ will eliminate
white collar exemptions have competed confusion regarding the appropriate
and for budget-driven furloughs (see 29 CFR with those of employees to limit use of level of deference to be given to the
541.5d).
12 Fair Labor Standards Act: White Collar
the exemptions. To resolve the issues provisions in each subpart.
Exemptions in the Modern Work Place (GAO/ presented, GAO suggested that The proposed rule reorganizes the
HEHS–99–164, September 30, 1999). employers’ desires for clear and subparts according to each category of
13 Under the FLSA, employees may sue their unambiguous regulatory standards must exemption, and consolidates common
employer (individually or collectively) for up to be balanced with employees’ desires for elements (such as a new subpart
two, or in some cases three, years of back wages,
plus an equal amount in liquidated damages and
fair and equitable treatment in the work containing common definitions), in
attorney fees and court costs, for violations of the place. The GAO recommended that the order to eliminate unnecessary
FLSA’s minimum wage and overtime requirements. Secretary of Labor comprehensively duplication and repetition of regulatory
text. Thus, after several introductory whether such occupations should be The percentage restrictions on
provisions in subpart A, the proposed treated as exempt or nonexempt, performing nonexempt work in the long
new subpart B would pertain to the including detailed information about job test do not apply to an employee who
executive exemption; subpart C would duties in such occupations. is in sole charge of an independent or
pertain to the administrative exemption; physically separate branch
Subpart A, General Regulations,
subpart D would pertain to the establishment, or to an owner of at least
§§ 541.000—.002
professional exemption; subpart E a 20 percent interest in the enterprise in
would contain provisions regarding The current regulations have several which the employee is employed. The
computer employees; and subpart F general, introductory provisions executive short duties test requires that
would contain provisions regarding scattered in various locations. The the employee have a primary duty of
outside sales employees. The proposed proposed regulations would gather these managing the enterprise (or a recognized
subpart G would include provisions provisions together into proposed department or subdivision thereof) and
regarding salary requirements subpart A. Thus, the proposed section customarily and regularly direct the
applicable to most of the exemptions, 541.000 combines an introductory work of two or more other employees.
including salary levels and the salary statement currently located at section The proposed regulations would
basis test. Subpart G would also include 541.99 and information currently streamline the current regulations by
a section on highly compensated located at section 541.5b regarding the eliminating the separate long and short
employees. Proposed subpart H would application of the equal pay provisions tests, and substituting a single standard
contain definitions and other in section 6(d) of the FLSA to duties test in proposed § 541.100. The
miscellaneous provisions applicable to employees exempt from the minimum proposed standard duties test would
all or several of the exemptions. Finally, wage and overtime provisions of the provide that an exempt executive
numerous editorial changes are FLSA under section 13(a)(1). Proposed employee must: (1) Have a primary duty
proposed throughout the rule to section 541.000 also contains new of managing the enterprise in which the
streamline and improve its clarity, language to reflect legislative changes to employee is employed or of a
delete outdated references and the FLSA regarding computer customarily recognized department or
illustrations, and remove gender- employees and information regarding subdivision thereof; (2) customarily and
specific references. the new organizational structure of the regularly direct the work of two or more
Current section 541.6, entitled proposed regulations. Proposed section other employees; and (3) have the
‘‘Petition for amendment of 541.001 relocates definitions of ‘‘Act’’ authority to hire or fire other employees
regulations,’’ has been deleted in this and ‘‘Administrator’’ from their current or have particular weight given to
proposed rule. The substance of that location in section 541.0. Finally, suggestions and recommendations as to
section, originally adopted in 1938 and proposed section 541.002 contains a the hiring, firing, advancement,
providing for interested persons to general statement that job titles alone promotion or any other change of status
petition the Administrator for desired are insufficient to establish the exempt of other employees. This standard test,
changes in these regulations, has been status of an employee. This fundamental consisting of the current short test
superseded and supplanted by concept, equally applicable to all the requirements plus a third objective
enactment of the Administrative exemption categories, currently appears requirement taken from the long test,
Procedure Act, 5 U.S.C. 553(e). in section 541.201(b) regarding represents a middle ground between the
Finally, the proposed rule deletes a administrative employees. current long and short tests.
number of discussions regarding This streamlining and simplification
Subpart B, Executive Employees,
application of the exemption to specific of the current executive exemption
§§ 541.100—.107
occupations. These discussions regulations will eliminate the long test
appeared to be outdated, relating to To qualify as an exempt executive subsections regarding the percentage
occupations and duties which may not under the current regulations, an restrictions on nonexempt work and the
exist in the 21st century economy. employee must be compensated on a discretionary powers requirement. We
However, because most stakeholders salary basis at a rate of not less than propose to eliminate these subsections
find such examples useful in applying $155 per week and meet the ‘‘long’’ for several reasons. Because of its
the regulations to specific occupations, duties test, or at a rate of not less than outdated salary level, the long test has,
we invite comments on specific $250 per week and meet an abbreviated as a practical matter, not been operative
occupations and duties which should be ‘‘short’’ duties test. The long test for many years. Reintroducing its
discussed in the regulations. In requires that an exempt executive requirements now would add new
particular, we invite comments on employee: Have a primary duty of complexity and burdens to the
occupations the exempt status of which managing the enterprise (or a recognized exemption tests. The tests are complex
has been the subject of confusion and department or subdivision thereof); and require time-testing managers for
litigation including but not limited to customarily and regularly direct the the duties they perform, hour-by-hour in
pilots, athletic trainers, funeral work of two or more other employees; a typical work week. Employers are not
directors, insurance salespersons, loan have authority to hire or fire other generally required to maintain any
officers, stock brokers, hotel sales and employees or have particular weight records of daily or weekly hours worked
catering managers, and dietary managers given to suggestions and by exempt employees (see 29 CFR
in retirement homes. The Department recommendations as to hiring, firing, 516.3), let alone perform a moment-by-
anticipates that the final rule will advancement, promotion or other moment examination of an employee’s
include additional provisions on the change of status; customarily and specific duties performed or
application of the exemptions to such regularly exercise discretionary powers; discretionary powers exercised. Yet
borderline occupations, but requires and devote no more than 20 percent (or reactivating the long test’s limitations
more information about the particular as much as 40 percent in retail or on nonexempt work could impose such
job duties and responsibilities generally service establishments) of hours worked significant new monitoring
found in such occupations. We invite per week to activities that are not requirements (and, indirectly, new
comments on which occupations should directly and closely related to recordkeeping burdens) for employers to
be included in the final rule and performing exempt managerial work. analyze the substance of each particular
employee’s daily and weekly tasks in charge executives and business owners. provides, as in the current regulation,
order to be confident of any claimed We have proposed to eliminate those that an employee with a primary duty
exemption. Further, historically, requirements only for the 20 percent of ordinary production work is not
deciding which specific activities were owner, based upon our belief that such exempt even if the employee also has
not inherently an ‘‘essential part of and an individual likely will share in the some supervisory responsibilities. This
necessarily incident to’’ the exempt profits of the enterprise and that this is situation often occurs in a factory
work proved to be a subjective and an adequate substitute indicator of setting where a collective bargaining
difficult standard to apply for exempt status. unit employee who works on a
employers, employees, as well as Wage The proposed regulations also would production line also has some
and Hour Division investigators. The reorganize, simplify, streamline and responsibility to direct the work of other
discretionary powers test has similarly update the regulations in other ways. bargaining unit employees. Another
proved to be a subjective and difficult The proposed regulations utilize example is a police officer who directs
standard to apply. Moreover, making objective, plain language in an attempt the work of other police officers on the
such finite determinations would be to make the regulations understandable conduct of an investigation but is also
made even more difficult in the to employees and employee a member of a bargaining unit.
aftermath of the decisions in Donovan v. representatives, small business owners Bargaining unit members do not become
Burger King, Corp., 675 F.2d 516 (2nd and human resource professionals. We exempt employees simply because they
Cir. 1982), Donovan v. Burger King also propose to eliminate outdated and are given some supervisory
Corp., 672 F.2d 221 (1st Cir. 1982), and uninformative examples and to update responsibilities.
similar judicial rulings which hold that definitions of key terms and phrases. The definition of the term
an exempt employee’s managerial duties The proposed regulations would move a ‘‘department or subdivision’’ remains at
can be carried out at the same time the number of sections pertaining to salary § 541.104, and the definition of ‘‘two or
employee performs nonexempt manual issues (current §§ 541.117, 541.118) to a more employees’’ remains at § 541.105.
tasks. Accordingly, given these new subpart G (discussed below), where The Department invites comments on
developments in judicial construction of all such provisions will be consolidated. whether the supervision of ‘‘two or
the law, the Department is of the view Other sections relevant to several or all more employees’’ required for
that the discretionary powers provision of the exemption categories (such as the exemption should be modified to
and the percentage limitations on definition of primary duty and a section include ‘‘the customary or regular
particular duties formerly applied under regarding application of the exemptions leadership, alone or in combination
the now dormant long test are not useful to trainees) would move to a proposed with others, of two or more other
criteria that should be reintroduced for new subpart H (Definitions and employees.’’
defining the executive exemption in Miscellaneous Provisions) to eliminate Section 541.106 of the current
unnecessary repetition. The following regulations, entitled ‘‘Authority to hire
today’s work place.
sections of the current regulations have or fire,’’ is proposed to be deleted. The
The proposed regulations at § 541.101 text in this section does not contribute
would recognize as an exempt executive been edited and moved to proposed new
subpart H: to any further explanation of the
any employee who owns at least a 20 requirement, and no further explanation
percent equity interest in the enterprise seems necessary. Section 541.107 of the
Current Section . . . Moved to Proposed
in which the employee is employed. . . . section current regulations, entitled
Section 541.102 of the proposed ‘‘Discretionary powers,’’ and § 541.112
regulations would continue the 541.101 General ........................ 541.702 of the current regulations, ‘‘Percentage
principle that an employee in ‘‘sole 541.103 Primary duty ................. 541.700 limitations on nonexempt work,’’ are
charge’’ of an independent 541.108 Work directly and also deleted from the proposed rule for
establishment or a physically separated closely related ........................... 541.703
541.109 Emergencies ................ 541.705 the reasons discussed above.
branch establishment may qualify as an
541.110 Occasional tasks .......... 541.706 Subpart C, Administrative Employees,
exempt executive. ‘‘Sole charge’’ of an 541.111 Nonexempt work gen-
establishment is defined to include the §§ 541.200–.207
erally .......................................... 541.702
senior employee with authority to make 541.116 Trainees ....................... 541.704 To qualify as an exempt
decisions regarding day-to-day administrative employee under the
operations and to direct the work of Section 541.102 of the current current regulations, an employee must
other employees. These provisions regulations, entitled ‘‘Management,’’ has be paid on a salary or fee basis at a rate
appear in the current regulations as been modified and moved to proposed of not less than $155 per week and meet
exceptions to the percentage restrictions section 541.103. the ‘‘long’’ duties test, or earn $250 per
on non-exempt work under the former Section 541.115 of the current week and meet the ‘‘short’’ duties test.
long test, in recognition of the due regulations, entitled ‘‘Working The long test requires that an exempt
weight to be given the freedom from foremen,’’ has been moved to proposed administrative employee have a primary
direct supervision and the high degree § 541.106 and renamed, ‘‘Working duty of either performing office or non-
of executive responsibility enjoyed by supervisors,’’ although no substantive manual work directly related to
the top person in charge of a separate changes are intended. A new provision management policies or general
business location, as well as the special on supervisors in retail establishments business operations of the employer or
status of a partial equity owner of an has been added as proposed § 541.107. the employer’s customers; or performing
enterprise. The Department believes that Both 541.106 and 541.107 address the functions in the administration of a
these continue to be valid concepts for difficult issue of classifying employees school system, or educational
special status as executives under the who have both exempt supervisory establishment or institution, in work
proposed restructured regulations as duties and non-exempt duties, and the directly related to academic instruction
well. The Department seeks comments Department invites comments on or training. In addition, the current
on whether the salary level and/or whether these sections have regulations require that an
salary basis requirements should be appropriately distinguished exempt and administrative employee: Customarily
eliminated as unnecessary for sole non-exempt employees. Section 541.106 and regularly exercise discretion and
independent judgment; regularly and includes an illustrative list of the types contributed to the management policies
directly assist another exempt employee of work areas that meet this of Ernst & Young because the employee
or perform work along specialized or requirement: tax, finance, accounting, played a major role in developing new
technical lines requiring special auditing, quality control, purchasing, methods for improving client services
training, experience or knowledge under procurement, advertising, marketing, and the timeliness of firm operations.
only general supervision or perform research, safety and health, personnel The proposed § 541.200 also contains
special assignments and tasks under management, human resources, a second requirement for the
only general supervision; and devote no employee benefits, labor relations, administrative exemption relating to the
more than 20 percent (or as much as 40 public relations, government relations importance of the work performed or
percent in retail or service and similar activities. The Department the high level of competence required
establishments) of work hours in a week invites comments on any other areas by the work performed—a requirement
to activities that are not directly and that should be included in this list and that an exempt employee must hold a
closely related to the performance of on any areas that should be deleted. ‘‘position of responsibility.’’ The term
exempt work. The short test requires Like the proposed changes to the ‘‘position of responsibility’’ is defined
that the employee have a primary duty executive exemption, the proposed in the proposed regulations at new
of performing office or non-manual administrative exemption focuses on § 541.202. To meet this new ‘‘position of
work directly related to management ‘‘primary duty’’ and eliminates the responsibility’’ requirement, an
policies or general business operations, percentage restrictions on non-exempt employee must either (1) perform work
which must include work requiring the work currently required by the now- of substantial importance, or (2) employ
exercise of discretion and independent inoperative long duties test, for the same a high level of skill or training. The
judgment. Under both tests, when reasons discussed above under the concept of ‘‘work of substantial
considering whether an employee’s executive exemption. importance’’ has been in the interpretive
work is ‘‘directly related to management The proposed rule would also reduce regulations since 1950, as a factor for
policies or general business operations’’ the emphasis on the so-called determining whether a worker is an
the regulations and the courts assess ‘‘production versus staff’’ dichotomy in exempt administrative employee. The
whether the work is ‘‘related to the distinguishing between exempt and proposed regulations at new § 541.204
administrative operations of the
non-exempt workers, while retaining define this phrase based on language in
business as distinguished from
the concept that an exempt the current regulations and include a
production’’—known as the
administrative employee must be revised list illustrating the types of
‘‘production versus staff dichotomy’’—
engaged in work related to the activities that are generally considered
and whether the work is ‘‘of substantial
management or general business of ‘‘substantial importance’’ for
importance to the management or
operations of the employer or of the purposes of the exemption including:
operation of the business.’’
The current duties test for employer’s customers. These changes Formulating or interpreting
administrative employees is the most are needed to reflect emerging case law management policies; providing
difficult to apply of all the duties tests. in this area. For example, the court in consultation and expert advice to
The requirement that the employee Piscione v. Ernst & Young, 171 F.3d 527 management; making or recommending
exercise ‘‘discretion and independent (7th Cir. 1999), examined whether an decisions that have a substantial impact
judgment,’’ for instance, has generated employee’s duties were directly related on business operations or finances;
significant confusion and litigation, as to Ernst & Young’s management policies analyzing and recommending changes
noted in the GAO report discussed or general business operations or those to operating practices; planning long or
above. This rule has been interpreted to of the firm’s clients. The employee short-term business objectives;
deny the exemption to an employee worked as a consultant in the firm’s analyzing data, drawing conclusions
who follows a procedures manual, even Human Resources Consulting Group on and recommending changes; and
though most employees in the modern several multi-million dollar defined handling complaints, arbitrating
workplace are required to operate benefit plans and defined contribution disputes or resolving grievances. The
within standard procedures. The plans in which thousands of individuals Department invites comments on any
‘‘production versus staff dichotomy’’ participated. The employee’s work additional activities that should be
also is difficult to apply uniformly in involved benefits calculations, actuarial included in this list and on any
the 21st century workplace. valuations, government filings, activities that should be deleted. The
The proposed regulations at § 541.200 compliance testing, and client advice. second alternative for meeting the
would retain the requirement that an The court stated that this work ‘‘position of responsibility’’
exempt administrative employee have a influenced the internal business requirement, ‘‘work requiring a high
‘‘primary duty’’ of ‘‘performing office or operations and policies of Ernst & level of skill or training,’’ defined in the
non-manual work related to the Young’s clients with regard to their proposed regulations at new § 541.205,
management or general business benefit plans. The employee was the would ensure that the administrative
operations of the employer or the primary contact for several clients; the exemption is not denied to a highly
employer’s customers,’’ but replace the employee identified problems with their trained and skilled employee who
‘‘discretion and independent judgment’’ plans and suggested solutions, and the performs administrative functions
requirement with a new requirement employee offered suggestions to clients merely because the employee uses a
that the employee hold ‘‘a position of regarding how to improve their procedures manual, so long as the
responsibility’’ with the employer. efficiency. The court rejected the manual contains information that can
The primary duty requirement of argument that, because the employee only be interpreted properly by
‘‘performing office or non-manual work provided clients with reports and someone with a high level of specialized
related to the management or general government forms to file, the work was skills or training, as opposed to a
business operations’’ is defined in a new production work. Rather, the employee manual in which the employee simply
§ 541.201. New § 541.201 clarifies that was an advisory specialist or consultant looks up the correct answer for a
this requirement refers to the type of whose work was exempt. In addition, particular set of circumstances. As
work performed by the employee and the court found that the employee reflected in the GAO report noted above,
it has become commonplace for current § 541.116 (‘‘Trainees, incident to exempt work. The short test
employees in the modern work place to executive’’) and current § 541.310 in the current regulations for both
use procedures manuals and written (‘‘Trainees, professional’’) and moved to learned professionals and teachers
guidelines as standard practices for proposed new § 541.704. Provisions contains the specific primary duty
achieving quality control and efficiency. related to the administration of requirement discussed above, and
The administrative exemption is the educational institutions in current requires that the employee perform
most challenging of the § 13(a)(1) §§ 541.2, 541.201(c), 541.202(e), and work requiring the consistent exercise of
exemptions to define and delimit, and 541.215 have been consolidated and discretion and judgment. For artistic
the ‘‘discretion and independent moved to new § 541.206; no substantive professionals, the work must require
judgment’’ requirement has become changes are intended by this invention, imagination or talent in a
increasingly difficult to apply with consolidation. recognized field of artistic endeavor.
uniformity in the 21st century The proposed regulations pertaining
workplace. Thus, the Department Subpart D, Professional Employees, to the professional employee exemption
proposes to delete this requirement and §§ 541.300–.304 would make changes similar to those we
replace it with the requirement that an The current regulations pertaining to propose for the executive and
employee hold a ‘‘position of the professional exemption contain four administrative exemptions. The goal is
responsibility.’’ The Department separate categories of exempt to clarify and simplify the regulations
specifically seeks comments on whether employees: learned professionals, defining the professional employee
the ‘‘discretion and independent artistic professionals, teachers, and exemption, while remaining consistent
judgment’’ requirement should be computer professionals. As with the with the purposes of the FLSA. For ease
deleted entirely, retained as a third executive and administrative of reference, and making no substantive
alternative for meeting the ‘‘position of exemptions, the regulations contain changes, we propose to move the
responsibility’’ requirement, or retained both ‘‘short’’ and ‘‘long’’ duties tests, provisions pertaining to computer
by itself but modified to provide better depending upon the salary level of the professionals to new subpart E, which
guidance on distinguishing exempt employee. The long test contains a will contain all information pertinent to
administrative employees. The separate primary duty requirement for such employees. We also propose to
Department invites commenters to each of the four categories of employees. simplify the regulations by eliminating
submit alternative proposed regulatory The long test for learned professionals the separate short and long tests for each
language for either ‘‘discretion and requires that the primary duty consist of of the remaining three categories and
independent judgment’’ or ‘‘position of work requiring knowledge of an substituting a single standard duties test
responsibility.’’ The Department solicits advanced type in a field of science or for each. This restructuring and
comment on how employers currently learning customarily acquired by a simplification would eliminate the
interpret the ‘‘discretion and prolonged course of specialized percentage limitation on nonexempt
independent judgment’’ requirement, intellectual instruction and study, as work and the consistent exercise of
and whether individuals currently distinguished from a general academic discretion and judgment requirement.
exempt under that requirement would education and from an apprenticeship, As discussed above in connection with
continue to be exempt under the new and from training in the performance of similar proposed changes to the
‘‘position of responsibility’’ routine mental, manual, or physical executive and administrative
requirement. processes. For creative professionals, exemptions, we are proposing to
Finally, the proposed regulations also the primary duty must consist of work eliminate these subsections because
would reorganize, simplify, streamline that is original and creative in character they have proven difficult standards to
and update the regulations in other in a recognized field of artistic endeavor apply uniformly.
ways. The proposed regulations utilize (as opposed to work which can be For learned professionals, the
objective, plain language; eliminate produced by a person endowed with proposed new standard test in § 541.301
outdated and uninformative examples; general manual or intellectual ability would provide that employees qualify
and update definitions of key terms and and training), and the result of which for exemption as a learned professional
phrases. As with the executive depends primarily on the invention, if they have a primary duty of
exemption, the proposal for the imagination, or talent of the employee. performing office or non-manual work
administrative exemption would move a For teachers, the primary duty must requiring advanced knowledge in a field
number of sections pertaining to salary consist of teaching, tutoring, instructing, of science or learning customarily
issues (current §§ 541.211, 541.212 and or lecturing in the activity of imparting acquired by a prolonged course of
541.213) to subpart G, and other knowledge by an employee who is specialized intellectual instruction, but
sections relevant to several or all of the employed and engaged in this activity which also may be acquired by an
exemption categories would move to the as a teacher in the school system or equivalent combination of intellectual
proposed subpart H (Definitions and educational establishment or institution instruction and work experience. This
Miscellaneous Provisions) to eliminate by which the person is employed. The proposed standard test for learned
unnecessary repetition. For example, duties tests for computer employees are professionals would focus on the
current § 541.203 entitled ‘‘Nonmanual discussed in subpart E. The long test knowledge of the employee and how
work’’ is moved to proposed new also requires that an exempt employee: that knowledge is used in everyday
§ 541.703. Current § 541.206 entitled Perform work requiring the consistent work, not on the educational path
‘‘Primary duty’’ is merged with current exercise of discretion and judgment; do followed to obtain that knowledge.
§ 541.103 and moved to proposed new work that is predominantly intellectual Although some flexibility to focus on
§ 541.700. Current § 541.208 entitled and varied in character, such that the the worker’s knowledge exists in the
‘‘Directly and closely related’’ is output produced or the result current regulation, it is very limited and
combined with current §§ 541.108, accomplished cannot be standardized in rarely used. The clarified test reflects
541.202, and 541.307 and moved to relation to a given period of time; and changes in the 21st century workplace
proposed new § 541.702. Current devote no more than 20 percent of work in how some ‘‘knowledge workers’’
§ 541.210 entitled ‘‘Trainees, hours in a week to activities that are not acquire specialized learning and skills:
administrative’’ is combined with an essential part of and necessarily in the modern workplace, some
employees acquire advanced knowledge work requiring invention, imagination, proposed § 541.304. Current § 541.307
through a combination of formal originality or talent in a recognized field entitled ‘‘Essential part of and
college-level education, training and of artistic or creative endeavor.’’ This necessarily incident to’’ has been
work experience, even where other language, although simplified, is not combined with current § 541.108
employees in that field customarily intended to make any material changes (‘‘Work directly and closely related’’),
acquire advanced knowledge by from the existing regulations. This 541.202 (‘‘Categories of work’’), and
obtaining a baccalaureate or advanced standard was applied in the case of § 541.208 (‘‘Directly and closely
degree. The proposed changes would Freeman v. National Broadcasting related’’), and moved to proposed new
clarify that, so long as such an Company, Inc., 80 F.3d 78 (2nd Cir. § 541.702 (‘‘Directly and closely
employee’s level of advanced 1996), in which employees who related’’), for a streamlined discussion
knowledge is equivalent to the researched facts, developed story of the principles for distinguishing
knowledge possessed by an employee elements, interviewed subjects, wrote exempt and nonexempt work. Although
with the typical academic degree scripts, and supervised the editing of these sections have been consolidated
generally required by the profession, the videotape were deemed to have been and simplified, we do not intend any
employee may qualify as an exempt correctly classified as artistic substantive changes.
professional. Thus, for example, an professional employees. On the other Finally, we propose to move sections
employee who obtained advanced hand, employees of small news that pertain to salary issues (§§ 541.311,
knowledge by completing college organizations who spent their time 541.312 and 541.313) to subpart G,
courses in a field such as engineering, gathering facts about routine community where all such issues will be
and who worked in that field for a events such as municipal, school board, consolidated. Other sections relevant to
number of years, could qualify for and city council meetings, and gathering several or all of the exemption
exemption if the knowledge acquired information from the police blotter and categories (such as the definition of
was equivalent to that of an employee real estate transaction reports, and then primary duty, a section regarding
with a baccalaureate degree in reporting those facts in a standard application of the exemption to trainees,
engineering. We have not proposed any format were deemed not to be artistic and a section discussing nonexempt
specific formula in the regulations for professional employees in Reich v. work generally) would move to the
determining the equivalencies of Newspapers of New England, 44 F.3d proposed subpart H (Definitions and
intellectual instruction and qualifying 1060 (1st Cir. 1995) and Reich v. Miscellaneous Provisions) to eliminate
work experience, although some Gateway Press, Inc., 13 F.3d 685 (3d Cir. unnecessary repetition. Current
examples from the current rule have 1994). § 541.305 entitled ‘‘Discretion and
been included and expanded. Public The standard test for teachers in judgment’’ and current § 541.309
comments are invited on whether the proposed section 541.303 would be entitled ‘‘20-percent nonexempt work
regulations should specify such unchanged from the current short test, limitation’’ have been deleted from the
equivalencies. with the exception of the deletion of the proposed regulations for the same
The view that several years of requirement that the employee’s work reasons similar changes are being
specialized training plus intensive on- require the consistent exercise of proposed in the executive and
the-job training for a number of discretion and judgment, a requirement administrative exemptions as discussed
additional years may be equated with a that, as discussed above, has above.
college degree in certain fields has engendered significant confusion.
Subpart E, Computer Employees
found support in reported judicial Provisions on teachers from current
Exemption, §§ 541.400–.403
decisions. For example, the professional §§ 541.3, 541.301(g), and 541.314 have
exemption has been applied to been consolidated into proposed new The exemption for employees in
employees with a combination of § 541.303. The minor editorial changes computer occupations has a unique
training and academics in Leslie v. are not intended to cause any legislative and regulatory history. Prior
Ingalls Shipbuilding, Inc., 899 F. Supp. substantive changes. to 1991, the interpretative regulations
1578 (D. Miss. 1995). In Leslie, the court In addition, the proposed regulations acknowledged that employees in
concluded that an employee who had utilize objective, plain language that can various computer-related occupations
completed three years of engineering be easily understood by employees, could have supervisory or managerial
study at a university and had many small business owners and human duties meeting the exemption for
years of experience in the field of resource professionals, and eliminate ‘‘executive’’ or ‘‘administrative’’
engineering was properly classified as a outdated and uninformative examples. employees, provided that all the
professional employee, even though the The proposed regulations also would applicable regulatory tests were
employee did not satisfy one of the address a number of specific otherwise met. However, the regulations
usual minimum qualifications for an occupations that have been the subject did not recognize computer employees
engineering position of having a of ambiguity and litigation. For as exempt ‘‘learned’’ professionals
bachelor’s degree in an engineering example, we propose to update and absent a showing that specialized,
discipline. The court considered the clarify the circumstances under which prolonged academic education and
employee’s combination of education employees working as newspaper training was an essential prerequisite for
and experience as satisfying the journalists or as radio or television entry into the computer field. At the
requirement for a prolonged course of commentators are exempt, because the time, colleges and universities did not
specialized intellectual instruction and case law regarding such employees has consistently recognize computer
study. been evolving over the years, and the sciences as a bona fide academic
For creative professionals, we propose existing regulations discussing such discipline under which standard
to adopt the current short test, slightly employees are outdated. licensing, certification, or registration
modified, as the new standard test in Provisions of the current regulations procedures were being followed. Thus,
proposed § 541.302. This new standard in §§ 541.3 and 541.314 that provide an before 1990, employees in computer
test would apply the creative exception to the salary or fee occupations were rarely recognized as
professional exemption to any employee requirements for physicians and lawyers exempt ‘‘learned’’ professionals and
with the primary duty of ‘‘performing have been consolidated and moved to many also did not perform duties
meeting all the requirements for the resulted from the 1990 enactment is employer who perform the kind of
executive or administrative exemptions. now substantially codified in section nonexempt work performed by the
Of course, much has changed since 13(a)(17) of the Act, and thus no outside sales employee. If no one else
then, and today ‘‘computer scientists’’ substantive changes have been made to performs such nonexempt work, the
who possess advanced academic that language. However, consistent with base applied is 40 hours, and the
degrees in the computer field are changes in the professional exemption, amount of nonexempt work allowed is
routinely recognized as exempt the proposal deletes the additional eight hours per week. There is no salary
professionals. requirement that an exempt computer or fee requirement for the outside sales
In November 1990, Congress enacted employee must consistently exercise employee exemption.
legislation directing the Department to discretion and judgment. Further, the
issue regulations permitting computer former regulatory text has been edited In keeping with similar proposed
systems analysts, computer and streamlined to provide a more changes to the other exemptions in this
programmers, software engineers, and concise presentation, and the structure part, and to simplify the outside sales
other similarly-skilled professional has been modified to conform to similar exemption, the Department proposes to
workers to qualify for exemption under changes proposed in the professional adopt a primary duty concept similar to
FLSA section 13(a)(1). This enactment exemption. Because of the tremendously the other exemptions, and to eliminate
also extended the exemption to rapid pace of significant changes the particularly confusing 20 percent
employees in such computer occurring in the information technology restriction on nonexempt work by
occupations if paid on an hourly basis industry, we have avoided citing outside sales employees. By eliminating
at a rate at least 61⁄2 times the minimum specific job titles as examples of exempt this percentage limitation, the
wage. Final implementing regulations workers, as they tend to quickly become Department proposes to avoid any
were issued in 1992 following public outdated once included in the necessity that the employer track hours
notice and comment procedures (see 29 regulatory text. The Department of outside sales employees. This will
CFR 541.3(a)(4) and 541.303; 57 FR recognizes that the computer employee provide a consistent approach between
46744, Oct. 9, 1992; 57 FR 47163, Oct. exemption has been particularly this exemption and the exemptions for
14, 1992). However, when Congress confusing, and invites comments on any executive, administrative and
increased the minimum wage in 1996, further clarifications possible under the professional employees. The essential
that law included some of the statute. elements required for exemption would
Department’s regulatory language as a continue, i.e., the outside sales
separate statutory exemption under a Subpart F, Outside Sales Employees,
§§ 541.500–.504 employee’s primary duty must be to
new FLSA section 13(a)(17). The 1996 make sales or obtain orders or contracts
enactment also froze the hourly Section 13(a)(1) of the FLSA contains for services or the use of facilities, and
compensation test at $27.63 (which a specific and separate exemption for the employee must be customarily and
equaled 61⁄2 times the former $4.25 any employee employed ‘‘in the regularly engaged away from the
minimum wage). The original 1990 capacity of outside salesman.’’ Under employer’s place of business performing
statute was not affected by the 1996 the existing regulations, outside sales such duty. Outdated illustrations and
enactment. employees must be customarily and redundant examples have also been
Accordingly, under the current regularly engaged away from the deleted from the regulations, but no
regulations, an exempt computer employer’s places of business making substantive changes are intended by
employee must have a primary duty of sales or obtaining orders or contracts for these deletions. Finally, although the
performing work requiring theoretical services or the use of facilities. (‘‘Inside
FLSA refers to the ‘‘outside salesman,’’
and practical application of highly- sales’’ employees are not within the
we propose replacing this gender-
specialized knowledge in computer scope of this statutory exemption for
specific term and refer instead to the
systems analysis, programming, or ‘‘outside sales’’ employees.) The
‘‘outside sales employee.’’ The
software engineering. In addition, an regulatory interpretations examine
whether any given employee’s chief discussion of nonexempt work generally
exempt computer employee must be
duty or primary function is to make in current § 541.506 has been
engaged in performing these activities as
a computer systems analyst, computer sales or take orders while away from the incorporated into proposed new
programmer, software engineer, or other employer’s premises, by analyzing the § 541.701, and the discussion of outside
similarly-skilled worker in the computer character of the job as a whole, to sales trainees in current § 541.508 has
software field. Finally, under the distinguish exempt outside sales been incorporated into proposed new
current regulations, an exempt employees from other nonexempt § 541.704. As noted above and in
computer employee must consistently occupations (e.g., route delivery connection with similar proposed
exercise discretion and judgment, and personnel). changes to the executive, administrative
be paid not less than $250 per week on Under the current regulations, outside and professional exemptions, the 20-
a salary basis or not less than $27.63 an sales employees also may not exceed a percent limitation on nonexempt work
hour if paid an hourly rate. 20 percent tolerance, per work week, in current § 541.507 is proposed to be
The proposed regulations would performing duties unrelated to their deleted.
consolidate and condense all of the own outside sales or solicitations. Subpart G, Compensation
regulatory guidance on the computer Activities that are incidental to, and in Requirements, §§ 541.600–.606
occupations exemption into a new conjunction with, their own outside
regulatory subpart E by combining sales or solicitations, including Salary Levels
provisions of the current regulations incidental deliveries and collections, are
found at §§ 541.3(a)(4), 541.205(c)(7), not counted against the 20 percent Salary level tests have been included
and 541.303. This new subpart will nonexempt work limitation. The 20 as part of the exemption criteria since
collect in one place the substance of the percent limit is based not upon the the original regulations of 1938. Under
original 1990 enactment, the 1992 final employee’s own hours of work the current rules, most executive,
regulations, and the 1996 enactment. performed, but upon the hours worked administrative and professional
The key regulatory language that by other nonexempt employees of the employees must earn a minimum salary
level to qualify for the exemption.14 tested for exemption under the short Because of these concerns, the
Employees paid below the minimum tests. Salary level was once viewed as Department believes it would be more
salary level are not exempt, irrespective being the best indicator of exempt appropriate to examine available data
of their job duties and responsibilities. status. Today, the existing salary level on actual salary levels currently being
Employees paid a salary above the tests are of no help in distinguishing paid in the economy. We reviewed a
minimum level in the regulations may exempt employees from non-exempt preliminary report on actual salary
be exempt if they also meet the salary workers. Accordingly, the question is levels based on the BLS year 2000
basis and job duties tests. not whether the Department should Current Population Survey (CPS)
To qualify for exemption under the raise the salary levels, but by how Outgoing Rotations data set. This data
existing regulations, an employee much. included full-time, salaried workers
currently must earn a minimum salary One suggestion for increasing the aged 16 and above, but excluded the
of $155 per week for the executive and current salary levels is to adjust the self-employed, agricultural workers,
administrative exemptions, and $170 existing rates, adopted in 1975, to volunteers and federal employees (who
per week for the professional account for inflation. The 1999 General are all not subject to the salary level
exemption. Employees paid above these Accounting Office report adjusted the tests in the part 541 regulations), broken
minimum salary levels must meet a 1975 salary levels for inflation based on out by industry and geographic area.
‘‘long’’ duties test to qualify for the 1998 BLS Consumer Price Index (CPI) In considering this data and various
exemption. The current regulations also data, resulting in the following salary salary levels in the development of this
provide that employees paid above a levels: $470/week for the executive and proposal, the Department was guided by
higher (or ‘‘upset’’) salary rate of $250 administrative long test; $515/week for the prescient analysis of a 1958
per week are exempt if they meet a the professional long tests; and $757/ Department of Labor report
‘‘short’’ duties test. As explained above, week for the short test.16 In January recommending changes to the salary
the short tests contain fewer 2001, the Department published a report levels:
requirements and are less burdensome that applied 1999 CPI data to inflation The salary tests have thus been set for the
to meet.15 The most recent updates to adjust the current salary levels to $480/ country as a whole * * * with appropriate
these minimum salary levels were in week for the long test and $774/week for consideration given to the fact that the same
1975. In January 1981, revisions to the short test.17 salary cannot operate with equal effect as a
increase the salary rates by the outgoing However, several considerations test in high-wage and low-wage industries
Carter Administration were stayed weigh against mechanically adjusting and regions, and in metropolitan and rural
indefinitely by the incoming Reagan the 1975 salary levels for inflation. First, areas, in an economy as complex and
Administration. Because the salary diversified as that of the United States.
the Department is proposing a different, Despite the variation in effect, however, it is
levels have not been increased since standard duties test. Consequently, clear that the objectives of the salary tests
1975, the existing salary levels are equivalency to either the current long will be accomplished if the levels selected
outdated and no longer useful in and short test salary levels is not are set at points near the lower end of the
distinguishing between exempt and appropriate. Second, although adjusting current range of salaries for each of the
nonexempt employees. the existing rates for inflation might categories. Such levels will assist in
Proposed Standard Test. Under the provide the simplest, mechanical demarcating the ‘‘bona fide’’ executive,
proposal, the minimum salary level to approach, the Department is concerned administrative and professional employees
qualify for exemption from the FLSA without disqualifying any substantial number
about the impact such adjusted salary of such employees.
minimum wage and overtime levels would have on certain segments
requirements as an executive, of industry and geographic areas of the * * * * *
administrative, or professional It is my conclusion, from all the evidence,
country, particularly in the retail that the lower portion of the range of
employee would be increased from $155 industry and in rural areas in the South,
per week to $425 per week. This salary prevailing salaries will be most nearly
which tend to pay lower salaries. Third, approximated if the tests are set at about the
level would be referred to as the mechanically adjusting for inflation levels at which no more than about 10
‘‘standard test,’’ thus eliminating the presumes that the salary levels set in percent of those in the lowest-range region,
‘‘short test’’ and ‘‘long test’’ 1975 are precisely the appropriate or in the smallest size establishment group,
terminology. The separate, higher salary baseline; and that the nature of work or in the smallest-sized city group, or in the
level test for professional employees and the relationship between job duties lowest-wage industry of each of the
also would be eliminated. and compensation practices have not categories would fail to meet the tests.
Most stakeholders agreed that the Although this may result in loss of
changed in the intervening years since exemption for a few employees who might
salary levels need to be increased. A 1975. Fourth, the regulatory history has
full-time minimum wage worker earns otherwise qualify for exemption, * * * in the
looked to information on actual salaries light of the objectives discussed above, this
$206 per week ($5.15/hour x 40 and incomes, not inflation-adjusted is a reasonable exercise of the
hours)—an amount above the current amounts. The 1949 Weiss Report, for Administrator’s authority to ‘‘delimit’’ as
long test levels and closely approaching example, considered and rejected well as define.19
the current short test level. As a result, proposals to increase salary levels based
under the current regulations, no full- As in the 1958 analysis, the
upon the change in the cost of living Department looked to ‘‘points near the
time salaried worker is automatically from the 1940 levels.18
exempt by earning below the long test
employees since October 1940 would be the best
level, and most salaried employees are 16 Fair Labor Standards Act: White Collar evidence of the appropriate salary increases for the
Exemptions in the Modern Work Place, GAO/ revised regulations. * * * The change in the cost
14 There is no salary level test for outside sales HEHS–99–164, September 30, 1999. of living which was urged by several witnesses as
employees and some professional employees 17 The ‘‘New Economy’’ and Its Impact on a basis for determining the appropriate levels is, in
(teachers, doctors, lawyers). Such employees are Executive, Administrative and Professional my opinion, not a measure of the rise in prevailing
exempt regardless of their salary. Exemptions to the Fair Labor Standards Act (FLSA), minimum salary levels.’’ Weiss Report, p. 12.
15 Also, in 1996, Congress amended the FLSA to January 2001, pp. 71–73. 19 Report and Recommendations on Proposed
exempt certain hourly-paid computer professionals 18 ‘‘Actual data showing the increases in the Revision of Regulations, Part 541 under the Fair
paid at least $27.63 per hour ($57,470 per year, prevailing minimum salary levels of bona fide Labor Standards Act, March 3, 1958, by Harry S.
assuming 40 hours per week). executive, administrative and professional Kantor, Assistant Administrator, Presiding Officer.
lower end of the current range of would allow the employer to make a Department invites comments on the
salaries’’ to determine an appropriate payment by the next pay period alternative of removing the salary tests
salary level for the standard test— sufficient to bring the employee to the from the regulations entirely and on
although we settled upon on the lowest guaranteed level. The employer is not how the regulations could be structured
20 percent, rather than the lowest 10 required to make this payment; without the need for any specific salary
percent, because of the proposed change however, if the employer elects not to amounts (relying only on duties tests,
from the ‘‘short’’ and ‘‘long’’ test make the one-time payment, the for example). The Department also
structure in the proposed rule and employee is not exempt as a highly invites comments on the alternative of
because the data included some salaried compensated employee.20 adopting a ‘‘salary only’’ test for highly
employees who would not meet the To determine an appropriate salary compensated employees. Under such an
duties tests for exemption. Applying level for highly compensated alternative, for example, employees
this analysis, and also considering employees, the Department looked to performing non-manual or office work
adjustments to the current salary levels points near the higher end of the current and earning a total annual
for inflation, the Department proposes a range of salaries and found that the top compensation over a certain amount
standard salary level test of $425/week. 20 percent of all salaried employees would automatically be considered
Under this level, approximately the earned above $65,000 annually. This exempt, without any reference to the
bottom 20 percent of salaried employees level is consistent with setting the employee’s duties.
would fall below the minimum salary proposed standard test salary level at
the bottom 20 percent of salaried Salary Basis Test
requirement and be automatically
entitled to overtime pay. employees. Under the current regulations, to
Puerto Rico, Virgin Islands and qualify for the executive, administrative
Proposed special rule for highly or professional exemption, an employee
American Samoa. Prior to the Fair Labor
compensated employees. The proposed Standards Amendments of 1989 (Pub. L. must be paid on a ‘‘salary basis’’ as
regulations also include in § 541.601 a 101–157), Puerto Rico, the Virgin defined in § 541.118. The employee
special, streamlined rule for employees Islands, and American Samoa were must regularly receive a predetermined
paid $65,000 or more annually. Under subject to wage order proceedings under amount of salary, on a weekly or less
this proposed rule for highly the Act, in lieu of the FLSA minimum frequent basis, that ‘‘is not subject to
compensated employees, employees wage, and consequently lower salary reduction because of variations in the
paid $65,000 or more annually and test levels traditionally were established quality or quantity of the work
performing non-manual work would be for employees in these jurisdictions. performed.’’ Thus, with a few
exempt if they have an identifiable The 1989 Amendments removed Puerto exceptions described below, the
executive, administrative or Rico and the Virgin Islands from the employee must receive the full salary
professional function as described in the Act’s wage order proceedings, and for any week in which the employee
standard duties tests. These highly provided that the U.S. mainland performs any work without regard to the
compensated employees would not have minimum hourly wage rates under number of days or hours worked.
to meet all the elements of the standard section 6(a)(1) of the Act would apply The salary basis test prohibits an
duties test to qualify for the exemption in Puerto Rico and the Virgin Islands. employer from making deductions from
as a highly compensated employee. For For this reason, the proposed the salary ‘‘for absences occasioned by
example, an employee who supervises regulations would apply the mainland the employer or by the operating
two workers but does not participate in salary test level of $425 per week in requirements of the business.’’ In other
any hiring or termination decisions in Puerto Rico and the Virgin Islands. words, ‘‘if the employee is ready,
the company would still be exempt Employees in American Samoa remain willing, and able to work, deductions
because the employee has a function subject to wage order proceedings under may not be made for time when work
that is identifiable as an executive the Act. Consequently, the proposed is not available.’’ However, the
function. In addition, the proposed regulations would apply a special, lower employee does not have to be paid for
special rule for highly compensated salary test level of $360 per week for any work week in which he or she
employees would permit counting base executive, administrative and performs no work.
salary, commissions, non-discretionary professional employees in American The current salary basis test also
bonuses and other non-discretionary Samoa. This special salary level prohibits deductions from pay for
compensation in determining whether maintains approximately the same ratio disciplinary problems, performance
an employee earns $65,000 or more to the mainland test in the current issues or for absences caused by jury
annually. To qualify as a highly regulations (84% for executive and duty, attendance as a witness, or
compensated employee under the administrative workers). Similarly, the temporary military leave (although
proposed regulation, any commissions proposal would apply a special test for employers may take offsets for jury or
or non-discretionary bonuses would highly compensated employees in military pay) in any week in which an
have to be settled and paid out to the American Samoa of $55,000 annually. employee performs any work.
employee as due on at least a monthly Comments are invited on whether the The current regulations contain
basis. An employee who works only a 84 percent ratio is appropriate. several exceptions to these salary basis
portion of a year, whether because the Comments on salary levels. The rules: An employer may make
employee begins work during the year Department invites comments on these deductions from the guaranteed pay
or leaves before the end of the year, proposed salary levels and on any ‘‘when the employee absents himself
must be guaranteed a pro rata portion of alternative salary level amounts or from work for a day or more for personal
the $65,000 annual guarantee. The pro methodologies for determining the reasons, other than sickness or
rata portion should be based upon the appropriate salary level. In addition, the accident.’’ Deductions also are
number of weeks the employee works in permitted for absences of a day or more
such a position. If an employee’s total 20 Of course, if all of the requirements in either
due to sickness or disability, if taken in
annual compensation does not total at the executive, administrative or professional accordance with a bona fide plan,
employee tests established in §§ 541.100, 541.200 or
least the guaranteed $65,000 by the end 541.300 are satisfied, the employer still would be policy or law (workers compensation,
of the year, the proposed regulation able to claim the appropriate exemption. for example) providing wage
replacement benefits. Employers also absences would breach the quid pro quo exemption would be lost only if there is
may make deductions from an exempt and blur the line between exempt and a pattern and practice of improper
employee’s salary for any hours not non-exempt employees. An exempt deductions, and then only for
worked in the initial and final weeks of manager, for example, does not receive employees in the same job classification
employment or for hours taken as extra pay for working 16 hours on a and working for the same manager who
unpaid FMLA leave without affecting Thursday to complete a project; thus, as is responsible for the improper pay
the exempt status of the employee. a matter of fundamental fairness, an docking decision or policy. For
Finally, less than full week deductions employer should not be allowed to dock example, if one manager at a single
from pay are permitted for violations of the employee’s salary for leaving work company facility routinely docks the
major safety rules. early on Friday. Of course, an employer pay of engineers for partial-day
Under the current rules, an employer can terminate an employee who abuses absences, then all engineers at that one
can lose the exemption for an entire this salary arrangement. facility whose pay could have been
class of employees for making improper Although the proposed rule retains docked by that same manager are not
deductions from guaranteed pay, even the salary basis test and its concept of exempt. Engineers at other facilities or
for highly paid employees. Depending guaranteed pay in proposed § 541.602, working for other managers would
on the facts, improper deductions can two significant updates are included in remain exempt. Further, the proposed
‘‘indicate that there was no intention to the proposal: Disciplinary Deductions. rule would create a new ‘‘safe harbor’’
pay the employee on a salary basis. In The proposed regulations would allow provision: if an employer has a written
such a case, the exemption would not be an exception to the no pay-docking rule policy prohibiting improper pay
applicable to him during the entire deductions, notifies employees of that
for deductions from pay for full-day
period when such deductions were policy and reimburses employees for
disciplinary suspensions. For example,
being made.’’ For inadvertent mistakes, any improper deductions, then that
an employer would be permitted to
however, the regulations provide employer would not lose the exemption
suspend an exempt employee without
employers with a ‘‘window of for any employees unless the employer’s
pay for reasons such as sexual
correction.’’ If the facts demonstrate that policy prohibiting improper deductions
harassment or workplace violence. The
the prohibited deduction from is repeatedly and willfully violated. The
current regulations permit such
guaranteed pay was inadvertent, the Department believes this approach
deductions only for penalties imposed
exemption is not lost if the employer would be much easier to apply
for infractions of safety rules of major
reimburses the employee for such uniformly and more consistent with the
deductions and promises to comply in significance and for unpaid suspensions
for one or more full work weeks (i.e., purposes of the FLSA.
the future. Proposed section 541.604 continues
In developing options for its proposed Monday to Friday). The proposed
change would allow employers to the guidance from current 541.118(b) on
rule, the Department considered
suspend exempt employees without pay allowing payments of additional
whether to eliminate the salary basis
for discriminatory harassment for two compensation besides the salary as not
test. We carefully weighed the need for
the salary basis test and concluded that days, four days or 10 days, as being inconsistent with the salary basis
the underlying concept of the test ‘‘ appropriate to respond to the of payment, and on pay plans that
guaranteed pay, not subject to reduction misconduct. The Department believes compute an exempt employee’s salary
because of variations in the quality or this is a common-sense change that will from daily or shift rates if accompanied
quantity of the work performed ‘‘ should permit employers to uniformly hold by the minimum guarantee. The
be retained. The nearly universal exempt employees to the same language has been clarified to add
practice of paying employees with the standards of conduct as that required of hourly compensation plans that include
requisite status to be bona fide nonexempt, hourly workers. Safe such guarantees, consistent with
executive, administrative, or Harbor Provision. Under the current established enforcement practices, if a
professional employees on a salary regulations, an employer who makes reasonable relationship exists between
basis, as the 1949 hearings on the improper deductions from pay can lose the guaranteed amount and an
exemption revealed, reflected the the exemption for an entire class of employee’s usual earnings for a normal
understanding that such employees employees. However, as mentioned scheduled work week.
have discretion to manage their time above, the current rules also include a Proposed § 541.605 contains updated
and are not answerable for the number ‘‘window of correction’’ provision at guidance on the ‘‘fee basis’’ of payment
of hours worked or the number of tasks 541.118(a)(6) under which an employer permitted for administrative and
performed. Such employees are not paid who inadvertently makes impermissible professional employees, taken from
by the hour or task, but for the general deductions can, in some circumstances, current sections 541.213 and 541.313.
value of services performed. The salary retain the exemption by reimbursing Proposed § 541.606 provides guidance
basis test also describes the quid pro employees for any improper deductions. on payment of required salary amounts
quo enjoyed by exempt employees, Unfortunately, the ‘‘window of ‘‘exclusive of board, lodging or other
which distinguishes them from non- correction’’ has proved difficult for the facilities’’ or ‘‘free and clear,’’ taken
exempt workers. Exempt employees are Department to administer and has been from §§ 541.117(c), 541.211(d), and
not paid overtime for working over 40 the source of considerable litigation. 541.311(d) of the current regulations
hours in a week. In exchange, the The proposed rule, at 541.603, would and expanded to cross-reference 29 CFR
employer must provide a guaranteed clarify the circumstances and the extent 531.32 for more guidance on qualifying
salary that cannot be reduced when an to which an improper deduction causes ‘‘other facilities’’ similar to board and
employee works less than 40 hours. an employee or groups of employees to lodging.
The Department also considered become nonexempt. The proposed rule The former ‘‘upset salary’’ provisions
amending the salary basis test to permit maintains the underlying purpose of the that were part of the short tests for
deductions from pay for cases in which current rule that an employer does not executive, administrative and
an exempt employee chooses to be lose the FLSA exemption because of professional employees have been
absent for a part of a day. But allowing isolated incidents of improper pay deleted from this proposed rule (current
such ‘‘pay docking’’ for partial-day deductions. Under the proposal, the §§ 541.119, 541.214, and 541.315).
Subpart H, Definitions and programs or the rights and obligations of regulations also apply to State and local
Miscellaneous Provisions, §§ 541.700– recipients thereof. governmental employees.
.708 For similar reasons, the Department The PRIA indicates that there are 6.5
has concluded that this proposed rule million establishments with 109.5
To eliminate unnecessary repetition, also is a major rule under the Small
the proposed regulations would move million employees, annual payrolls
Business Regulatory Enforcement totaling $2.8 trillion, annual sales
definitions and other provisions Fairness Act of 1996 (5 U.S.C. 801 et revenues of $17.9 trillion, and annual
applicable to several or all of the seq.). Although it could result in an
pre-tax profits of $769.5 billion in the
exemption categories to a new subpart annual effect on the economy of $100
industry sectors affected by the
H, Definitions and Miscellaneous million or more, it is not likely to result
proposed rule. Corresponding data
Provisions. The proposed subpart H in a major increase in costs or prices for
based on SBA’s size standards for small
would define ‘‘primary duty’’ in consumers, individual industries,
business entities indicates that over 5.2
proposed § 541.700; ‘‘directly and Federal, State or local government
million of these establishments are
closely related’’ in proposed Section agencies, or geographic regions; or have
considered to be small businesses.
541.702; ‘‘exempt and nonexempt significant adverse effects on
These small firms employ
work’’ in proposed § 541.701; and competition, employment, investment,
approximately 38.7 million workers
‘‘office or non-manual work’’ in productivity, innovation, or on the
ability of United States-based with an annual payroll of $940.0 billion.
proposed § 541.703. Subpart H would Their total annual sales are estimated to
also contain provisions regarding enterprises to compete with foreign-
based enterprises in domestic or export be $5.7 trillion and their annual pre-tax
trainees, emergencies and occasional profits are estimated to be $233.9
tasks, combination exemptions, the markets.
As a result, the Department has billion. Approximately 79.8 percent of
motion picture producing industry, and the affected establishments are
employees of public agencies. Most of prepared a Preliminary Regulatory
Impact Analysis (PRIA) in connection considered to be small businesses and
these provisions have been moved from they account for 38.8 percent of the
the existing regulations without with this proposed rule as required
under section 6(a)(3) of the Order and employment, 33.7 percent of the
substantial change, although some payroll, 31.8 percent of the annual sales,
changes have been made to simplify and the Office of Management and Budget
has reviewed the rule. Copies of the and 30.4 percent of the annual pre-tax
update the current regulations. Current profits.
§ 541.602, containing guidance on the complete PRIA may be obtained from
percentage limitations on performing the Department by contacting the Wage Over 87,400 state and local
nonexempt work for executive and and Hour Division at the address and governmental entities will be affected by
telephone number provided above. The the proposed rule (3,043 county
administrative employees in multi-store
results of the PRIA are summarized governments, 19,372 municipal
retailing operations, is proposed to be
below. governments, 16,629 township
deleted for the same reasons noted
above for eliminating those former long Preliminary Regulatory Impact Analysis governments, 34,683 special district
duties test requirements from the governments, and 13,726 school district
Overview governments). Nationwide, these
executive and administrative
exemptions. The proposed changes in the rules for entities receive more than $1.4 trillion
determining whether an employee is in general revenues, including revenues
IV. Executive Order 12866 and the exempt as an executive, administrative, from taxes, some categories of fees and
Small Business Regulatory Enforcement or professional (EAP) worker under the charges, and intergovernmental
Fairness Act Fair Labor Standards Act (FLSA) will transfers. Their direct expenditures
affect virtually all employers covered by exceed $1.6 trillion in the aggregate.
This proposed rule has been drafted the FLSA that employ workers within State and local governments employ
and reviewed in accordance with the scope of the exemptions in 29 CFR more than 4 million workers and their
Executive Order 12866, section 1(b), part 541. Employers will be affected payrolls exceed $12.6 billion per month.
Principles of Regulation. The unless all of their employees are The following tables summarize the
Department has determined that the expressly excluded from FLSA coverage provisions of the current 29 CFR part
proposed rule is an economically by the statute. Excluded from these 541 and the proposed rule that were
significant regulatory action under regulations are the self-employed, analyzed in the PRIA.
section 3(f)(1) of Executive Order 12866. agricultural workers, railroad workers,
Based on a preliminary analysis of the selected occupations in the
data the rule could have an annual
TABLE 1.—WEEKLY SALARY LEVELS IN
transportation industries and in THE CURRENT AND PROPOSED RULES
effect on the economy of $100 million automobile dealerships, and most
or more. However, the proposed rule is Federal employees subject to separate Dollars
not likely to adversely affect in a rules administered by the U.S. Office of
material way the economy, a sector of Personnel Management. However, 29 Current Rule
the economy, productivity, competition, CFR part 541 regulations apply to the Long Test:
jobs, the environment, public health or following Federal agencies: Library of Executives ................................. 155
safety, or state, local, or tribal Congress, U.S. Postal Service, Postal Administrative ............................ 155
governments or communities; create a Rate Commission, and Tennessee Valley Professionals ............................. 170
serious inconsistency or otherwise Authority (see 29 U.S.C. 204(f)). Short Test ..................................... 250
interfere with an action taken or Therefore, employers in all industrial Proposed Rule
planned by another agency; or sectors except agriculture, railroads, and
Standard Test ............................... 425
materially alter the budgetary impact of private households are subject to the Highly Compensated .................... 1,250
entitlements, grants, user fees, or loan existing and proposed regulations. The
TABLE 2.—THE CURRENT AND PROPOSED DUTIES TESTS FOR EXECUTIVE EMPLOYEES
Current long test (salary and duties) Current short test (salary and duties) Proposed standard test (salary and duties)
$155 per week .................................................... $250 per week ................................................. $425 per week.
Primary duty of the management of the enter- Primary duty of the management of the enter- Primary duty of management of the enterprise
prise or a recognized department or subdivi- prise or a recognized department or sub- or a recognized department or subdivision.
sion. division.
Customarily and regularly directs the work of Customarily and regularly directs the work of Customarily and regularly directs the work of
two or more other employees. two or more other employees. two or more other employees.
Has authority to hire or fire other employees (or Has authority to hire or fire other employees
recommendations as to hiring, firing, pro- (or recommendations as to hiring, firing,
motion or other change of status of employ- promotion or other change of status of
ees is given particlar weight). other employees is given particlar weight).
Customarily and regularly exercises discre-
tionary powers.
Does not devote more than 20 percent (40 per-
cent in retail or service establishments) of
time to activities that are not directly and
closely related to exempt work.
TABLE 3.—THE CURRENT AND PROPOSED DUTIES TESTS FOR ADMINISTRATIVE EMPLOYEES
Primary duty of performing office or non-manual Primary duty of performing office or non-man- Primary duty of performing office or non-man-
work directly related to management policies ual work directly related to management ual work directly related to the management
or general business operations of the em- policies or general business operations of or general business operations of the em-
ployer or the employer’s customers. the employer or the employer’s customers. ployer or the employer’s customers.
Customarily and regularly exercises discretion Customarily and regularly exercises discretion Holds a ‘‘position of responsibility’’ with the
and independent judgment. and independent judgment. employer, defined as either (1) performing
work of substantial importance or (2) per-
forming work requiring a high level skill or
training.
Regularly and directly assists a proprietor, or
exempt executive or administrative employee;
or performs specialized or technical work re-
quiring special knowledge under only general
supervision; or executes special assignments
under only general supervision.
Does not devote more than 20 percent (40 per-
cent in retail or service establishments) of
time to activities that are not directly and
closely related to exempt work.
TABLE 4.—THE CURRENT AND PROPOSED DUTIES TESTS FOR LEARNED PROFESSIONAL EMPLOYEES
Current long test Current short test Proposed standard test
(salary and duties) (salary and duties) (salary and duties)
Primary duty of performing work requiring Primary duty of performing work requiring Primary duty of performing office or non-man-
knowledge of an advanced type in a field of knowledge of an advanced type in a field of ual work requiring knowledge of an ad-
science or learning customarily acquired by a science or learning customarily acquired by vanced type in a field of science or learning
prolonged course of specialized intellectual a prolonged course of specialized intellec- customarily acquired by a prolonged course
instruction and study. tual instruction and study of specialized intellectual instruction, but
Consistently exercises discretion and judgment. Consistently exercises discretion and which also may be acquired by alternative
Performs work that is predominantly intellectual judgment. means such as an equivalent combination
and varied in character and is of such char- of intellectual instruction and work
acter that the output produced or result ac- experience.
complished cannot be standardized in rela-
tion to a given period of time..
Does not devote more than 20 percent of time
to activities that are not an essential part of
and necessarily incident to exempt work.
TABLE 5.—THE CURRENT AND PROPOSED DUTIES TESTS FOR CREATIVE PROFESSIONAL EMPLOYEES
TABLE 5.—THE CURRENT AND PROPOSED DUTIES TESTS FOR CREATIVE PROFESSIONAL EMPLOYEES—Continued
Primary duty of performing work that is original Performs work requiring invention, imagina- Primary duty of performing work requiring in-
and creative in character in a recognized field tion, or talent in a recognized field of artistic vention, imagination, originality or talent in a
of artistic endeavor, and the result of which endeavor. recognized field of artistic or creative
depends primarily on the invention, imagina- endeavor.
tion, or talent of the employee.
Consistently exercises discretion and judgment.
Performs work that is predominantly intellectual
and varied in character and is of such char-
acter that the output produced or result ac-
complished cannot be standardized in rela-
tion to a given period of time.
Does not devote more than 20 percent of time
to activities that are not directly and closely
related to exempt work.
TABLE 6.—THE CURRENT AND PROPOSED DUTIES TESTS FOR COMPUTER EMPLOYEES
Current long test Current short test Section 13(a)(17) test Proposed Standard Test
(salary and duties) (salary and duties) (salary and duties) (salary and duties)
$170 per week ............................... $250 per week .............................. $27.63 an hour ............................. $425 per week or $27.63 an hour.
Primary duty of performing work Primary duty of performing work Primary duty of (A) application of Primary duty of (A) application of
requiring theoretical and prac- requiring theoretical and prac- systems analysis techniques systems analysis techniques
tical application of highly-special- tical application of highly-spe- and procedures, including con- and procedures, including con-
ized knowledge in computer sys- cialized knowledge in computer sulting with users, to determine sulting with users, to determine
tems analysis, programming, systems analysis, programming, hardware, software of system hardware, software of system
and software engineering. and software engineering. functional applications; or (B) functional applications; or (B)
design, development, docu- design, development, docu-
mentation analysis, creation, mentation analysis, creation,
testing, or modification of com- testing, or modification of com-
puter systems or programs, in- puter systems or programs, in-
cluding prototypes, based on cluding prototypes, based on
and related to user of system and related to user of system
design specifications; or (C) de- design specifications; or (C) de-
sign, documentation, testing , sign, documentation, testing ,
creation or modification of com- creation or modification of com-
puter programs related to ma- puter programs related to ma-
chine operating systems; or (D) chine operating systems; or (D)
a combination of duties de- a combination of duties de-
scribed in (A), (B) and (C), the scribed in (A), (B) and (C), the
performance of which requires performance of which requires
the same level of skills. the same level of skills.
Employed as a computer systems Employed as a computer systems Employed as a computer systems Employed as a computer systems
analyst, computer programmer, analyst, computer programmer, analyst, computer programmer, analyst, computer programmer,
software engineer, or other simi- software engineer, or other software engineer, or other software engineer, or other
larly skilled worker in the com- similarly skilled worker in the similarly skilled worker in the similarly skilled worker in the
puter software field. computer software field. computer software field. computer software field.
Consistently exercises discretion Consistently exercises discretion
and judgment. and judgment.
Performs work that is predomi-
nantly intellectual and varied in
character and is of such char-
acter that he output produced or
result accomplished cannot be
standardized in relation to a
given period of time.
Does not devote more than 20
percent of time to activities that
are not directly and closely re-
lated to exempt work.
TABLE 7.—THE CURRENT AND PROPOSED DUTIES TESTS FOR OUTSIDE SALES EMPLOYEES
None required ..................................................... None required .................................................. None required.
TABLE 7.—THE CURRENT AND PROPOSED DUTIES TESTS FOR OUTSIDE SALES EMPLOYEES—Continued
Employed for the purpose of and customarily No separate ‘‘short’’ test .................................. Primary duty of making sales; or of obtaining
and regularly engaged away from the em- orders or contracts for services or for the
ployer’s place of business in making sales; or use of facilities for which a consideration
in obtaining orders or contracts for services will be paid by the client or customer
or for the use of facilities for which a consid- Customarily and regularly engaged away from
eration will be paid by the client or customer. the employer’s place or places of business.
Does not devote more than 20 percent of the
hours worked by nonexempt employees of
the employer to activities that are not inci-
dental to and in conjunction with the employ-
ee’s own outside sales or solicitations.
Methodology for Estimating Costs from overtime under the current rule, worked beyond 40 in the week. This
The principal database used in the who become nonexempt as a result of method of payment is known as a ‘‘fixed
PRIA is the 2001 Current Population raising the salary levels and revising the salary for fluctuating hours’’ (see 29 CFR
Survey (CPS). A complete description of duties tests. 778.114). For a 45-hour workweek, total
the methodology used for determining Affected employers would have four compensation due under this method,
the employees who are potentially choices concerning potential payroll including overtime, would equal
exempt and nonexempt from the costs: (1) Adhering to a 40 hour work $422.22 ($400 + (($400÷45) × 1⁄2 × 5) =
overtime requirements of the current week; (2) paying statutory overtime $422.22).
and proposed rule is contained in the premiums for affected workers’ hours The third choice above is
PRIA available by contacting the Wage worked beyond 40 per week; (3) raising straightforward—an employer could
and Hour Division at the address and employees’ salaries to levels required simply raise the salary level for
telephone number provided above. for exempt status by the proposed rule; currently exempt salaried workers
The economic impact of the proposed or (4) converting salaried employees’ earning less than $22,100 to at least the
rule includes two components: One- basis of pay to an hourly rate (no less new proposed salary level or more and
time implementation costs; and than the federal minimum wage) that have them remain exempt salaried
recurring incremental payroll costs results in virtually no (or only a workers.
incurred by employers for those minimal) changes to the total Nothing in the FLSA would prohibit
employees presently treated as exempt compensation paid to those workers. an employer affected by the proposed
from overtime under the current rule, Employers could also change the duties rule, or under the current rule, from
who become nonexempt. of currently exempt and nonexempt implementing the fourth choice above
The implementation costs contain two workers to comply with the proposed that results in virtually no (or only a
parts. The first part includes the amount rule. minimal) increase in labor costs. For
of time employers would take to: (1) For the second choice above, paying example, to pay an hourly rate and time
Read and understand the proposed rule; overtime premium pay, employers and one-half that rate for 5 hours of
(2) update and formulate their overtime typically have two options, with overtime in a 45-hour workweek and
policies; (3) notify employees of any differing cost implications, for meeting incur approximately the same total costs
changes; and (4) all other time taken to their statutory overtime obligations. For as the former $400 weekly salary, the
implement the proposed rule. The example, assume an employer paid an regular hourly rate would compute to
second part of the implementation costs employee a fixed salary of $400 per $8.421 ((40 hours × $8.421) + (5 hours
is the amount of time employers would week with no overtime premium pay, × (1.5 × $8.421)) = $399.99).
take to review their job categories to for which the employee worked 45 Most employers affected by the
determine (1) whether or not a hours per week, and the employer must proposed rule would be expected to
particular job category is exempt or now begin to pay this employee choose the most cost-effective
nonexempt under the proposed rule, overtime pay. As one option, the compensation adjustment method that
and (2) how to adjust to the new salary employer could assume that the former maintains the stability of their work
levels and duties tests. To estimate the weekly salary of $400 represents force, pay structure, and output levels.
implementation costs of the proposed compensation for a standard 40-hour Given the range of options available to
rule, the department contacted six workweek, and pay this employee in the an employer confronted with paying
human resource specialists from around future time-and-one-half the $10 hourly overtime to employees previously
the country to obtain information on the rate for any overtime hours worked treated as exempt, the actual payroll
amount of time small and large beyond 40 per week. For a 45-hour cost impact for individual employers
businesses would take for each of these workweek, total compensation due, could range from near zero to up to the
activities. High and low estimates of the including overtime, would equal $475 maximum cost impacts estimated in the
implementation costs were estimated by ((40 hours × $10/hour) + (5 hours × $15/ Department’s PRIA. However, for the
varying the amount of time taken to hour) = $475), compared to $400 PRIA it is was assumed that, for any
review job categories and other time formerly. As a second option, the nonexempt employee who satisfies the
taken to implement the proposed rule. employer could pay the fixed salary of pertinent duties test, the employer will
The second component of the $400 per week as total straight time pay choose to pay the smaller of either the
economic impact of the proposed rule is for all hours worked in the week additional weekly salary required to
the recurring incremental payroll costs (provided it equals or exceeds the qualify the employee for exemption or
incurred by employers for those federal minimum wage), and pay the usual weekly overtime payment for
employees presently treated as exempt additional ‘‘half-time’’ for each hour the employee. Thus, the Department’s
assessment of costs of the proposed rule hours worked by salaried employees in Total Costs and Benefits
reflects a range of upper bound the PRIA data, and then reduced these The upper bound total cost estimate
estimates. Actual payroll costs would be estimates by two-thirds to account for for the proposed rule ranges from $870.3
expected to be lower than the estimates other types of overtime violations (off- million to $1,575.5 million. This
summarized below and presented in the the-clock-work, straight time for all includes one-time implementation costs
PRIA because of the payroll adjustment hours) that occur in addition to ranging from $535.4 million to $680.0
option employers have that could offset violations of the ‘‘white collar’’ million and recurring payroll costs
the impact of the proposed rule. exemptions. The Department’s high and ranging from $334.8 million to $895.5
Moreover, some of the cost is likely to low benefit estimates result from million. The lower bound total benefit
be passed on to consumers in the form different assumptions on the lower costs estimate for the proposed rule ranges
of higher prices, some of the cost is associated with determining the exempt from $1,109.8 million to $1,972.7
likely to be passed on to business status of employees including million.
owners and shareholders in the form of
conducting expensive time-and-motion
lower profits, and some of the cost is Private Sector Costs and Benefits
studies and lower litigation costs, as
likely to be passed on to workers in the The upper bound private sector cost
form of fewer overtime hours. well as the updated window of
correction and safe harbor provisions in estimate for the proposed rule ranges
Finally, estimated costs are presented
the proposed rule. The benefit estimates from $849.2 million to $1,531.9 million.
as ranges because data limitations
summarized below are lower bound This includes one-time implementation
prevent the Department from identifying
estimates because they exclude costs ranging from $521.4 million to
exactly which workers are exempt and
significant, but difficult to quantify, $660.3 million and recurring payroll
nonexempt based on the current and
benefits such as avoidance of the costs ranging from $327.8 million to
proposed duties tests. The estimates
following additional costs which could $871.6 million. The total private sector
were determined using previous
Department and U.S. General be incurred by an employer who has costs as a percentage of total payroll
Accounting Office methodology and the misclassified employees as exempt: (1) range from 0.03 percent to 0.05 percent
latest data from the Bureau of Labor for all industries, and from 0.11 percent
The second and third years of overtime
Statistics, the Census Bureau, and Dunn to 0.21 percent of total pre-tax profits for
back pay allowed under the FLSA; (2)
and Bradstreet. The ranges result from all industries.
an amount equal to the back pay as
estimating a minimum and maximum The lower bound private sector
liquidated damages; and (3) litigation benefit estimate for the proposed rule
number of workers that are likely to costs, including attorney’s fees. The
change from exempt to nonexempt ranges from $1,061.3 million to $1,886.5
benefit estimates also exclude the million. These estimates include the
employees. To estimate the recurring reduced human resource and legal costs
payroll costs of the proposed rule, it was impact of updating the window of
for classifying workers under the correction and safe harbor provisions in
necessary to apply some assumptions to proposed rule, and improved
the PRIA data to identify which the proposed rule but do not include
management productivity from reduced significant, but difficult to quantify,
employees are exempt and nonexempt Department of Labor investigations and
under the current and proposed rules. benefits such as the reduced human
private litigation. resource and legal costs for classifying
Specifically, the Department assumed
that for employees in occupations with Three assumptions were applied to workers under the proposed rule, and
a combination of exempt and the PRIA data to estimate the benefits of improved management productivity
nonexempt duties those with lower the proposed rule; the Department from reduced investigations and
salaries would more likely be non- requests comments on these and all litigation.
exempt. The Department also assumed assumptions used for the impact The largest total costs are incurred by
that six years or more of work analysis. First, the overtime violation the Health Services industry ($85.3
experience would be considered rates published by the Minimum Wage million to $163.4 million), Construction
equivalent to a bachelor’s degree for the Study Commission in 1980 were ($71.2 million to $119.1 million),
learned professional exemption. For assumed to apply today. Second, the Business Services ($54.1 million to
each occupational category with a Commission’s overtime violation rates $86.4 million), Personal Services ($38.1
combination of exempt and nonexempt million to $83.8 million), and Real
were reduced to account for other types
duties a lower bound and an upper Estate ($32.2 million to $71.4 million).
of overtime violations (off-the-clock-
bound estimate of the number of The 10 industries with the highest costs
work, straight time for all hours) that
employees who are exempt has been account for over 50.4 percent of the total
occur in addition to violations of the
calculated. Finally, it was assumed that private sector costs.
‘‘white collar’’ exemptions. Finally, the Although the benefits of the proposed
for each executive, administrative, or Department’s range of benefit estimates
professional employee who becomes rule exceed the costs at the total level
result from different assumptions on the and for many of the major industry
nonexempt, the likely incremental
impact of the updated window-of- levels, there are some industries where
payroll cost is the smaller of the
correction and safe harbor provisions in the costs exceed the benefits (see Table
additional weekly salary required to
the proposed rule. The Department 8). This result arises for three reasons.
qualify for exemption or the usual
weekly overtime payment required to be welcomes comments and estimates from First, the costs are upper bound
paid to that worker. the public on the amount of benefits estimates and the benefits are lower
associated with these provisions and bound estimates (see Methodology
Methodology for Estimating Benefits other significant, but difficult to section above). The true net benefit for
The benefit estimates are lower bound quantify, benefits such as the reduced most industries could very well be
estimates based on PRIA data and a human resource and legal costs for positive. Second, a large increase in the
Minimum Wage Study Commission classifying workers under the proposed salary levels raises the potential costs of
report that estimated overtime violation rule, and improved management the proposed rule. Finally, the
rates by industry. The Department productivity from reduced industries most likely to bear the cost of
applied these rates to the overtime investigations and litigation. the proposed rule are not necessarily the
industries most likely to receive the levels in the Personal Services and and Parking (0.13 percent to 0.29
benefits. Most of the benefits come from Automotive Repair, Services, and percent), and Transportation by Air
the reduction in the potential legal Parking industries one would expect to (0.11 percent to 0.22 percent).
liability from unintentionally find far more relatively low paid The largest recurring payroll costs as
misclassifying fairly high paid salaried salaried workers affected by the a percentage of pre-tax profits are
workers working more than 40 hours proposed salary level tests than
incurred by the Educational Services
per week in occupations with exempt relatively high paid salaried workers
and nonexempt duties, while most of industry (1.95 percent to 5.22 percent),
unintentionally misclassified.
the costs come from increasing the The largest total costs as a percentage Personal Services (1.38 percent to 3.03
salary level tests for relatively low paid of payroll are incurred by the percent), Automotive Repair, Services,
salaried workers. The PRIA data suggest Educational Services industry (0.37 and Parking (0.84 percent to 1.81
that the number of workers in these two percent to 0.98 percent), Agricultural percent), Agricultural Services (0.54
groups is often not equal at a detailed Services (0.22 percent to 0.53 percent), percent to 1.26 percent), and
industry level. For example, because of Personal Services (0.21 percent to 0.46 Transportation by Air (0.54 percent to
the historical pattern of compensation percent), Automotive Repair, Services, 1.07 percent).
TABLE 8.—SUMMARY OF COSTS AND BENEFITS FOR INDUSTRY SECTORS AFFECTED BY THE PROPOSED RULE
Low im- High im- Low High Low total High total Low High Low High
SIC Industry description plementa- plementa- payroll payroll costs costs benefits benefits difference difference
tion costs tion costs costs costs
07 .......... Agricultural Services 4 ................. $2,895 $4,020 $14,833 $37,529 $17,729 $41,549 $2,032 $3,612 ¥$15,697 ¥$37,937
08 .......... Forestry 4 .................................... 83 113 27 58 110 171 346 614 235 444
09 .......... Fishing, Hunting, & Trapping 4 ... 63 88 121 381 184 469 195 346 11 ¥123
.......... Agriculture Subtotal ............. 3,042 4,221 14,981 37,968 18,023 42,188 2,572 4,573 ¥15,451 ¥37,616
10 .......... Metal mining ............................... 121 146 0 0 121 146 185 328 64 182
12 .......... Coal mining ................................ 239 293 119 346 358 639 647 1,150 289 511
13 .......... Oil & gas extraction .................... 1,431 1,820 856 1,882 2,287 3,701 4,525 8,044 2,238 4,342
14 .......... Nonmetallic minerals, except 475 602 8 13 483 615 520 924 37 309
fuels.
Mining Subtotal ................... 2,266 2,860 984 2,242 3,250 5,102 5,877 10,447 2,627 5,345
15–17 .... Construction ............................... 48,090 64,024 23,096 55,046 71,186 119,070 33,486 59,524 ¥37,700 ¥59,545
20 .......... Food & kindred products ............ 5,587 6,577 1,767 3,793 7,354 10,370 3,654 6,495 ¥3,700 ¥3,875
21 .......... Tobacco products ....................... 87 100 83 197 169 297 110 195 ¥60 ¥102
22 .......... Textile mill products ................... 1,855 2,176 488 1,192 2,343 3,368 538 956 ¥1,806 ¥2,412
23 .......... Apparel & other textile products 4,367 5,212 960 1,896 5,327 7,108 790 1,405 ¥4,537 ¥5,703
24 .......... Lumber & wood products ........... 5,746 6,917 804 2,103 6,550 9,021 922 1,639 ¥5,628 ¥7,382
25 .......... Furniture & fixtures ..................... 2,454 2,918 371 1,068 2,824 3,986 727 1,292 ¥2,098 ¥2,694
26 .......... Paper & allied products .............. 2,034 2,383 826 1,754 2,860 4,137 1,484 2,638 ¥1,376 ¥1,500
27 .......... Printing & publishing .................. 10,260 12,319 3,607 16,921 13,867 29,240 3,554 6,318 ¥10,313 ¥22,922
28 .......... Chemicals & allied products ....... 3,118 3,678 2,969 11,299 6,087 14,977 5,892 10,473 ¥196 ¥4,504
29 .......... Petroleum & coal products ......... 481 569 910 1,637 1,390 2,206 776 1,380 ¥614 ¥826
30 .......... Rubber & miscellaneous plastics 4,040 4,775 819 2,313 4,860 7,088 1,586 2,820 ¥3,274 ¥4,268
products.
31 .......... Leather & leather products ......... 373 443 179 459 552 902 261 465 ¥291 ¥437
32 .......... Stone, clay, & glass products .... 2,915 3,487 642 1,616 3,558 5,104 998 1,774 ¥2,560 ¥3,329
33 .......... Primary metal industries ............. 2,125 2,485 1,078 3,017 3,203 5,501 1,596 2,837 ¥1,607 ¥2,664
34 .......... Fabricated metal products .......... 7,498 8,927 1,993 4,837 9,491 13,764 1,942 3,452 ¥7,549 ¥10,311
35 .......... Industrial machinery & equip- 10,509 12,543 2,778 6,887 13,287 19,430 7,515 13,359 ¥5,772 ¥6,071
ment.
36 .......... Electronic & other electric equip- 5,180 6,076 3,768 8,860 8,948 14,936 6,759 12,014 ¥2,189 ¥2,922
ment.
37 .......... Transportation equipment .......... 4,689 5,469 5,207 11,883 9,896 17,352 5,352 9,513 ¥4,545 ¥7,839
38 .......... Instruments & related products .. 3,032 3,573 1,911 4,940 4,943 8,512 3,057 5,435 ¥1,885 ¥3,078
39 .......... Misc. manufacturing industries ... 2,886 3,470 1,281 3,727 4,167 7,196 1,220 2,169 ¥2,947 ¥5,027
Manufacturing Subtotal ....... 79,235 94,095 32,442 90,399 111,678 184,494 48,733 86,628 ¥62,944 ¥97,866
40 Railroad Transportation (5) .......... nc nc 528 1,890 528 1,890 1,510 2,684 982 793
41 .......... Local & interurban passenger 1,500 1,881 1,216 2,652 2,716 4,533 861 1,531 ¥1,854 ¥3,003
transportation.
42 .......... Motor freight transportation & 8,873 11,271 3,415 7,879 12,288 19,150 7,722 13,727 ¥4,566 ¥5,423
warehousing.
43 .......... U.S. Postal Service (6) ................ 2,875 3,610 1,359 5,147 4,234 8,757 643 1,143 ¥3,591 ¥7,614
44 .......... Water transportation ................... 655 827 380 1,255 1,036 2,082 1,694 3,010 658 928
45 .......... Transportation by air (7) .............. 986 1,225 11,213 22,633 12,200 23,858 4,588 8,155 ¥7,612 ¥15,703
46 .......... Pipelines, except natural gas ..... 59 74 6 14 65 89 31 54 ¥35 ¥34
47 .......... Transportation services .............. 3,125 4,014 822 2,407 3,947 6,421 963 1,712 ¥2,984 ¥4,710
48 .......... Communications ......................... 3,815 4,740 5,424 13,690 9,239 18,430 14,516 25,804 5,277 7,374
49 .......... Electric, gas, & sanitary services 2,052 2,537 2,623 7,136 4,675 9,673 5,977 10,625 1,302 952
.......... Trans., Comm., & Pub. Util. 23,940 30,180 26,460 62,813 50,400 92,993 36,994 65,761 ¥13,406 ¥27,233
Subtotal.
50 .......... Wholesale trade—durable goods 25,544 32,579 4,334 10,296 29,877 42,875 38,356 68,182 8,479 25,307
51 .......... Wholesale trade—nondurable 14,764 18,738 4,538 10,934 19,302 29,672 31,512 56,016 12,210 26,344
goods.
.......... Wholesale Subtotal ............. 40,308 51,318 8,871 21,229 49,179 72,547 69,868 124,198 20,689 51,650
52 .......... Building materials, hardware, 4,608 5,874 949 2,380 5,557 8,254 10,553 18,758 4,995 10,504
garden supply, & mobile home
dealers.
TABLE 8.—SUMMARY OF COSTS AND BENEFITS FOR INDUSTRY SECTORS AFFECTED BY THE PROPOSED RULE—Continued
Low im- High im- Low High Low total High total Low High Low High
SIC Industry description plementa- plementa- payroll payroll costs costs benefits benefits difference difference
tion costs tion costs costs costs
53 .......... General merchandise stores ...... 5,222 6,352 2,961 7,041 8,183 13,393 14,966 26,604 6,783 13,210
54 .......... Food stores ................................ 13,060 16,499 6,487 16,941 19,547 33,441 19,519 34,698 ¥28 1,257
55 .......... Automotive dealers & gasoline 13,380 17,101 3,942 10,470 17,322 27,571 38,529 68,490 21,207 40,919
service stations.
56 .......... Apparel & accessory stores ....... 7,926 10,182 959 1,905 8,885 12,087 5,547 9,860 ¥3,339 ¥2,227
57 .......... Home furniture, furnishings, & 7,015 9,032 1,627 3,795 8,641 12,827 20,518 36,472 11,876 23,646
equipment stores.
58 .......... Eating & drinking places ............ 33,346 42,414 9,310 26,857 42,656 69,271 38,054 67,646 ¥4,601 ¥1,626
59 .......... Miscellaneous retail .................... 22,326 28,755 6,152 14,028 28,478 42,783 31,195 55,452 2,717 12,669
.......... Retail Subtotal ..................... 106,884 136,210 32,387 83,417 139,271 219,627 178,881 317,979 39,611 98,353
60 .......... Depository institutions ................ 6,943 8,924 2,677 8,836 9,620 17,760 23,042 40,960 13,422 23,200
61 .......... Nondepository credit institutions 2,727 3,580 1,795 4,701 4,522 8,281 13,449 23,907 8,927 15,625
62–67 .... Holding & other investment of- 4,055 5,302 8,260 20,789 12,315 26,091 30,936 54,992 18,620 28,901
fices, except trusts, & Security
& commodity brokers, dealers,
exchanges, & services.
63–64 .... Insurance carriers, Insurance 9,454 12,342 6,016 11,003 15,470 23,345 26,681 47,428 11,211 24,083
agents, brokers, & services.
65 .......... Real estate ................................. 10,801 14,565 21,401 56,982 32,202 71,546 21,773 38,703 ¥10,429 ¥32,843
.......... Fin., Insure., & Real Est. Sub- 33,980 44,713 40,150 102,311 74,130 147,024 115,881 205,990 41,751 58,966
total.
70 .......... Hotels, rooming houses, camps, 6,394 7,899 2,707 7,492 9,101 15,391 10,461 18,595 1,359 3,204
& other lodging places.
72 .......... Personal services ....................... 12,705 16,505 25,351 67,270 38,055 83,775 8,112 14,419 ¥29,943 ¥69,355
73 .......... Business services ....................... 37,518 46,860 16,606 39,540 54,124 86,401 109,491 194,631 55,367 108,230
75 .......... Automotive repair, services, & 11,698 15,230 19,375 51,798 31,073 67,028 9,480 16,851 ¥21,593 ¥50,177
parking.
76 .......... Miscellaneous repair services .... 4,164 5,406 1,373 4,213 5,537 9,618 1,586 2,819 ¥3,951 ¥6,800
78 .......... Motion pictures ........................... 3,470 4,419 4,283 19,485 7,753 23,904 10,446 18,570 2,693 ¥5,334
79 .......... Amusement & recreation serv- 7,987 10,088 5,622 16,716 13,609 26,804 10,573 18,795 ¥3,035 ¥8,009
ices.
80 .......... Health services ........................... 48,132 60,026 37,155 103,356 85,287 163,382 114,546 203,617 29,259 40,235
81 .......... Legal services ............................ 10,263 13,361 2,246 8,969 12,509 22,329 42,821 76,119 30,313 53,790
82 .......... Educational services .................. 1,878 2,412 14,052 40,243 15,930 42,655 155,178 275,844 139,248 233,189
83 .......... Social services ........................... 12,637 16,039 9,438 21,396 22,075 37,435 12,498 22,216 ¥9,577 ¥15,219
84 .......... Museums, art galleries, & botan- 455 574 294 858 749 1,432 1,009 1,794 260 362
ical & zoological gardens.
86 .......... Membership organizations ......... 4,425 5,701 1,396 9,151 5,821 14,851 8,252 14,668 2,430 ¥183
87 .......... Engineering, accounting, re- 20,847 26,721 7,828 23,332 28,675 50,053 71,813 127,656 43,138 77,602
search, management, & re-
lated services.
89 .......... Services, not elsewhere classi- 1,080 1,405 206 488 1,286 1,892 1,205 2,143 ¥81 251
fied 4.
Services Subtotal ................ 183,651 232,645 147,933 414,307 331,584 646,952 567,471 1,008,736 235,887 361,784
.
Private Industry .......................... 521,396 660,266 327,832 871,621 849,228 1,531,887 1,061,273 1,886,519 212,045 354,632
State & Local Government ......... 14,033 19,695 7,012 23,911 21,045 43,606 48,495 86,205 27,450 42,599
Total .................................... 535,429 679,961 334,844 895,532 870,273 1,575,493 1,109,768 1,972,724 239,495 397,231
Note: Unless otherwise noted, data are from USDOC (2001a). Na: Data not available. Nc: Not calculable.
1 Number of employers are derived from the U.S. Department of Commerce, Bureau of Census, 1992 Enterprise Statistics.
2 Employment is estimated when data suppression occurs.
3 Sales data for industries 07, 08, 09, and 89 are from the D&B (2001a) database.
4 Number of establishments, number of employees, and annual payroll are derived from the USDOC (1999) database. Sales data are derived from the D&B (2001a)
database.
5 Only includes Railroad Switching and Terminal Establishments (SIC 4013).
6 All data for the U.S. Postal Service are from USPS (1997).
7 Data do not include large certificated passenger carriers that report to the Office of Airline Statistics, U.S. Department of Transportation.
Sources: CONSAD Research Corporation and the U.S. Department of Labor; U.S. Department of Commerce, Bureau of the Census (USDOC, 2001a), 1997 Eco-
nomic Census: Comparative Statistics, downloaded from http://www.census.gov/epcd/ec97sic/index.html#download; U.S. Department of Commerce, Bureau of the
Census (USDOC (1999), 1997 County Business Patterns; Dun & Bradstreet (D&B, 2001a) National Profile of Businesses Database for Fiscal Year 2000; Dun & Brad-
street (D&B, 2001b), Industry Norms and Key Business Ratios for Fiscal Year 2000/2001; U.S. Department of the Treasury, Internal Revenue Service (IRS, 2000)
Corporate Tax Returns for Active Corporations for 1997; and U.S. Postal Service (USPS, 1997), 1997 Annual Report.
Small Business Cost Estimates costs as a percentage of total payroll benefits such as the reduced human
range from 0.02 percent to 0.04 percent, resource and legal costs for classifying
The upper bound small business cost
and from 0.07 percent to 0.16 percent of workers under the proposed rule, and
estimate for the proposed rule ranges
from $502.4 million to $835.9 million. total pre-tax profits. improved management productivity
This includes one-time implementation The lower bound small business from reduced investigations and
costs ranging from $349.3 million to benefit estimate for the proposed rule litigation.
$451.7 million and recurring payroll ranges from $629.8 million to $1,119.4 The largest recurring payroll costs are
costs ranging from $153.1 million to million. These estimates do not include incurred by the Personal Services
$384.2 million. The recurring payroll significant, but difficult to quantify, industry ($17.6 million to $46.6
million), Construction ($16.7 million to Wyoming (0.2 percent to 0.4 percent), rule had increased the standard salary
$39.4 million), Automotive Repair, Alabama (0.1 percent to 0.3 percent), level test and highly compensated salary
Services, and Parking ($13.9 million to Illinois (0.1 percent to 0.3 percent), and levels to $425 per week and $1,250 per
$37.1 million), Agricultural Services West Virginia (0.1 percent to 0.3 week, respectively, without replacing
($10.4 million to $26.4 million), and percent). As a percentage of total state the current long duties tests with the
Real Estate ($9.9 million to $26.3 and local government revenues, the updated duties test, employers would
million). The 10 industries with the recurring payroll costs do not exceed have incurred incremental payroll costs
highest costs account for 57.4 percent to 0.01 percent in any state. for all executive, administrative, and
67.0 percent of the total small business professional employees in that salary
Economic Impact of Updating the Duties
costs. range who would satisfy the updated
The largest recurring payroll costs as Tests
duties test but would not satisfy the
a percentage of payroll are incurred by The economic impact of updating the current long duties tests. The PRIA
the Educational Services industry (0.4 duties tests includes two components. estimates that the incremental payroll
percent to 1.0 percent), Agricultural First, determining whether an employee costs for those 1.5 million to 2.7 million
Services (0.2 percent to 0.6 percent), satisfies the requirements of the updated employees will be between $1.839
Personal Services (0.2 percent to 0.4 duties tests will be less difficult than
billion and $3.370 billion, in addition to
percent), Transportation by Air (0.1 determining whether that employee
the $870.2 million to $1,575.5 million
percent to 0.3 percent), and Automotive satisfies the requirements of the current
for the regulation as proposed.
Repair, Services, and Parking (0.1 duties tests. As a result, employers will
percent to 0.2 percent). likely incur much lower costs associated Finally, revising the duties tests could
The largest recurring payroll costs as with determining the exempt status of result in some paid hourly workers
a percentage of pre-tax profits are employees, including conducting becoming salaried employees. PRIA data
incurred by the General Merchandise expensive time-and-motion studies, and indicate there are 644,000 paid hourly
Stores (4.5 percent to 10.6 percent), responding to litigation contesting their workers working overtime in
Educational Services (2.0 percent to 5.3 exemption decisions. The second occupations with exempt administrative
percent), Agricultural Services (1.1 component is the incremental payroll and professional duties that could be
percent to 2.8 percent), Personal costs that employers would be required converted to salaried employees. All of
Services (0.9 percent to 2.4 percent), to pay to the employees who satisfy the these workers have either an associate
and Eating and Drinking Places (0.8 updated duties test but do not satisfy degree or 4 year college degree or more
percent to 2.2 percent). the current duties test if the proposed and their average income ranges from
salary level tests were adopted without $50,100 to $54,700 per year. This is an
State and Local Government Cost and simultaneously adopting the proposed upper bound estimate based on the
Benefit Estimates duties tests. number of professional and
The upper bound cost estimate for The possible magnitude of the cost administrative workers in occupations
State and local governments for the savings of the first component is with mixed exempt and nonexempt
proposed rule ranges from $21.0 million indicated by the estimated numbers of duties employing a high level of skill or
to $43.6 million. This includes one-time employees with salaries between $425 training.
implementation costs ranging from per week and $1,250 per week who
$14.0 million to $19.7 million and would have failed to satisfy the current V. Regulatory Flexibility Act and
recurring payroll costs ranging from duties tests but would pass the updated Executive Order 13272
$7.0 million to $23.9 million. The cost duties tests. Because very little evidence
The Regulatory Flexibility Act of
estimates represents less than 0.005 is available on the costs for this
1980, as amended by the Small Business
percent of the $1.4 trillion in general component, the only indicator that is
Regulatory Enforcement Fairness Act of
revenues received by all state and local available is the potential number of
employees who might require time-and- 1996, 5 U.S.C. 601 et seq., requires
governmental entities nationwide, and agencies to prepare regulatory flexibility
0.01 percent to 0.03 percent of the $150 motion studies or involve litigation. The
PRIA indicates an additional 1.5 million analyses, and make them available for
billion in total payrolls for those public comment, when proposing
entities. to 2.7 million employees will be more
readily identified as exempt from the regulations that will have ‘‘a significant
The lower bound benefit estimate for
overtime requirements of the FLSA economic impact on a substantial
State and local governments for the
because the updated duties tests will number of small entities.’’ Accordingly,
proposed rule ranges from $48.5 million
replace the current duties tests in the following analysis assesses the
to $86.2 million. These estimates do not
determining their exemption. Although impact of these regulations on small
include significant, but difficult to
certification and adjudication costs entities as defined by the applicable
quantify, benefits such as the reduced
would only have been incurred on SBA size standards.
human resource and legal costs for
classifying workers under the proposed behalf of some portion of those In accordance with E.O. 13272,
rule, and improved management employees, the large number of ‘‘Proper Consideration of Small Entities
productivity from reduced employees who could bring litigation in Agency Rulemaking,’’ this proposed
investigations and litigation. under the current regulations and their rule has been reviewed to assess its
The largest costs are incurred by relatively high levels of compensation potential impact on small businesses,
California ($2.6 million to $5.3 million), indicate that the impact of revising the small governmental jurisdictions, and
New York ($2.3 million to $4.7 million), duties tests is probably substantial. small organizations, as provided by the
Texas ($1.3 million to $2.8 million), The second component of the Regulatory Flexibility Act. The Chief
Illinois ($1.2 million to $2.5 million), economic impact of the revised duties Counsel for Advocacy of the Small
and Florida ($1.1 million to $2.2 tests is the additional incremental Business Administration was notified of
million). payroll costs that employers would be a draft of this rule upon submission of
The largest recurring payroll costs as required to pay if the revised salary the rule to the Office of Management
a percentage of payroll are incurred by level tests were adopted without and Budget under E.O. 12866,
Arizona (0.2 percent to 0.4 percent), updating duties tests. If the proposed Regulatory Planning and Review.
(1) Reasons Why Action by Agency Is and Hour Division at the address and employees at least the federal minimum
Being Considered telephone number provided above. Data wage of $5.15 an hour, and time-and-
Section 13(a)(1) of the Fair Labor based on SBA’s size standards for small one-half overtime premium pay for
Standards Act (FLSA), 29 U.S.C. business entities indicates that 5.2 hours worked over 40 per week. Under
213(a)(1), directs the Secretary of Labor million establishments that will be the terms of the statute, Congress
affected by the proposed rule are excluded some smaller businesses
to define and delimit from time to time,
considered to be small businesses. (those with annual revenues less than
by regulations subject to the
These small businesses employ $500,000) from the definition of covered
Administrative Procedure Act, ‘‘any
approximately 38.7 million workers ‘‘enterprises’’ (although individual
employee employed in a bona fide
with an annual payroll of $940.0 billion. workers who are engaged in interstate
executive, administrative, or
Their total annual sales are estimated to commerce or who produce goods for
professional capacity * * * or in the
be $5.7 trillion and their annual pre-tax such commerce may be individually
capacity of outside salesman * * *.’’
profits are estimated to be $233.9 covered by the FLSA). This proposed
Employees meeting the criteria specified
billion. Approximately 79.8 percent of rule clarifies and updates the criteria for
in these regulations are completely
all affected establishments are the statutory exemption from the FLSA
exempt from minimum wage and considered to be small businesses and for executive, administrative,
overtime pay under the FLSA. The they account for 38.8 percent of the professional, and outside sales
existing regulations contain employment, 33.7 percent of the employees for all employers covered by
requirements for payment ‘‘on a salary payroll, 31.8 percent of the annual sales, the FLSA. Moreover, given the purpose
basis,’’ at not less than specified and 30.4 percent of the annual pre-tax of the FLSA, Congressional intent, and
minimum amounts, and certain profits. the statutory provisions regarding the
additional tests related to an employee’s coverage for smaller businesses,
primary job duties and responsibilities. (4) Reporting, Recordkeeping and Other
adopting different compliance
The duties tests were last modified in Compliance Requirements of the Rule
requirements for small entities under
1949 and have remained essentially Although an employer claiming an this rule was not considered feasible.
unchanged since contributing to higher exemption from the FLSA under 29 CFR
human resource and legal costs in the part 541 must be prepared to establish (7) Clarification, Consolidation and
economy. The salary levels required for affirmatively that all required Simplification of Compliance and
exemption were last updated in 1975 on conditions for the exemption are met, Reporting Requirements for Small
an interim basis. In 1999, the U.S. this proposed rule contains no reporting Entities
General Accounting Office reviewed or recordkeeping requirements as a As previously noted, the purpose of
these regulations and recommended that condition for the exemption. However, this proposed rule is to clarify,
the Secretary of Labor comprehensively the recordkeeping requirements for consolidate, simplify, and update the
review and update them, and make employers claiming exemptions from existing criteria for compliance with the
necessary changes to better meet the the FLSA under 29 CFR part 541 for exemption from the FLSA for executive,
needs of both employers and employees particular employees are contained in administrative, professional, and
in the modern work place. These the general FLSA recordkeeping outside sales employees, for all
regulations were also suggested as a regulations, applicable to all employers businesses including small businesses.
candidate for reform in public covered by the FLSA (codified at 29 The proposed rule contains no new
comments submitted on OMB’s 2001 CFR part 516; see 29 CFR 516.0 and reporting requirements.
and 2002 Reports to Congress on the 516.3) and have been approved by the
Costs and Benefits of Regulations. The (8) Use of Performance Rather Than
Office of Management and Budget Design Standards
Department is proposing revisions to Control Number 1215–0017. There are
these regulations in response to the no other compliance requirements The FLSA requires that employers
concerns that have been raised over the under the proposed rule. comply with the minimum wage and
years to update, clarify and simplify overtime pay requirements and permits
them for the 21st century workplace. (5) Relevant Federal Rules Duplicating, a number of ways in which employers
Overlapping or Conflicting With the can achieve these ‘‘performance
(2) Objectives of and Legal Basis for Rule standards.’’
Rule The Department considered a number
No other Federal rules duplicate or
This proposed rule is issued pursuant conflict with the requirements of alternatives to the proposed rule that
to the authority provided by section contained in these rules. Federal would impact small entities. One
13(a)(1) of the FLSA. Its objective is to employees subject to the jurisdiction of alternative would be not to change the
provide clear and concise regulatory the U.S. Office of Personnel existing regulations. This alternative
guidance, in plain language, that will Management (OPM) are governed by was rejected because the Department
assist employers and employees in separate regulations administered by has determined that the existing salary
determining whether an employee is OPM and not these regulations. Some tests, which have not been raised in
exempt from the FLSA as a bona fide state laws have exemption standards over 27 years, no longer provide any
executive, administrative, professional, applied under state law that differ from help in distinguishing between bona
or outside sales employee. the exemption standards provided by fide executive, administrative, and
these Federal rules. The FLSA does not professional employees and those who
(3) Number of Small Entities Covered by
preempt any stricter exemption should not be considered for exemption,
the Rule
standards that may apply under state and that the duties tests, which were
The estimated number of small law. See 29 U.S.C. 218. last modified in 1949, are too
entities covered by this rule is presented complicated, confusing, and outdated
in the Department’s Preliminary (6) Differing Compliance and Reporting for the modern workplace.
Regulatory Impact Analysis (PRIA). A Requirements for Small Entities Two other alternatives would be to
copy of the Department’s complete PRIA The FLSA generally requires raise the salary levels and not update
may be obtained by contacting the Wage employers to pay covered non-exempt the duties tests or conversely to update
the duties tests without raising the businesses with annual revenues less governments, 16,629 township
salary levels. However, the Department than $500,000 from the definition of governments, 34,683 special district
has concluded that raising the salary covered enterprises under the FLSA. governments, and 13,726 school district
levels is necessary to reestablish a clear Given the purpose of the FLSA, governments). Nationwide, these
relevant bright-line test between exempt Congressional intent, and the statutory entities receive more than $1.4 trillion
and nonexempt workers for both provisions regarding the coverage for in general revenues, including revenues
employers and employees. Moreover, smaller businesses, adopting different from taxes, some categories of fees and
increasing the salary levels without compliance requirements for small charges, and intergovernmental
updating the duties tests would increase entities under this rule was not transfers. Their direct expenditures
the cost of the proposed rule by $1.839 considered feasible. exceed $1.6 trillion in the aggregate.
billion to $3.370 billion per year—much State and local governments employ
VI. Unfunded Mandates Reform Act
of which would be incurred by small more than 4 million workers and their
business. The duties tests were last The Unfunded Mandates Reform Act
of 1995, 2 U.S.C. 1501, requires agencies payrolls exceed $12.6 billion per month.
revised in 1949 and have remained
essentially unchanged since that time. to prepare a written statement that The Department’s Preliminary
The salary levels were last updated in identifies the: (1) Authorizing Regulatory Impact Analysis (PRIA)
1975. The Department has determined legislation; (2) cost-benefit analysis; (3) includes estimates of the
that updating both the salary level and macro-economic effects; (4) summary of implementation costs, incremental
duties tests are necessary to better meet state, local, and tribal government input; payroll costs, and benefits of the
the needs of both employees and and (5) identification of reasonable proposed rule for all state and local
employers in the modern workplace and alternatives and selection, or government sectors in the aggregate in
to anticipate future workplace trends. explanation of non-selection, of the least each state. The results indicate that the
Another alternative could be to adjust costly, most cost-effective or least total first year costs of the proposed rule
the salary levels for the proposed burdensome alternative; for proposed on state and local government entities
standard test for inflation. However, the rules that include any Federal mandate range from $21.0 to $43.6 million. This
Department has never relied solely on that may result in increased includes $14.0 to $19.7 million in first
inflation adjustments to determine the expenditures by State, local, and tribal year (nonrecurring) implementation
appropriate salary levels, and has governments, in the aggregate, or by the costs and $7.0 to $23.9 million in
decided to continue its long-standing private sector, of $100 million or more recurring incremental payroll costs. The
regulatory practice to reject such in any one year. first year costs represent less than three
mechanical adjustments for inflation. In
(1) Authorizing Legislation one-thousandths percent (0.003 percent)
addition, the Department has
determined that this alternative would This rule is issued pursuant to section of the $1.434 trillion in general revenues
be far too burdensome on small 13(a)(1) of the Fair Labor Standards Act, received by all state and local
businesses. The PRIA indicates that 29 U.S.C. 213(a)(1). The section exempts government entities nationwide, and
adjusting the salary levels for inflation from the FLSA’s minimum wage and three one-hundredths percent (0.03
would more than double the recurring overtime pay requirements ‘‘any percent) of the $150.8 billion in total
payroll costs of the proposed rule from employee employed in a bona fide payrolls for those entities. The recurring
a range of $335 million to $896 million executive, administrative, or incremental payroll costs are about one-
per year to $747 million to $1,966 professional capacity (including any half these very small amounts.
million per year. employee employed in the capacity of The Department’s PRIA estimates that
Another alternative would be to academic administrative personnel or the benefits of the proposed rule for all
adjust the salary levels for the proposed teacher in elementary or secondary state and local government sectors range
standard test and highly compensated schools), or in the capacity of outside from $48.5 to $86.2 million. These
test to levels consistent with the 1958 salesman (as such terms are defined and estimates exclude difficult to quantify
Department of Labor report—no more delimited from time to time by benefits such as lower human resource
than 10 percent of those [workers] in the regulations of the Secretary, subject to costs and additional lower legal and
lowest-range—instead of the 20 percent the provisions of the Administrative settlement costs stemming from
range in the proposed rule. However, Procedure Act * * *).’’ The unintentionally misclassifying workers.
the Department has concluded that this requirements of the exemption provided The PRIA results indicate that the
would exclude overtime protections for by this section of the Act are contained benefits of the proposed rule will
a significant number of workers without in this rule, 29 CFR part 541. exceed the costs for state and local
having much of an impact on the cost Section 3(e) of the Fair Labor
governments in every year. However,
of the proposed rule. The PRIA Standards Act, 29 U.S.C. 203(e) defines
State and local governments, as
indicates that adjusting the salary levels employee to include most individuals
employers covered by the monetary
consistent with the 1958 report could employed by a state, political
exempt 319,000 to 360,000 employees subdivision of a state, or interstate requirements of the FLSA, will need to
from overtime and reduce the cost of the governmental agency. Section 3(x) of the raise any such additional revenues
proposed rule to $265 million to $719 Fair Labor Standards Act, 29 U.S.C. required, however minimal, to meet
million per year. The Department 203(x), also defines public agencies to their future compliance obligations if
invites comments on the appropriate include the government of a state or the proposed rule is adopted. The FLSA
salary levels for the proposed standard political subdivision thereof, or any does not provide for Federal financial
test and highly compensated test. interstate governmental agency. assistance or other Federal resources to
meet the requirements of its
(9) Exemption from Coverage of the Rule (2) Cost-Benefit Analysis intergovernmental mandates. The
for Small Entities Over 87,400 State and local Federal mandate imposed by the rule is
As discussed above in section (6) of governmental entities will be affected by not expected to have measurable effects
this analysis, under the terms of the the proposed rule (3,043 county on health, safety, or the natural
statute, Congress excluded smaller governments, 19,372 municipal environment.
(3) Macro-Economic Effects foremost of their concerns, particularly by accrued leave and other special
Agencies are expected to estimate the in the administrative exemption ‘‘salary basis’’ rules for budget-driven
effect of a regulation on the national category. Many State and local furloughs (29 CFR 541.5d). The U.S.
economy, such as the effect on governments classified nearly all of Supreme Court’s 1997 decision in Auer
productivity, economic growth, full their non-supervisory ‘‘white collar’’ v. Robbins, 519 U.S. 452 (1997), a public
employment, creation of productive workers as exempt administrative sector case involving the City of St.
jobs, and international competitiveness employees without regard to whether Louis Police Department and
of United States goods and services, if their primary duty relates directly to disciplinary deductions from pay, may
agency management policies or general also have relieved many concerns of
accurate estimates are reasonably
business operations or meets the public agencies over pay docking for
feasible and the effect is relevant and
discretion and independent judgment discipline.
material. 5 U.S.C. 1532(a)(4). However, Although public agency organizations
test. In the late 1980s, several Governors
OMB guidance on this requirement were invited to the Department’s
and State and local government agencies
notes that such macro-economic effects stakeholder meetings to address
urged the Department to exempt
tend to be measurable in nationwide concerns over the 541 regulations, they
classifications such as social workers,
econometric models only if the mostly did not respond to the
detectives, probation officers, and
economic impact of the regulation invitations. The International Personnel
others, to avoid disrupting the level of
reaches 0.25 percent to 0.5 percent of Management Association, accompanied
public services that would result from
Gross Domestic Product, or in the range increasing costs or limiting the hours of by the National Public Employers Labor
of $1.5 billion to $3.0 billion. A service due to overtime requirements. In Relations Association and the U.S.
regulation with smaller aggregate effect 1989, former Labor Secretary Elizabeth Conference of Mayors, suggested that
is not likely to have a measurable Dole, in a widely disseminated response progressive discipline systems are
impact in macro-economic terms unless to 13 Governors, confirmed the nature of common in the public sector (some
it is highly focused on a particular the administrative exemption’s duties collectively bargained) and the ‘‘salary
geographic region or economic sector, test as applied to public sector basis’’ rule for exempt workers, which
which is not the case with this proposed employees but solicited specific input prohibits disciplinary deductions except
rule. with accompanying rationale for what for major safety rules, threatens such
The Department’s PRIA estimates that should be changed. Responses were systems. Representatives of the
the total aggregate economic impact of limited but argued generally that Interstate Labor Standards Association
this proposed rule ranges from $870.3 government services are unique because (ILSA) submitted written views
million to $1,575.5 million. However, as of the impact on health, safety, welfare suggesting that the salary threshold be
noted in the previous section or liberty of citizens. This, they argued, indexed to the current minimum wage
summarizing the Department’s PRIA, should allow exemption of positions in or some multiple thereof (e.g., 3 times
these are upper bound estimates and the law enforcement and criminal justice, the minimum wage for a 40-hour
actual costs and impacts expected to be human services, health care and workweek or $618 per week). One
incurred by employers, including state rehabilitation services, and the additional idea was to relate the salary
and local governments, if the proposed unemployment compensation systems, levels to those of the supervised
rule were adopted, are likely to be regardless of whether any particular employees.
lower. Therefore, given OMB’s employee’s job duties include important The proposed rule would revise and
guidance, the Department has decision-making on how the agency is simplify the exemptions’ duties tests,
determined that a full macro-economic operated or managed internally. They but would continue to apply the same
analysis is not likely to show any also urged the Department to redefine basic duties tests in both the public and
measurable impact on the economy. the professional exemption to recognize private sectors. The public sector is
(4) Summary of State, Local, and Tribal a broader contemporary use of that term governed by a different set of pay-
Government Input in government employment. docking rules and additional proposed
In the midst of a growing wave of revisions in this rule would broaden
Congress amended the FLSA in 1985 private lawsuits filed by public permissible disciplinary deductions to
to readjust how the Act would apply to employees against their employers include sanctions for infractions such as
the public sector. The 1985 amendments challenging their exempt status, a series sexual harassment and work place
allowed compensatory time off in lieu of of court decisions were rendered that violence. However, a broader or separate
cash overtime pay, partial overtime sharply limited public employers’ duties test rule applicable solely to the
exemptions for police and fire ability to successfully assert exemption public sector does not seem warranted
departments, the use of unpaid under the ‘‘salary basis’’ rule. This led at this time, as the case has not been
volunteers in certain circumstances, and the Department to alter the ‘‘salary made for such separate treatment. The
a temporary phase-in period for meeting basis’’ rules to provide specific relief to Department is interested in receiving
FLSA compliance obligations. However, public employers in a final rule issued specific public comments on any issues
Congress enacted no special provisions in August 1992 (57 FR 37666; Aug. 19, of concern to public employees and
for public agencies related to the section 1992). Under this special rule, the fact public employers, and will carefully
13(a)(1) exemptions or the 541 that a public sector pay and leave examine any such public comments
regulations. Consequently, the same system includes partial-day deductions submitted on this proposal during the
rules for distinguishing 541-exempt from pay for absences not covered by rulemaking process.
employees from nonexempt employees accrued paid leave becomes irrelevant
that apply in the private sector were to determining any public sector (5) Least Burdensome Option or
initially applied to the public sector employee’s eligibility for exemption. Explanation Required
following the 1985 amendments. Public sector employers have been The Department’s consideration of
Since 1985, State and local less vocal over FLSA issues since the various options is described in the
governments have confronted FLSA Department’s 1992 rulemaking allowing preceding section in the preamble on
compliance issues and the 541 partial-day (or hourly) deductions from the Regulatory Flexibility Act and
regulations have been among the pay for employee absences not covered Executive Order 13272. The Department
believes that it has chosen the least Procedure Act * * *).’’ The relationship between the Federal
burdensome option that updates, requirements of the exemption provided government and Indian tribes, or on the
clarifies, and simplifies the rule. One by this section of the Act are contained distribution of power and
alternative option would have set the in this rule, 29 CFR part 541. responsibilities between the Federal
exemptions’ salary level at a rate lower Section 3(e) of the Fair Labor government and Indian tribes.’’ As a
than the proposed $425 per week, Standards Act, 29 U.S.C. 203(e), defines result, no tribal summary impact
which might impose lower direct employee to include most individuals statement has been prepared.
payroll costs on employers but may not employed by a state, political
necessarily be the most cost-effective or subdivision of a state, or interstate XI. Executive Order 12630,
least burdensome alternative for governmental agency. Section 3(x) of the Constitutionally Protected Property
employers. A lower salary level could Fair Labor Standards Act, 29 U.S.C. Rights
result in a less effective ‘‘bright-line’’ 203(x), also defines public agencies to
test that separates exempt workers from include the government of a state or This rule is not subject to E.O. 12630
those nonexempt workers whom political subdivision thereof, or any because it does not involve
Congress intended to cover by the Act. interstate governmental agency. implementation of a policy ‘‘that has
Greater ambiguity regarding who is The Department’s Preliminary takings implications’’ or that could
exempt and nonexempt increases the Regulatory Impact Analysis (PRIA) impose limitations on private property
potential legal liability from estimates the implementation costs, use.
unintentionally misclassifying workers, incremental payroll costs, and benefits
of the proposed rule for all state and XII. Executive Order 12988, Civil
and thus the ultimate cost of the
regulation. local government sectors in the Justice Reform Analysis
aggregate in each state. The results
VII. Effects on Families This rule was drafted and reviewed in
indicate that the total first year costs of
the proposed rule on state and local accordance with E.O. 12988 and will
This rule has been assessed under
section 654 of the Treasury and General government entities range from $24.1 to not unduly burden the federal court
Government Appropriations Act, 1999, $43.6 million. This includes $14.0 to system. The rule was: (1) Reviewed to
for its effect on family well-being and $19.7 million in first year (nonrecurring) eliminate drafting errors and
the undersigned hereby certifies that the implementation costs and $10.1 to $23.9 ambiguities; (2) written to minimize
rule will not adversely affect the well- million in recurring incremental payroll litigation; and (3) written to provide a
being of families. costs. The first year costs represent less clear legal standard for affected conduct,
than three one-thousandths percent and to promote burden reduction.
VIII. Executive Order 13045, Protection (0.003 percent) of the $1.434 trillion in
of Children XIII. Executive Order 13211, Energy
general revenues received by all state
In accordance with Executive Order and local government entities Supply
13045, the Department has evaluated nationwide, and three one-hundredths This rule is not subject to E.O. 13211.
this rule and determined that it has no percent (0.03 percent) of the $150.8 It will not have a significant adverse
environmental health risk or safety risk billion in total payrolls for those effect on the supply, distribution, or use
that may disproportionately affect entities. The recurring incremental
of energy.
children. payroll costs are about one-half these
very small amounts. XIV. Environmental Impact Assessment
IX. Executive Order 13132, Federalism The Department’s PRIA also estimates
This rule will not have ‘‘substantial that the benefits of the proposed rule for The Department has reviewed this
direct effects on the States, on the all state and local government sectors rule in accordance with the
relationship between the national range from $48.5 to $86.2 million. These requirements of the National
government and the States, or on the estimates exclude difficult to quantify Environmental Policy Act (NEPA) of
distribution of power and benefits such as lower human resource 1969 (42 U.S.C. 4321 et seq.), the
responsibilities among the various costs and additional lower legal and regulations of the Council on
levels of government.’’ Under the terms settlement costs stemming from Environmental Quality (40 U.S.C. 1500),
of section 6 of E.O. 13132, it has been unintentionally misclassifying workers. and the Department’s NEPA procedures
determined that this rule does not have The PRIA results indicate that the (29 CFR part 11). The rule will not have
sufficient federalism implications to benefits of the proposed rule will a significant impact on the quality of the
warrant the preparation of a federalism exceed the costs for state and local human environment, and, thus, the
summary impact statement. governments in every year. The Federal Department has not conducted an
This rule is issued pursuant to section mandate imposed by the rule is not environmental assessment or an
13(a)(1) of the Fair Labor Standards Act, expected to have substantial direct
29 U.S.C. 213(a)(1). The section exempts environmental impact statement.
effects on the States and will not affect
from the FLSA’s minimum wage and the current relationship between the List of Subjects in 29 CFR Part 541
overtime pay requirements ‘‘any national government and the states or
employee employed in a bona fide the distribution of power and Labor, Minimum wages, Overtime
executive, administrative, or responsibilities among the various pay, Salaries, Teachers, Wages.
professional capacity (including any levels of government. Signed in Washington, DC, this 25th day of
employee employed in the capacity of March, 2003.
academic administrative personnel or X. Executive Order 13175, Indian
Tribal Governments Tammy D. McCutchen,
teacher in elementary or secondary
schools), or in the capacity of outside This rule was reviewed under the Administrator, Wage and Hour Division.
salesman (as such terms are defined and terms of E.O. 13175 and determined not For the reasons set forth above, 29
delimited from time to time by to have ‘‘tribal implications.’’ The rule CFR part 541 is proposed to be amended
regulations of the Secretary, subject to does not have ‘‘substantial direct effects as set forth below.
the provisions of the Administrative on one or more Indian tribes, on the
PART 541—DEFINING AND 541.704 Trainees. the United States Equal Employment
DELIMITING THE EXEMPTIONS FOR 541.705 Emergencies. Opportunity Commission.
EXECUTIVE, ADMINISTRATIVE, 541.706 Occasional tasks.
541.707 Combination exemptions. § 541.1 Terms defined.
PROFESSIONAL, COMPUTER AND 541.708 Motion picture producing industry.
OUTSIDE SALES EMPLOYEES Act means the Fair Labor Standards
541.709 Employees of public agencies. Act of 1938, as amended.
Subpart A—General Regulations Authority: 29 U.S.C. 213; Pub. L. 101–583, Administrator means the
Sec. 104 Stat. 2871; Reorganization Plan No. 6 of Administrator of the Wage and Hour
541.0 Introductory statement. 1950 (3 CFR 1945–53 Comp. p. 1004); Division, United States Department of
541.1 Terms defined. Secretary’s Order No. 4–2001 (66 FR 29656). Labor. The Secretary of Labor has
541.2 Job titles insufficient. delegated to the Administrator the
Subpart A—General Regulations
Subpart B—Executive Employees functions vested in the Secretary under
§ 541.0 Introductory statement. sections 13(a)(1) and 13(a)(17) of the
541.100 General rule for executive
employees. (a) Section 13(a)(1) of the Fair Labor Fair Labor Standards Act.
541.101 Business owner. Standards Act, as amended, provides an § 541.2 Job titles insufficient.
541.102 Sole charge executive. exemption from the Act’s minimum
541.103 Management of the enterprise. A job title alone is insufficient to
wage and overtime requirements for any establish the exempt status of an
541.104 Department or subdivision.
541.105 Two or more other employees.
employee employed in a bona fide employee. The exempt or nonexempt
541.106 Working supervisors. executive, administrative, or status of any particular employee must
541.107 Supervisors in retail professional capacity (including any be determined on the basis of whether
establishments. employee employed in the capacity of the employee’s salary and duties meet
academic administrative personnel or the requirements of the regulations in
Subpart C—Administrative Employees
teacher in elementary or secondary this part.
541.200 General rule for administrative schools), or in the capacity of an outside
employees.
541.201 Related to management or general
sales employee, as such terms are Subpart B—Executive Employees
business operations. defined and delimited from time to time
by regulations of the Secretary, subject § 541.100 General rule for executive
541.202 Position of responsibility. employees.
541.203 Work of substantial importance. to the provisions of the Administrative
541.204 High level of skill or training. Procedure Act. Section 13(a)(17) of the (a) The term ‘‘employee employed in
541.205 Educational establishments. Act provides an exemption from the a bona fide executive capacity’’ in
minimum wage and overtime section 13(a)(1) of the Act shall mean
Subpart D—Professional Employees
requirements for computer systems any employee:
541.300 General rule for professional (1) Compensated on a salary basis at
employees.
analysts, computer programmers,
software engineers, and other similarly a rate of not less than $425 per week (or
541.301 Learned professionals. $360 per week, if employed in
541.302 Creative professionals. skilled computer employees.
(b) The requirements for these American Samoa by employers other
541.303 Teachers.
541.304 Practice of law or medicine. exemptions are contained in this part as than the Federal Government), exclusive
follows: executive employees, subpart of board, lodging or other facilities;
Subpart E—Computer Employees (2) With a primary duty of the
B; administrative employees, subpart C;
541.400 General rule for computer management of the enterprise in which
professional employees, subpart D;
employees. the employee is employed or of a
541.401 High level of skill and expertise. computer employees, subpart E; outside
customarily recognized department or
541.402 Computer operation, manufacture sales employees, subpart F. Subpart G
subdivision thereof;
and repair. contains regulations regarding salary
(3) Who customarily and regularly
541.403 Executive and administrative requirements applicable to most of the
directs the work of two or more other
computer employees. exemptions, including salary levels and
employees; and
Subpart F—Outside Sales Employees the salary basis test. Subpart G also (4) Who has the authority to hire or
contains a provision for exempting fire other employees or whose
541.500 General rule for outside sales
certain highly compensated employees. suggestions and recommendations as to
employees.
541.501 Making sales or obtaining orders. Subpart H contains definitions and the hiring, firing, advancement,
541.502 Away from employer’s place of other miscellaneous provisions promotion or any other change of status
business. applicable to all or several of the of other employees will be given
541.503 Promotion work. exemptions. particular weight.
541.504 Drivers who sell. (c) Effective July 1, 1972, the Fair (b) The phrase ‘‘salary basis’’ is
Subpart G—Salary Requirements Labor Standards Act was amended to defined at § 541.602; ‘‘board, lodging or
include within the protection of the other facilities’’ is defined at § 541.606;
541.600 Amount of salary required.
541.601 Highly compensated employees.
equal pay provisions those employees ‘‘primary duty’’ is defined at § 541.700;
541.602 Salary basis. exempt from the minimum wage and and ‘‘customarily and regularly’’ is
541.603 Effect of improper deductions from overtime pay provisions as bona fide defined at § 541.701.
salary. executive, administrative, and
541.604 Minimum guarantee plus extras. professional employees (including any § 541.101 Business owner.
541.605 Fee basis. employee employed in the capacity of The term ‘‘employee employed in a
541.606 Board, lodging or other facilities. academic administrative personnel or bona fide executive capacity’’ in section
Subpart H—Definitions and Miscellaneous teacher in elementary or secondary 13(a)(1) of the Act also includes any
Provisions schools), or in the capacity of an outside employee who owns at least a 20-
541.700 Primary duty. sales employee under section 13(a)(1) of percent equity interest in the enterprise
541.701 Customarily and regularly. the Act. The equal pay provisions in in which the employee is employed,
541.702 Exempt and nonexempt work. section 6(d) of the Fair Labor Standards regardless of whether the business is a
541.703 Directly and closely related. Act are administered and enforced by corporate or other type of organization.
The requirements of subpart G (salary § 541.103 Management of the enterprise. that the employee is in charge of a
requirements) of this part do not apply Generally, ‘‘management of the recognized unit with a continuing
to the business owners described in this enterprise’’ includes activities such as function.
section. interviewing, selecting, and training of
employees; setting and adjusting their § 541.105 Two or more other employees.
§ 541.102 Sole charge executive. rates of pay and hours of work; directing (a) To qualify as an exempt executive
(a) The term ‘‘employee employed in the work of employees; maintaining under § 541.100, the employee must
a bona fide executive capacity’’ in production or sales records for use in customarily and regularly direct the
section 13(a)(1) of the Act also includes supervision or control; appraising work of two or more other employees.
any employee compensated on a salary employees’ productivity and efficiency; The phrase ‘‘two or more other
basis at a rate of not less than $425 per handling employee complaints and employees’’ means two full-time
week (or $360 per week, if employed in grievances; disciplining employees; employees or their equivalent. One full-
American Samoa by employers other planning the work; determining the time and two half-time employees, for
than the Federal Government), exclusive techniques to be used; apportioning the example, are equivalent to two full-time
of board, lodging or other facilities, who work among the employees; employees. Four half-time employees
is in sole charge of an independent determining the type of materials, are also equivalent.
establishment or a physically separated supplies, machinery or tools to be used (b) The supervision can be distributed
branch establishment. or merchandise to be bought, stocked among two, three or more employees,
(b) The term ‘‘sole charge’’ means that and sold; controlling the flow and but each such employee must
the employee ordinarily must be in distribution of materials or merchandise customarily and regularly direct the
charge of the company activities at the and supplies; and providing for the work of two or more other full-time
location where the employee is safety of the employees or the property. employees or the equivalent. Thus, for
employed. Thus, to qualify as a ‘‘sole example, a department with five full-
§ 541.104 Department or subdivision. time non-exempt workers may have up
charge’’ executive, the employee must
(a) The phrase ‘‘a customarily to two exempt supervisors if each such
have authority to make decisions
recognized department or subdivision’’ supervisor customarily and regularly
regarding the day-to-day operations of
is intended to distinguish between a directs the work of two of those
the establishment and to direct the work
mere collection of employees assigned workers.
of any other employees at the
from time to time to a specific job or (c) An employee who merely assists
establishment or branch. Only one
series of jobs and a unit with permanent the manager of a particular department
person in any establishment can qualify
status and function. A customarily and supervises two or more employees
as a sole charge executive, and then
recognized department or subdivision only in the actual manager’s absence
only if that person is the top person in must have a permanent status and a
charge at that location. The ‘‘sole- does not meet this requirement.
continuing function. For example, a (d) Hours worked by an employee
charge’’ status of an employee will not large employer’s human resources
be considered lost because of an cannot be credited more than once for
department might have subdivisions for different executives. Thus, a shared
occasional visit to the establishment or labor relations, pensions and other
branch office of a superior. responsibility for the supervision of the
benefits, equal employment same two employees in the same
(c) The phrase ‘‘independent opportunity, and personnel
establishment or a physically separated department does not satisfy this
management, each of which has a requirement. However, a full-time
branch establishment’’ means an permanent status and function.
establishment that has a fixed location employee who works four hours for one
(b) When an enterprise has more than supervisor and four hours for a different
and is geographically separated from one establishment, the employee in
other company property. The supervisor, for example, can be credited
charge of each establishment may be as a half-time employee for both
management of operations within one of considered in charge of a recognized
several buildings located on single or supervisors.
subdivision of the enterprise. The
adjoining tracts of company property employee also may qualify for the sole § 541.106 Working supervisors.
does not qualify for the exemption charge exemption, if all of the Employees, sometimes called
under this section. In the case of a requirements of § 541.102 are satisfied. ‘‘working foremen’’ or ‘‘working
branch, there must be a true and (c) A recognized department or supervisors,’’ who have some
complete physical separation from the subdivision need not be physically supervisory functions, such as directing
main office. within the employer’s establishment the work of other employees, but also
(d) A leased department may qualify and may move from place to place. The perform work unrelated or only
as an independent establishment when mere fact that the employee works in remotely related to the supervisory
the lessee operates under a separate more than one location does not activities are not exempt executives if,
trade name, with its own separate invalidate the exemption if other factors instead of having management as their
employees and records, and in other show that the employee is actually in primary duty as required in § 541.100,
respects conducts the lessee’s business charge of a recognized unit with a their primary duty consists of either the
independently of the lessor’s. In such a continuing function in the organization. same kind of work as that performed by
case the leased department would enjoy (d) Continuity of the same their subordinates; work that, although
the same status as a physically subordinate personnel is not essential to not performed by their own
separated branch establishment. A the existence of a recognized unit with subordinates, consists of ordinary
leased department cannot be considered a continuing function. An otherwise production or sales work; or routine,
an independent establishment when the exempt employee will not lose the recurrent or repetitive tasks.
lessor has authority over such matters as exemption merely because the employee
hiring and firing of employees, other draws and supervises workers from a § 541.107 Supervisors in retail
personnel policies, advertising, pool or supervises a team of workers establishments.
purchasing, pricing, credit operations, drawn from other recognized units, if Supervisors in retail establishments
insurance and taxes. other factors are present that indicate often perform work such as serving
customers, cooking food, stocking insurance, quality control, purchasing, whole. It includes the work of
shelves, cleaning the establishment or procurement, advertising, marketing, employees who carry out major
other non-exempt work. Performance of research, safety and health, personnel assignments in conducting the
such non-exempt work by a supervisor management, human resources, operations of the business, or whose
in a retail establishment does not employee benefits, labor relations, work affects general business operations
disqualify the employee from the public relations, government relations to a significant degree, even though
exemption if the requirements of and similar activities. Some of these their assignments are tasks related to the
§ 541.100 are otherwise met. Thus, an activities may be performed by operation of a particular segment of the
assistant manager whose primary duty employees who also would qualify for business.
includes such activities as scheduling another exemption. For example, a tax (1) For example, an employee who is
employees, assigning work, overseeing attorney and an accountant likely are a buyer of a particular type of
product quality, ordering merchandise, performing work that qualifies for the equipment in an industrial plant or who
managing inventory, handling customer professional exemption. is an assistant buyer for a retail or
complaints, authorizing payment of bills (c) An employee may qualify for the service establishment may have a
or performing other management administrative exemption if the significant impact on the business, even
functions may be an exempt executive employee performs work related to the though the work may be limited to
even though the assistant manager management or general business purchasing for a particular department.
spends the majority of the time on non- operations of the employer’s customers. Similarly, although comparison
exempt work. Thus, for example, employees acting as shopping by an employee who merely
advisers and consultants to their reports findings on a competitor’s prices
Subpart C—Administrative Employees employer’s clients or customers (as tax is not work of substantial importance,
experts or financial consultants, for the buyer who evaluates such reports to
§ 541.200 General rule for administrative set the employer’s prices does perform
employees.
example) may be exempt.
work of substantial importance.
(a) The term ‘‘employee employed in § 541.202 Position of responsibility. (2) Insurance claims adjusters also
a bona fide administrative capacity’’ in To qualify for the administrative generally perform work of substantial
section 13(a)(1) of the Act shall mean exemption, an employee must hold a importance, whether they work for an
any employee: position of responsibility with the insurance company or other type of
(1) Compensated on a salary or fee employer. The phrase ‘‘position of company, if their duties include
basis at a rate of not less than $425 per responsibility’’ refers to the importance activities such as interviewing insureds,
week (or $360 per week, if employed in to the employer of the work performed witnesses and physicians; inspecting
American Samoa by employers other or the high level of competence required property damage; reviewing factual
than the Federal Government), exclusive by the work performed. To meet this information to prepare damage
of board, lodging or other facilities; requirement, an employee must either estimates; evaluating and making
(2) With a primary duty of the customarily and regularly perform work recommendations regarding coverage of
performance of office or non-manual of substantial importance or perform claims; determining liability and total
work related to the management or work requiring a high level of skill or value of a claim; negotiating
general business operations of the training. The phrase ‘‘customarily and settlements; and making
employer or the employer’s customers; regularly’’ is defined at § 541.710. recommendations regarding litigation.
and (3) An employee who leads a team of
(3) Who holds a position of § 541.203 Work of substantial importance. other employees assigned to complete a
responsibility with the employer. (a) The phrase ‘‘work of substantial major project for the employer (such as
(b) The term ‘‘salary basis’’ is defined importance’’ means work that, by its purchasing, selling or closing all or part
at § 541.602; ‘‘fee basis’’ is defined at nature or consequence, affects the of the business, negotiating a real estate
§ 541.605; ‘‘board, lodging or other employer’s general business operations transaction or a collective bargaining
facilities’’ is defined at § 541.606; and or finances to a significant degree. agreement, or designing and
‘‘primary duty’’ is defined at § 541.700. (b) Work of substantial importance implementing productivity
includes activities such as formulating, improvements) performs work of
§ 541.201 Related to management or interpreting or implementing substantial importance, even if the
general business operations. management policies; providing employee does not have direct
(a) To qualify for the administrative consultation or expert advice to supervisory responsibility over the other
exemption, an employee must perform management; making or recommending employees on the team.
work related to the management or decisions that have a significant impact (4) Other employees that perform
general business operations of the on general business operations or work of substantial importance, even if
employer or the employer’s customers. finances; analyzing and recommending their decisions or recommendations are
The phrase ‘‘related to management or changes to operating practices; planning reviewed for possible modification or
general business operations’’ refers to long or short-term business objectives; rejection at a higher level, include: a
the type of work performed by the analyzing data, drawing conclusions human resources manager who
employee. To meet this requirement, an and recommending changes; handling formulates employment policies; a
employee must perform work related to complaints, arbitrating disputes or management consultant who studies the
assisting with the running or servicing resolving grievances; representing the operations of a business and proposes
of the business, as distinguished, for company during important contract change in organization; a purchasing
example, from working on a negotiations; and work of similar impact agent who is required to consult with
manufacturing production line or on general business operations or top management officials when making
selling a product. finances. Work of substantial a purchase commitment for raw
(b) Work related to management or importance thus is not limited to materials in excess of the contemplated
general business operations includes, employees who participate in the plant needs; or an executive or
for example, work in areas such as tax, formulation of management policies or administrative assistant to a proprietor
finance, accounting, auditing, in the operation of the business as a or chief executive of a business if such
employee, without specific instructions consultants, marketing consultants, (b) The term ‘‘educational
or prescribed procedures, has been safety directors, account executives of establishment’’ means an elementary or
delegated authority to arrange meetings, advertising agencies and stock brokers. secondary school system, an institution
handle callers and answer Employees with a high level of skill or of higher education or other educational
correspondence. training also may perform special institution. Sections 3(v) and 3(w) of the
(c) Work of substantial importance assignments, including assignments Act define elementary and secondary
does not include clerical or secretarial performed away from their employer’s schools as those day or residential
tasks, recording or tabulating data, or place of business if the employee serves schools that provide elementary or
performing other mechanical, repetitive, as a field representative for the secondary education, as determined
recurrent or routine work. For example, employer. under State law. Under the laws of most
an employee who simply tabulates data (b) Work requiring a high level of skill States, such education includes the
is not exempt, even if labeled as a or training may include work by curricula in grades 1 through 12; under
‘‘statistician.’’ An example of an employees who use a reference manual. many it includes also the introductory
employee who does not perform work of The use of such a manual can require programs in kindergarten. Such
substantial importance is a personnel a high level of skill and training if the education in some States may also
clerk engaged in ‘‘screening’’ of manual contains highly technical, include nursery school programs in
applicants (collecting data and rejecting scientific, legal, financial or other elementary education and junior college
applicants who do not meet basic similarly complex information that can curricula in secondary education. The
qualifications), but who is not involved be interpreted properly only by those term ‘‘educational establishment’’
in making the decision to hire. with advanced training or specialized includes special schools for mentally or
(d) An employer’s volume of business knowledge or skills. Such manuals are physically disabled or gifted children,
may make it necessary to employ a used to provide guidance in addressing regardless of any classification of such
number of employees to perform the very difficult or novel circumstances. schools as elementary, secondary or
same or similar work. The fact that Thus, if an employee performs higher. Also, for purposes of the
many employees perform identical work exemption, no distinction is drawn
administrative work that satisfies the
or work of the same relative importance between public and private schools, or
‘‘high level of skill or training’’
does not mean that the work of each between those operated for profit and
standard, using this type of reference
such employee is not work of those that are not for profit.
manual would not affect the employee’s
substantial importance. (c) The phrase ‘‘performing
(e) The work of an employee does not exempt status.
administrative functions directly related
meet this requirement merely because (c) Work requiring a high level of skill
to academic instruction or training’’
the employer will experience financial or training does not include work
means work related to the academic
losses if the employee fails to perform requiring the employee simply to look
operations and functions in a school
the job properly. For example, a up information (from a handbook, for rather than to administration along the
messenger who is entrusted with example) to determine the correct lines of general business operations.
carrying large sums of money does not response to an inquiry or set of Such academic administrative functions
perform work of substantial importance circumstances. Nor does it include include operations directly in the field
even though serious consequences may clerical or secretarial work, recording or of education. Jobs relating to areas
flow from the employee’s neglect. An tabulating data, or other mechanical, outside the educational field are not
employee who operates very expensive repetitive, recurrent or routine work. within the definition of academic
equipment is not performing work of Employees such as inspectors, administration.
substantial importance merely because examiners and graders who use (1) Employees engaged in academic
improper performance of the employee’s established techniques, procedures or administrative functions include: the
duties may cause serious financial loss standards to accept or reject a product superintendent or other head of an
to the employer. do not perform work requiring a high elementary or secondary school system,
level of skill or training, even though and any assistants, responsible for
§ 541.204 High level of skill or training. such employees may have some leeway administration of such matters as
(a) The phrase ‘‘work requiring a high in the performance of their work. curriculum, quality and methods of
level of skill or training’’ means instructing, measuring and testing the
§ 541.205 Educational establishments.
administrative work requiring learning potential and achievement of
specialized knowledge or abilities, or (a) The term ‘‘employee employed in students, establishing and maintaining
advanced training. The specialized a bona fide administrative capacity’’ in academic and grading standards, and
knowledge or abilities need not be section 13(a)(1) of the Act also includes other aspects of the teaching program;
acquired through any particular course employees: the principal and any vice-principals
of academic training or study. Also, the (1) Compensated for services on a responsible for the operation of an
high level of training required may salary or fee basis at a rate of not less elementary or secondary school;
involve advanced academic instruction than $425 per week (or $360 per week, department heads in institutions of
or advanced on-the-job training, or a if employed in American Samoa by higher education responsible for the
combination of both. Administrative employers other than the Federal administration of the mathematics
work that satisfies the ‘‘high level of Government) exclusive of board, lodging department, the English department, the
skill or training’’ standard includes or other facilities, or on a salary basis foreign language department, etc.; and
advisory work performed for the which is at least equal to the entrance other employees with similar
management of the company (or for the salary for teachers in the educational responsibilities.
management of the company’s establishment by which employed; and (2) Jobs relating to building
customers), as is typically performed by (2) With a primary duty of performing management and maintenance, jobs
financial advisors, tax advisors, administrative functions directly related relating to the health of the students,
insurance experts, credit managers, to academic instruction or training in an and academic staff such as social
employee benefits experts, human educational establishment or workers, psychologists, lunch room
resource consultants, labor relations department or subdivision thereof. managers or dietitians do not perform
academic administrative functions. (b) The phrase ‘‘knowledge of an (5) Accountants. Certified public
Although such work is not considered advanced type’’ means knowledge that accountants, except in unusual cases,
academic administration, such cannot be attained at the high school meet the primary duty requirement for
employees may qualify for exemption level. the learned professional exemption. In
under § 541.200 or under other sections (c) The phrase ‘‘field of science or addition, many other accountants who
of this part provided the requirements learning’’ distinguishes the learned are not certified public accountants but
for such exemptions are met. professions from the mechanical arts perform similar job duties may qualify
where in some instances the knowledge as exempt learned professionals.
Subpart D—Professional Employees is of a fairly advanced type, but not in However, accounting clerks and other
a field of science or learning. employees who normally perform a
§ 541.300 General rule for professional (d) The phrase ‘‘customarily acquired
employees.
great deal of routine work generally will
by a prolonged course of specialized not qualify as exempt professionals.
(a) The term ‘‘employee employed in intellectual instruction’’ generally (6) Chefs. Chefs, such as executive
a bona fide professional capacity’’ in restricts the exemption to professions chefs and sous chefs, who have attained
section 13(a)(1) of the Act shall mean where specialized academic training is a college degree in a culinary arts
any employee: a standard prerequisite for entrance into program, meet the primary duty
(1) Compensated on a salary or fee the profession. The best prima facie requirement for the learned professional
basis at a rate of not less than $425 per evidence that an employee meets this exemption.
week (or $360 per week, if employed in requirement is possession of the (f) Professional occupations do not
American Samoa by employers other appropriate academic degree. However, include those whose duties may be
than the Federal Government), exclusive the word ‘‘customarily’’ means that the performed with the general knowledge
of board, lodging, or other facilities; and exemption is also available to acquired by an academic degree in any
(2) With a primary duty of performing employees in such professions who field or with knowledge acquired
office or non-manual work: have substantially the same knowledge through an apprenticeship or from
(i) Requiring knowledge of an level as the degreed employees, but who training in routine mental, manual or
advanced type in a field of science or attained such knowledge through a physical processes. Thus, for example,
learning customarily acquired by a combination of work experience, the professional exemption does not
prolonged course of specialized training in the armed forces, attending apply to occupations such as carpenters,
intellectual instruction, but which also a technical school, attending a electricians, mechanics, plumbers, iron
may be acquired by alternative means community college or other intellectual workers, craftsmen, operating engineers,
such as an equivalent combination of instruction. longshoremen, construction workers,
intellectual instruction and work (e) The following professions have teamsters and other employees who
experience; or been found by the Administrator perform manual work that does not
(ii) Requiring invention, imagination, generally to meet the primary duty require an advanced academic degree.
originality or talent in a recognized field requirement for learned professionals in (g) The areas in which professional
of artistic or creative endeavor. § 541.300(b)(1): exemptions may be available are
(b) The term ‘‘salary basis’’ is defined (1) Registered or certified medical expanding. As knowledge is developed,
at § 541.602; ‘‘fee basis’’ is defined at technologists. Registered or certified academic training is broadened and
§ 541.605; ‘‘board, lodging or other medical technologists who have specialized degrees are offered in new
facilities’’ is defined at § 541.606; and successfully completed three academic and diverse fields, thus creating new
‘‘primary duty’’ is defined at § 541.700. years of pre-professional study in an specialists in particular fields of science
accredited college or university plus a or learning. When a specialized degree
§ 541.301 Learned professionals.
fourth year of professional course work has become a standard requirement for
(a) Learned professionals must have a in a school of medical technology a particular occupation, that occupation
primary duty of performing office or approved by the Council of Medical may have acquired the characteristics of
non-manual work requiring advanced Education of the American Medical a learned profession.
knowledge in a field of science or Association.
learning. The term ‘‘advanced (2) Registered nurses. Nurses who are § 541.302 Creative professionals.
knowledge’’ means knowledge that is registered by the appropriate State (a) Creative professionals must have a
customarily acquired through a examining board. primary duty of performing office or
prolonged course of specialized (3) Dental hygienists. Dental non-manual work requiring invention,
intellectual instruction, but which also hygienists who have successfully imagination, originality or talent in a
may be acquired by alternative means completed four academic years of pre- recognized field of artistic or creative
such as an equivalent combination of professional and professional study in endeavor as opposed to routine mental,
intellectual instruction and work an accredited college or university manual, mechanical or physical work.
experience. The learned professions approved by the Commission on The exemption does not apply to work
include the professions of law, Accreditation of Dental and Dental which can be produced by a person
medicine, theology, teaching, Auxiliary Educational Programs of the with general manual ability and
accounting, actuarial computation, American Dental Association. training.
engineering, architecture, various types (4) Physician assistants. Physician (b) To qualify for exemption as a
of physical, chemical and biological assistants who have successfully creative professional, the work
sciences, pharmacy, and other similar completed three years of pre- performed must be ‘‘in a recognized
occupations that have a recognized professional study (or 2,000 hours of field of artistic or creative endeavor.’’
professional status based on the patient care experience in a military or This includes such fields as music,
acquirement of advanced knowledge civilian occupation such as laboratory writing, acting and the graphic arts.
and performance of work that is technology, nursing, psychology, (c) The requirement of ‘‘invention,
predominantly intellectual in character biology, or related activity) plus not less imagination, originality or talent’’
as opposed to routine, mental, manual, than one year of professional course distinguishes the creative professions
mechanical or physical work. work in a medical school or hospital. from work that primarily depends on
intelligence, diligence and accuracy. faculty members who are engaged as (doctors of osteopathy), podiatrists,
This requirement generally is met by teachers but also spend a considerable dentists (doctors of dental medicine),
actors, musicians, composers, amount of their time in extracurricular and optometrists (doctors of optometry
conductors, and soloists; painters who activities such as coaching athletic or bachelors of science in optometry).
at most are given the subject matter of teams or acting as moderators or (c) Employees engaged in internship
their painting; cartoonists who are advisors in such areas as drama, speech, or resident programs, whether or not
merely told the title or underlying debate or journalism are engaged in licensed to practice prior to
concept of a cartoon and must rely on teaching. Such activities are a commencement of the program, qualify
their own creative ability to express the recognized part of the schools’ as exempt professionals if they enter
concept; essayists, novelists, short-story responsibility in contributing to the such internship or resident programs
writers and screen play writers who educational development of the student. after the earning of the appropriate
choose their own subjects and hand in (c) The possession of an elementary or degree required for the general practice
a finished piece of work to their secondary teacher’s certificate provides of their profession.
employers (the majority of such persons a clear means of identifying the (d) The requirements of § 541.300 and
are, of course, not employees but self- individuals contemplated as being subpart G (salary requirements) of this
employed); and persons holding the within the scope of the exemption for part do not apply to the licensed
more responsible writing positions in teaching professionals. Teachers who lawyers and medical professionals
advertising agencies. This requirement possess a teaching certificate qualify for described in this section.
generally is not met by a person who is the exemption regardless of the
employed as a copyist, as an ‘‘animator’’ terminology (e.g., permanent, Subpart E—Computer Employees
of motion-picture cartoons, or as a conditional, standard, provisional,
§ 541.400 General rule for computer
retoucher of photographs, since such temporary, emergency, or unlimited) employees.
work is not properly described as used by the State to refer to different
creative in character. kinds of certificates. However, private (a) Computer systems analysts,
(d) Journalists may qualify as creative schools and public schools are not computer programmers, software
professionals if their work generally uniform in requiring a certificate for engineers or other similarly skilled
requires invention, imagination, employment as an elementary or workers in the computer field are
originality or talent. Writers for secondary school teacher, and a eligible for exemption as professionals
newspapers, news magazines, television teacher’s certificate is not generally under section 13(a)(1) of the Act and
news programs, the Internet and other necessary for employment in under section 13(a)(17) of the Act.
media, for example, generally perform institutions of higher education or other Employees who qualify for this
work involving originality and talent. educational establishments. Therefore, a exemption are highly skilled in
Radio announcers and television teacher who is not certified may be computer systems analysis,
announcers also perform work that considered for exemption, provided that programming, software engineering or
requires artistic or creative talent. such individual is employed as a similar computer functions. Because job
Exempt work includes conducting teacher by the employing school or titles vary widely and change quickly in
interviews, reporting or analyzing school system. the computer industry, job titles are not
public events, and acting as a narrator, (d) The requirements of § 541.300 and determinative of the applicability of this
announcer or commentator. Positions subpart G (salary requirements) of this exemption. To qualify for the computer
that primarily require the employee to part do not apply to the teaching occupations exemption, the employee
collect and record routine facts or data professionals described in this section. must:
without analysis, interpretation, (1) Be compensated on a salary or fee
synthesis, or creative or original writing § 541.304 Practice of law or medicine. basis at a rate of not less than $425 per
would not qualify for the creative (a) The term ‘‘employee employed in week (or $360 per week, if employed in
professional exemption. a bona fide professional capacity’’ in American Samoa by employers other
section 13(a)(1) of the Act also shall than the Federal Government), exclusive
§ 541.303 Teachers. mean: of board, lodging or other facilities, or
(a) The term ‘‘employee employed in (1) Any employee who is the holder on an hourly basis at a rate not less than
a bona fide professional capacity’’ in of a valid license or certificate $27.63 an hour; and
section 13(a)(1) of the Act also means permitting the practice of law or (2) Have a primary duty consisting of:
any employee with a primary duty of medicine or any of their branches and (i) The application of systems analysis
teaching, tutoring, instructing or is actually engaged in the practice techniques and procedures, including
lecturing in the activity of imparting thereof; and consulting with users, to determine
knowledge and who is employed and (2) Any employee who is the holder hardware, software or system functional
engaged in this activity as a teacher in of the requisite academic degree for the specifications;
an educational establishment by which general practice of medicine and is (ii) The design, development,
the employee is employed. The term engaged in an internship or resident documentation, analysis, creation,
‘‘educational establishment’’ is defined program pursuant to the practice of the testing or modification of computer
in § 541.205(b). profession. systems or programs, including
(b) Exempt teachers include, but are (b) In the case of medicine, the prototypes, based on and related to user
not limited to: regular academic exemption applies to physicians and or system design specifications;
teachers; teachers of kindergarten or other practitioners licensed and (iii) The design, documentation,
nursery school pupils; teachers of gifted practicing in the field of medical testing, creation or modification of
or disabled children; teachers of skilled science and healing or any of the computer programs related to machine
and semiskilled trades and occupations; medical specialties practiced by operating systems; or
teachers engaged in automobile driving physicians or practitioners. The term (iv) A combination of the
instruction; aircraft flight instructors; ‘‘physicians’’ includes medical doctors aforementioned duties, the performance
home economics teachers; and vocal or including general practitioners and of which requires the same level of
instrumental music instructors. Those specialists, osteopathic physicians skills.
(b) The term ‘‘salary basis’’ is defined qualify as exempt administrative of facilities for which a consideration
at § 541.602; ‘‘fee basis’’ is defined at employees under § 541.200. Similarly, a will be paid by the client or customer.’’
§ 541.605; ‘‘board, lodging or other senior or lead computer programmer Obtaining orders for ‘‘the use of
facilities’’ is defined at § 541.606; and whose primary duty is to manage and facilities’’ includes the selling of time
‘‘primary duty’’ is defined at § 541.700. direct the work of other programmers in on radio or television, the solicitation of
a customarily recognized department or advertising for newspapers and other
§ 541.401 High level of skill and expertise. subdivision may qualify as an exempt periodicals, and the solicitation of
The exemption for computer executive employee under § 541.100. freight for railroads and other
employees applies only to highly-skilled transportation agencies.
employees who have achieved a level of Subpart F—Outside Sales Employees (d) The word ‘‘services’’ extends the
proficiency in the theoretical and outside sales exemption to employees
practical application of highly- § 541.500 General rule for outside sales
employees. who sell or take orders for a service,
specialized knowledge in computer which may be performed for the
systems analysis, programming and (a) The term ‘‘employee employed in customer by someone other than the
software engineering. This exemption the capacity of outside salesman’’ in person taking the order.
does not include trainees or employees section 13(a)(1) of the Act shall mean
in entry level positions learning to any employee: § 541.502 Away from employer’s place of
become proficient in such areas or to (1) With a primary duty of: business.
employees in computer occupations (i) Making sales within the meaning of (a) An outside sales employee must be
who have not attained a level of skill section 3(k) of the Act, or customarily and regularly engaged
and expertise which allows them to (ii) Obtaining orders or contracts for ‘‘away from the employer’s place or
work generally without close services or for the use of facilities for places of business.’’ This requirement is
supervision. The level of expertise and which a consideration will be paid by based on the obvious connotation of the
skill required to qualify for this the client or customer; and word ‘‘outside’’ in the statutory term
exemption is generally attained through (2) Who is customarily and regularly ‘‘outside salesman.’’ The Administrator
combinations of education, specialized engaged away from the employer’s place does not have authority to define this
training and experience in the field. No or places of business in performing such exemption for ‘‘outside’’ sales under
particular academic degree is required primary duty. section 13(a)(1) of the Act as including
for this exemption, nor are there any (b) The term ‘‘primary duty’’ is inside sales work. Section 13(a)(1) does
requirements for licensure or defined at § 541.700. In determining the not exempt inside sales and other inside
certification. primary duty of an outside sales work (except work performed incidental
employee, work performed incidental to to and in conjunction with outside sales
§ 541.402 Computer operation, and in conjunction with the employee’s and solicitations). However, section 7(i)
manufacture and repair. own outside sales or solicitations, of the Act exempts commissioned inside
The exemption for employees in including incidental deliveries and sales employees of qualifying retail or
computer occupations does not include collections, shall be regarded as exempt service establishments if those
employees engaged in the operation of outside sales work. Other work that employees meet the compensation
computers or in the manufacture, repair furthers the employee’s sales efforts also requirements of section 7(i).
or maintenance of computer hardware shall be regarded as exempt work (b) The outside sales employee is an
and related equipment. Employees including, for example, writing sales employee who makes sales at the
whose work is highly dependent upon, reports, updating or revising the customer’s place of business or, if
or facilitated by, the use of computers employee’s sales or display catalog, selling door-to-door, at the customer’s
and computer software programs (e.g., planning itineraries and attending sales home. Outside sales does not include
engineers, drafters and others skilled in conferences. The requirements of sales made by mail, telephone or the
computer-aided design software), but subpart G (salary requirements) of this Internet unless such contact is used
who are not in computer systems part do not apply to the outside sales merely as an adjunct to personal calls.
analysis and programming occupations, employees described in this section. Thus, any fixed site, whether home or
are also not exempt computer office, used by a salesperson as a
professionals. § 541.501 Making sales or obtaining headquarters or for telephonic
orders.
solicitation of sales is considered one of
§ 541.403 Executive and administrative (a) Section 541.500 requires that the the employer’s places of business, even
computer employees. employee be engaged in: though the employer is not in any
Computer employees within the scope (1) Making sales within the meaning formal sense the owner or tenant of the
of this exemption, as well as those of section 3(k) of the Act, or property. However, an outside sales
employees not within its scope, may (2) Obtaining orders or contracts for employee does not lose the exemption
also have executive and administrative services or for the use of facilities. by displaying samples in hotel sample
duties which qualify the employees for (b) Sales within the meaning of rooms during trips from city to city;
exemption under subpart B or subpart C section 3(k) of the Act include the these sample rooms should not be
of this part. For example, systems transfer of title to tangible property, and considered as the employer’s places of
analysts and computer programmers in certain cases, of tangible and valuable business.
whose primary duties are to plan, evidences of intangible property.
schedule, and coordinate activities Section 3(k) of the Act states that ‘‘sale’’ § 541.503 Promotion work.
required to develop systems to solve or ‘‘sell’’ includes any sale, exchange, (a) Promotion work is one type of
complex business, scientific or contract to sell, consignment for sale, activity often performed by persons who
engineering problems of the employer or shipment for sale, or other disposition. make sales, which may or may not be
the employer’s customers are (c) Exempt outside sales work exempt outside sales work, depending
performing work of substantial includes not only the sales of upon the circumstances under which it
importance related to management or commodities, but also ‘‘obtaining orders is performed. Promotional work that is
general business operations and may or contracts for services or for the use actually performed incidental to and in
conjunction with an employee’s own hiring; sales training; attendance at sales Subpart G—Compensation
outside sales or solicitations is exempt conferences; method of payment; and Requirements
work. On the other hand, promotional proportion of earnings directly
work that is incidental to sales made, or attributable to sales. § 541.600 Amount of salary required.
to be made, by someone else is not (c) Drivers who may qualify as exempt (a) To qualify as an exempt executive,
exempt outside sales work. outside sales employees include: administrative or professional employee
(b) A manufacturer’s representative, under section 13(a)(1) of the Act, an
(1) A driver who provides the only
for example, may perform various types employee must be compensated on a
sales contact between the employer and
of promotional activities such as putting salary basis at a rate of not less than
the customers visited, who calls on
up displays and posters, removing $425 per week (or $360 per week, if
customers and takes orders for products,
damaged or spoiled stock from the employed in American Samoa by
who delivers products from stock in the
merchant’s shelves or rearranging the employers other than the Federal
employee’s vehicle or procures and
merchandise. Such an employee can be Government), exclusive of board,
delivers the product to the customer on
considered an exempt outside sales lodging or other facilities.
a later trip, and who receives
employee if the employee’s primary Administrative and professional
compensation commensurate with the
duty is making sales or contracts. employees may also be paid on a fee
volume of products sold.
Promotion activities directed toward basis, as defined in § 541.605.
consummation of the employee’s own (2) A driver who obtains or solicits (b) The $425 a week may be translated
sales are exempt. Promotional activities orders for the employer’s products from into equivalent amounts for periods
designed to stimulate sales that will be persons who have authority to commit longer than one week. The requirement
made by someone else are not exempt. the customer for purchases. will be met if the employee is
(c) Another example is a company (3) A driver who calls on new compensated biweekly on a salary basis
representative who visits chain stores, prospects for customers along the of $850, semimonthly on a salary basis
arranges the merchandise on shelves, employee’s route and attempts to of $920.84, or monthly on a salary basis
replenishes stock by replacing old with convince them of the desirability of of $1,841.67. However, the shortest
new merchandise, consults with the accepting regular delivery of goods, period of payment that will meet this
store manager as to the requirements of (4) A driver who calls on established compensation requirement is one week.
the store, fills out a requisition for the customers along the route and carrying (c) In the case of academic
quantity wanted, but leaves the an assortment of the employer’s administrative employees, the
requisition with the store manager to be products who persuades regular compensation requirement also may be
transmitted to the central warehouse of customers to accept delivery of met by compensation on a salary basis
the chain store company which later increased amounts of goods or of new at a rate at least equal to the entrance
ships the quantity requested. The products, even though the initial sale or salary for teachers in the educational
arrangement of merchandise on the agreement for delivery was made by establishment by which the employee is
shelves or the replenishing of stock is someone else. employed, as provided in
not exempt work unless it is incidental (d) Drivers who generally would not § 541.206(a)(1).
to and in conjunction with the qualify as exempt outside sales (d) In the case of computer
employee’s own outside sales. Because employees include: employees, the compensation
the employee in this instance does not (1) A route driver whose primary duty requirement also may be met by
consummate the sale nor direct efforts is to transport products sold by the compensation on an hourly basis at a
toward the consummation of a sale, the employer through vending machines rate not less than $27.63 an hour, as
work in this example is not exempt. and to keep such machines stocked, in provided in § 541.400(a).
(e) In the case of professional
§ 541.504 Drivers who sell. good operating condition, and in good
employees, the compensation
(a) Drivers who deliver products and locations does not have a primary duty
requirements in this section shall not
also sell such products may qualify as of making sales.
apply to employees engaged as teachers
exempt outside sales employees only if (2) A driver who often calls on (§ 541.303); employees who hold a valid
the employee has a primary duty of established customers day after day or license or certificate permitting the
making sales. If the employee has a week after week, delivering a quantity of practice of law or medicine or any of
primary duty of making sales, all work the employer’s products at each call their branches and are actually engaged
performed incidental to and in when the sale was not significantly in the practice thereof (see § 541.304); or
conjunction with the employee’s own affected by solicitations of the customer to employees who hold the requisite
sales efforts, including loading, driving by the delivering driver or the amount academic degree for the general practice
or delivering products, is exempt work. of the sale is determined by the volume of medicine and are engaged in an
(b) Several factors should be of the customer’s sales since the internship or resident program pursuant
considered in determining if a driver previous delivery. to the practice of the profession (see
has a primary duty of making sales, (3) A driver primarily engaged in § 541.304). In the case of medical
including: a comparison of the driver’s making deliveries to customers and occupations, the exception from the
duties with those of other employees performing activities intended to salary or fee requirement does not apply
engaged as truck drivers and as promote sales by customers (including to pharmacists, nurses, therapists,
salespersons; possession of a selling or placing point-of-sale and other technologists, sanitarians, dietitians,
solicitor’s license when such license is advertising materials, price stamping social workers, psychologists,
required by law or ordinances; presence commodities, arranging merchandise on psychometrists, or other professions
or absence of customary or contractual shelves, in coolers or in cabinets, which service the medical profession.
arrangements concerning amounts of rotating stock according to date, and
products to be delivered; description of cleaning and otherwise servicing § 541.601 Highly compensated employees.
the employee’s occupation in collective display cases), unless such work is in (a) An employee who performs office
bargaining agreements; the employer’s furtherance of the driver’s own sales or non-manual work and is guaranteed
specifications as to qualifications for efforts. a total annual compensation of at least
$65,000 ($55,000 if employed in pro rata portion of the minimum (b) Exceptions. The prohibition
American Samoa by employers other guarantee established in § 541.601(a), against deductions from pay in the
than the Federal Government) is based upon the number of weeks that salary basis requirement is subject to the
deemed exempt under section 13(a)(1) the employee will be or has been following exceptions:
of the Act if the employee performs any employed. The employer may utilize (1) Deductions from pay may be made
one or more of the exempt duties or any 52-week period as the year, such as when an exempt employee is absent
responsibilities of an executive, a calendar year, a fiscal year, or an from work for a full day for personal
administrative or professional employee anniversary of hire year. If the employer reasons, other than sickness or
identified in subparts B, C or D of this does not identify some other year period disability. Thus, if an employee is
part. in advance, the calendar year will absent for two full days to handle
(b) The phrase ‘‘total annual apply. personal affairs, the employee’s salaried
compensation’’ excludes board, lodging (c) A high level of compensation is a status will not be affected if deductions
or other facilities as defined in strong indicator of an employee’s are made from the salary for two full-
§ 541.606, but includes base salary, exempt status, thus eliminating the need day absences. However, if an exempt
commissions, non-discretionary for a detailed analysis of the employee’s employee is absent for one and a half
bonuses and other non-discretionary job duties. Thus, a highly compensated days for personal reasons, the employer
compensation. employee may qualify for exemption if can deduct only for the one full-day
(1) The base salary, commissions and the employee performs any one or more absence.
non-discretionary compensation must of the exempt duties or responsibilities (2) Deductions from pay may be made
be settled and paid out to the employee of an executive, administrative or for absences of a full day or more
as due on at least a monthly basis. Thus, professional employee identified in occasioned by sickness or disability
for example, employees told they will subparts B, C or D of this part. Thus, an (including work-related accidents) if the
receive a commission of 1 percent of all employee may qualify as a highly deduction is made in accordance with a
monthly sales orders that exceed $1 compensated executive employee, for bona fide plan, policy or practice of
million must receive any commission example, if the employee directs the providing compensation for loss of
due each month. Of course, if sales do work of two or more other employees, salary occasioned by such sickness or
not exceed $1 million in a particular even though the employee does not disability. The employer is not required
month, no commission is due for that have authority to hire and fire. to pay any portion of the employee’s
month. Similarly, employees who are (d) This section applies only to salary for full day absences for which
told they will receive a $300 production employees performing office or non- the employee receives compensation
bonus for each ton of product manual work. carpenters, electricians, under the plan, policy or practice.
manufactured in excess of a weekly mechanics, plumbers, iron workers, Deductions for such full day absences
quota must receive any bonus earned at craftsmen, operating engineers, also may be made before the employee
least monthly. Again, there may be longshoremen, construction workers, has qualified under the plan, policy or
months in which no bonus is due teamsters and other employees who practice, and after the employee has
because production did not exceed the perform manual work are not exempt exhausted the leave allowance
quota in any week of the month. under this section no matter how highly thereunder. Thus, for example, if an
(2) If an employee’s base salary and paid they might be. employer maintains a short-term
non-discretionary compensation do not disability insurance plan providing
total at least the minimum guarantee § 541.602 Salary basis. salary replacement for 12 weeks starting
established in § 541.601(a) by end of the (a) General rule. An employee will be on the fourth day of absence, the
year, the employer may, by the next pay considered to be paid on a ‘‘salary employer may make deductions from
period after the end of the year, make basis’’ within the meaning of these pay for the three days of absence before
a final payment sufficient to achieve the regulations if the employee regularly the employee qualifies for benefits
guaranteed level. For example, an receives each pay period on a weekly, under the plan; for the twelve weeks in
employee may earn $36,000 in or less frequent basis, a predetermined which the employee receives salary
guaranteed base salary, and the amount constituting all or part of the replacement benefits under the plan;
employer may anticipate based upon employee’s compensation, which and for absences after the employee has
past sales that the employee also will amount is not subject to reduction exhausted the 12 weeks of salary
earn $36,000 in commissions. However, because of variations in the quality or replacement benefits. Similarly, an
due to poor sales in the final quarter of quantity of the work performed. Subject employer may make deductions from
the year, the employee actually only to the exceptions provided in paragraph pay for absences of a full day or more
earns $26,000 in commissions. In this (b) of this section, an exempt employee if salary replacement benefits are
situation, the employer may by the next must receive the full salary for any week provided under a State disability
pay period after the end of the year in which the employee performs any insurance law or under a State workers’
make a payment of $3,000 to the work without regard to the number of compensation law.
employee. If the employer fails to make days or hours worked. Exempt (3) While an employer cannot make
such a payment, the employee does not employees need not be paid for any deductions from pay for absences of an
qualify as a highly compensated workweek in which they perform no exempt employee occasioned by jury
employee, but may still qualify as work. An employee is not paid on a duty, attendance as a witness or
exempt under subparts B, C or D of this salary basis if deductions from the temporary military leave, the employer
part. employee’s predetermined can offset any amounts received by an
(3) An employee who does not work compensation are made for absences employee as jury fees, witness fees or
a full year for the employer, either occasioned by the employer or by the military pay for a particular week
because the employee is newly hired operating requirements of the business. against the salary due for that particular
after the beginning of the year or ends If the employee is ready, willing and week without loss of the exemption.
the employment before the end of the able to work, deductions may not be (4) Deductions from pay of exempt
year, may qualify for exemption under made for time when work is not employees may be made for penalties
this section if the employee receives a available. imposed in good faith for infractions of
safety rules of major significance. Safety § 541.603 Effect of improper deductions (d) This section shall not be construed
rules of major significance include those from salary. in an unduly technical manner so as to
relating to the prevention of serious (a) An employer who makes improper defeat the exemption.
danger in the workplace or to other deductions from salary shall lose the
§ 541.604 Minimum guarantees plus
employees, such as rules prohibiting exemption if the facts demonstrate that extras.
smoking in explosive plants, oil the employer has a pattern and practice
refineries and coal mines. (a) An exempt employee may receive
of not paying employees on a salary
additional compensation, consistent
(5) Deductions from pay of exempt basis. A pattern and practice of making
with the exemption and the salary basis
employees may be made for unpaid improper deductions demonstrates that
requirement, if the employment
disciplinary suspensions of a full day or the employer did not intend to pay
arrangement also includes a guarantee
more imposed in good faith for employees in the job classification on a
of at least the minimum weekly-
infractions of workplace conduct rules. salary basis. Improper deductions that
required amount paid on a salary basis.
Such suspensions must be imposed are isolated or inadvertent, however,
Thus, for example, an exempt employee
pursuant to a written policy applied will not result in loss of the exemption.
guaranteed at least $425 each week paid
uniformly to all workers. Thus, for The factors to consider when
on a salary basis may also receive
example, an employer may suspend an determining whether an employer has a
additional compensation of a one
exempt employee without pay for three pattern and practice of not paying
percent commission on sales. An
days for violating a uniformly applied employees on a salary basis include, but
exempt employee also may receive a
written policy prohibiting sexual are not limited to: The number of
percentage of the sales or profits of the
harassment. Similarly, an employer may improper deductions; the time period
employer if the employment
suspend an exempt employee without during which the employer made
arrangement also includes a guarantee
pay for twelve days for violating a improper deductions; the number and
of at least $425 each week paid on a
uniformly applied written policy geographic location of employees whose
salary basis. Similarly, the exemption is
prohibiting workplace violence. salary was improperly reduced; the
not lost if an exempt employee who is
number and geographic location of
(6) An employer is not required to pay guaranteed at least $425 each week paid
managers responsible for taking the
the full salary in the initial or terminal on a salary basis also receives additional
improper deductions; the size of the
week of employment. Rather, an compensation based on hours worked.
employer; whether the employer has a
employer may pay a proportionate part Such additional compensation may be
written policy prohibiting improper
of an employee’s full salary for the time paid on any basis (e.g. flat sum, bonus
deductions; and whether the employer
actually worked in the first and last payment, straight-time hourly amount,
corrected the improper pay deductions.
week of employment. In such weeks, the time and one-half or any other basis).
(b) If the facts demonstrate that the (b) An exempt employee’s salary may
payment of an hourly or daily
employer has a policy of not paying on be computed on an hourly, a daily or a
equivalent of the employee’s full salary
a salary basis, the exemption is lost shift basis, consistent with the
for the time actually worked will meet
during the time period in which exemption and the salary basis
the requirement. However, employees
improper deductions were made for requirement, if the employment
are not paid on a salary basis within the
employees in the same job classification arrangement also includes a guarantee
meaning of these regulations if they are
working for the same managers of at least the minimum weekly required
employed occasionally for a few days,
responsible for the improper amount paid on a salary basis regardless
and the employer pays them a
deductions. Employees in different job of the number of hours, days or shifts
proportionate part of the weekly salary
classifications who work for different worked and a reasonable relationship
when so employed.
managers do not lose their status as exists between the guaranteed amount
(7) An employer is not required to pay exempt employees. Thus, for example, if
the full salary for weeks in which an and the amount actually earned. The
a manager at a company facility reasonable relationship test will be met
exempt employee takes unpaid leave routinely docks the pay of engineers at
under the Family and Medical Leave if the weekly guarantee is roughly
that facility for partial-day personal equivalent to the employee’s usual
Act. Rather, when an exempt employee absences, then all engineers at that
takes unpaid leave under the Family earnings at the assigned hourly, daily or
facility whose pay could have been shift rate for the employee’s normal
and Medical Leave Act, an employer improperly docked by the manager
may pay a proportionate part of the full scheduled workweek. Thus, for
would lose the exemption; engineers at example, an exempt employee
salary for time actually worked. For other facilities or working for other
example, if an employee who normally guaranteed compensation of at least
managers, however, would remain $500 for any week in which the
works forty hours per week uses four exempt.
hours of unpaid leave under the Family employee performs any work, and who
(c) If an employer has a written policy normally works four or five shifts each
and Medical Leave Act, the employer prohibiting improper pay deductions as
could deduct 10% of the employee’s week, may be paid $150 per shift
provided in § 541.602, notifies consistent with the salary basis
normal salary that week. employees of that policy and reimburses requirement.
(c) When calculating the amount of a employees for any improper deductions,
deduction from pay allowed under such employer will not lose the § 541.605 Fee basis.
paragraph (b) of this section, the exemption for any employees unless the (a) Administrative and professional
employer may use the hourly or daily employer repeatedly and willfully employees may be paid on a fee basis,
equivalent of the employee’s full weekly violates the policy or continues to make rather than on a salary basis. An
salary or any other amount proportional improper deductions after receiving employee will be considered to be paid
to the time actually missed by the employee complaints. Examples of on a ‘‘fee basis’’ within the meaning of
employee. A deduction from pay as a notification include publishing the these regulations if the employee is paid
penalty for violations of major safety policy to employees at the time of hire, an agreed sum for a single job regardless
rules under paragraph (b)(4) of this in an employee handbook or on the of the time required for its completion.
section may be made in any amount. employer’s Intranet. These payments in a sense resemble
piecework payments with the important Subpart H—Definitions and work. All other work is considered
distinction that generally a ‘‘fee’’ is paid Miscellaneous Provisions ‘‘nonexempt.’’
for the kind of job that is unique rather
§ 541.700 Primary duty. § 541.703 Directly and closely related.
than for a series of jobs repeated an
indefinite number of times and for (a) Work that is ‘‘directly and closely
To qualify for exemption under this
which payment on an identical basis is related’’ to the performance of exempt
part, an employee must have a ‘‘primary
made over and over again. Payments work is also considered exempt work.
duty’’ of performing exempt work. The
based on the number of hours or days The phrase ‘‘directly and closely
term ‘‘primary duty’’ means the
worked and not on the accomplishment related’’ means tasks that are related to
principal, main, major or most
of a given single task are not considered exempt duties and that contribute to or
important duty that the employee
payments on a fee basis. facilitate performance of exempt work.
performs. Determination of an
(b) To determine whether the fee Thus, ‘‘directly and closely related’’
employee’s primary duty must be based
payment meets the minimum amount of work may include physical tasks and
on all the facts in a particular case.
salary required for exemption under menial tasks that arise out of exempt
Factors to consider when determining
these regulations, the amount paid to duties, and the routine work without
the primary duty of an employee
the employee will be tested by which the exempt employee’s more
include, but are not limited to the
determining the time worked on the job important work cannot be performed
relative importance of the exempt duties
and whether the fee payment is at a rate properly. Work ‘‘directly and closely
as compared with other types of duties;
that would amount to at least $425 per related’’ to the performance of exempt
the amount of time spent performing
week if the employee worked 40 hours. duties may also include recordkeeping;
exempt work; the employee’s relative
Thus, an artist paid $250 for a picture monitoring and adjusting machinery;
freedom from direct supervision; and
that took 20 hours to complete meets the taking notes; using the computer to
the relationship between the employee’s
minimum salary requirement for create documents or presentations;
salary and the wages paid to other
exemption since earnings at this rate opening the mail for the purpose of
employees for the same kind of
would yield the artist $500 if 40 hours reading it and making decisions; and
nonexempt work. The term ‘‘primary
were worked. using a photocopier or fax machine.
duty’’ does not require that employees
Work is not ‘‘directly and closely
§ 541.606 Board, lodging or other facilities. spend over fifty percent of their time
related’’ if the work is remotely related
(a) To qualify for exemption under performing exempt work. Thus, for
or completely unrelated to exempt
section 13(a)(1) of the Act, an employee example, an assistant manager in a retail
duties.
must earn the minimum salary amount establishment who performs exempt (b) The following examples further
set forth in § 541.600, ‘‘exclusive of work such as supervising and directing illustrate the type of work that is and is
board, lodging or other facilities.’’ The the work of other employees, ordering not normally considered as directly and
phrase ‘‘exclusive of board, lodging or merchandise, handling customer closely related to exempt work:
other facilities’’ means ‘‘free and clear’’ complaints and authorizing payment of (1) Keeping time, production or sales
or independent of any claimed credit for bills may have management as the records for subordinates is work directly
non-cash items of value that an primary duty, even if the assistant and closely related to an exempt
employer may provide to an employee. manager spends more than fifty percent executive’s function of managing a
Thus, the costs incurred by an employer of the time performing non-exempt department and supervising employees.
to provide an employee with board, work such as running the cash register. (2) The distribution of materials,
lodging or other facilities may not count However, the amount of time spent merchandise or supplies to maintain
towards the minimum salary amount performing exempt work can be a useful control of the flow of and expenditures
required for exemption under this part guide, and employees who spend over for such items is directly and closely
541. Such separate transactions are not fifty percent of the time performing related to the performance of exempt
prohibited between employers and their exempt work will be considered to have duties.
exempt employees, but the costs to a primary duty of performing exempt (3) A supervisor who spot checks and
employers associated with such work. The fact that an employer has examines the work of subordinates to
transactions may not be considered well-defined operating policies or determine whether they are performing
when determining if an employee has procedures should not by itself defeat their duties properly, and whether the
received the full required minimum an employee’s exempt status. product is satisfactory, is performing
salary payment. work which is directly and closely
§ 541.701 Customarily and regularly.
(b) Regulations defining what related to managerial and supervisory
constitutes ‘‘board, lodging, or other The phrase ‘‘customarily and functions, so long as the checking is
facilities’’ are contained in 29 CFR part regularly’’ means a frequency that must distinguishable from the work
531. As described in 29 CFR 531.32, the be greater than occasional but which, of ordinarily performed by a nonexempt
term ‘‘other facilities’’ refers to items course, may be less than constant. Tasks inspector.
similar to board and lodging, such as or work performed ‘‘customarily and (4) A supervisor who sets up a
meals furnished at company restaurants regularly’’ includes work normally and machine may be engaged in exempt
or cafeterias or by hospitals, hotels, or recurrently performed every work week; work, depending upon the nature of the
restaurants to their employees; meals, it does not included isolated or one-time industry and the operation. In some
dormitory rooms, and tuition furnished tasks. cases the setup work, or adjustment of
by a college to its student employees; the machine for a particular job, is
§ 541.702 Exempt and nonexempt work.
merchandise furnished at company typically performed by the same
stores or commissaries, including The term ‘‘exempt work’’ means all employees who operate the machine.
articles of food, clothing, and household work described in §§ 541.100, 541.101, Such setup work is part of the
effects; housing furnished for dwelling 541.102, 541.200, 541.206, 541.300, production operation and is not exempt.
purposes; and transportation furnished 541.301, 541.302, 541.303, 541.304, In other cases, the setting up of the work
to employees for ordinary commuting 541.400 and 541.500, and the activities is a highly skilled operation which the
between their homes and work. directly and closely related to such ordinary production worker or machine
tender typically does not perform. In resulting from delays, damages or emergency work depending on factors
large plants, non-supervisors may irregularities in transit is performing such as the size of the establishment
perform such work. However, exempt work. If the employee also and of the executive’s department, the
particularly in small plants, such work spends part of the day taking telephone nature of the industry, the consequences
is a regular duty of the executive and is orders for local deliveries, such order- that would flow from the failure to
directly and closely related to the taking is a routine function and is not replace the ailing employee
executive’s responsibility for the work directly and closely related to the immediately, and the feasibility of
performance of subordinates and for the exempt work. filling the employee’s place promptly.
adequacy of the final product. Under (9) An example of work directly and (4) Regular repair and cleaning of
such circumstances, it is exempt work. closely related to exempt professional equipment is not emergency work, even
(5) A department manager in a retail duties is a chemist performing menial when necessary to prevent fire or
or service establishment who walks tasks such as cleaning a test tube in the explosion; however, repairing
about the sales floor observing the work middle of an original experiment, even equipment may be emergency work if
of sales personnel under the employee’s though such menial tasks can be the breakdown of or damage to the
supervision to determine the assigned to laboratory assistants. equipment was caused by accident or
effectiveness of their sales techniques, (10) A teacher performs work directly carelessness that the employer could not
checks on the quality of customer and closely related to exempt duties reasonably anticipate.
service being given, or observes when, while taking students on a field
customer preferences is performing trip, the teacher drives a school van or § 541.706 Occasional tasks.
work which is directly and closely monitors the students’ behavior in a Occasional, infrequently recurring
related to managerial and supervisory restaurant. tasks that cannot practicably be
functions. performed by nonexempt employees,
(6) A business consultant may take § 541.704 Trainees. but are the means for an exempt
extensive notes recording the flow of The executive, administrative, employee to properly carry out exempt
work and materials through the office or professional, outside sales and functions and responsibilities, are
plant of the client; after returning to the computer employee exemptions do not considered exempt work. The following
office of the employer, the consultant apply to employees training for factors should be considered in
may personally use the computer to employment in an executive, determining whether such work is
type a report and create a proposed table administrative, professional, outside exempt work: whether the same work is
of organization. Standing alone, or sales or computer employee capacity performed by any of the executive’s
separated from the primary duty, such who are not actually performing the subordinates; practicability of
note taking and typing would be routine duties of an executive, administrative, delegating the work to a nonexempt
in nature. However, because this work professional, outside sales or computer employee; whether the executive
is necessary for analyzing the data and employee. performs the task frequently or
making recommendations, the work is occasionally; and existence of an
directly and closely related to exempt § 541.705 Emergencies.
industry practice for the executive to
work. While it is possible to assign note (a) An exempt employee will not lose perform the task.
taking and typing to nonexempt the exemption by performing work of a
employees, and in fact it is frequently normally nonexempt nature because of § 541.707 Combination exemptions.
the practice to do so, delegating such the existence of an emergency. Thus, Employees who perform a
routine tasks is not required as a when emergencies arise that threaten combination of exempt duties as set
condition of exemption. the safety of employees, a cessation of forth in these regulations for executive,
(7) A credit manager who makes and operations or serious damage to the administrative, professional, outside
administers the credit policy of the employer’s property, any work sales and computer employees may
employer, establishes credit limits for performed in an effort to prevent such qualify for exemption. Thus, for
customers, authorizes the shipment of results is considered exempt work. example, an employee who works forty
orders on credit, and makes decisions (b) An ‘‘emergency’’ does not include percent of the time performing exempt
on whether to exceed credit limits occurrences that are not beyond control administrative duties and another forty
would be performing work exempt or for which the employer can percent of the time performing exempt
under § 541.200. Work that is directly reasonably provide in the normal course executive duties may qualify for
and closely related to these exempt of business. Emergencies generally exemption. In other words, work that is
duties may include checking the status occur only rarely, and are events that exempt under one section of this part
of accounts to determine whether the the employer cannot reasonably will not defeat the exemption under any
credit limit would be exceeded by the anticipate. other section.
shipment of a new order, removing (c) The following examples illustrate
credit reports from the files for analysis, the distinction between emergency work § 541.708 Motion picture producing
and writing letters giving credit data considered exempt work and routine industry.
and experience to other employers or work that is not exempt work: The requirement that the employee be
credit agencies. (1) A mine superintendent who paid ‘‘on a salary basis’’ does not apply
(8) A traffic manager in charge of pitches in after an explosion and digs to an employee in the motion picture
planning a company’s transportation, out workers who are trapped in the producing industry who is compensated
including the most economical and mine is still a bona fide executive. at a base rate of at least $650 a week
quickest routes for shipping (2) Assisting nonexempt employees (exclusive of board, lodging, or other
merchandise to and from the plant, with their work during periods of heavy facilities). Thus, an employee in this
contracting for common-carrier and workload or to handle rush orders is not industry who is otherwise exempt under
other transportation facilities, exempt work. subparts B, C and D of this part, and
negotiating with carriers for adjustments (3) Replacing a nonexempt employee who is employed at a base rate of at
for damages to merchandise, and during the first day or partial day of an least $650 a week is exempt if paid a
making the necessary rearrangements illness may be considered exempt proportionate amount (based on a week
of not more than 6 days) for any week § 541.709 Employees of public agencies. work-day when accrued leave is not
in which the employee does not work a (a) An employee of a public agency used by an employee because:
full workweek for any reason. Moreover, who otherwise meets the salary basis (1) Permission for its use has not been
an otherwise exempt employee in this requirements of § 541.602 shall not be sought or has been sought and denied;
industry qualifies for exemption if the disqualified from exemption under (2) Accrued leave has been exhausted;
employee is employed at a daily rate §§ 541.100, 541.200, 541.300 or 541.400 or
under the following circumstances: on the basis that such employee is paid (3) The employee chooses to use leave
according to a pay system established by without pay.
(a) The employee is in a job category (b) Deductions from the pay of an
for which a weekly base rate is not statute, ordinance or regulation, or by a
policy or practice established pursuant employee of a public agency for
provided and the daily base rate would absences due to a budget-required
yield at least $650 if 6 days were to principles of public accountability,
under which the employee accrues furlough shall not disqualify the
worked; or employee from being paid on a salary
personal leave and sick leave and which
(b) The employee is in a job category requires the public agency employee’s basis except in the workweek in which
having a weekly base rate of at least pay to be reduced or such employee to the furlough occurs and for which the
$650 and the daily base rate is at least be placed on leave without pay for employee’s pay is accordingly reduced.
one-sixth of such weekly base rate. absences for personal reasons or because [FR Doc. 03–7449 Filed 3–28–03; 8:45 am]
of illness or injury of less than one BILLING CODE 4510–27–P

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29 CFR Part 541

before June 30, 2003. requirements codified at 29 CFR part 9 (1977).

None required ..................................................... None required .................................................. None required.

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