ESA Proposed Rule

Defining and Delimiting the Exemptions for Executive, Administrative,
Professional, Outside Sales and Computer Employees; Proposed Rule

[PDF Version]

Volume 68, Number 61, Page 15559

[Federal Register: March 31, 2003 (Volume 68, Number 61)]
[Proposed Rules]               
[Page 15559-15597]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31mr03-43]                         


[[Page 15559]]

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Part II





Department of Labor





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Wage and Hour Division



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29 CFR Part 541



Defining and Delimiting the Exemptions for Executive, Administrative, 
Professional, Outside Sales and Computer Employees; Proposed Rule


[[Page 15560]]


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DEPARTMENT OF LABOR

Wage and Hour Division

29 CFR Part 541

RIN 1215-AA14

 
Defining and Delimiting the Exemptions for Executive, 
Administrative, Professional, Outside Sales and Computer Employees

AGENCY: Wage and Hour Division, Employment Standards Administration, 
Labor.

ACTION: Proposed rule and request for comments.

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SUMMARY: The Department of Labor proposes to update and revise the 
regulations issued under the Fair Labor Standards Act (FLSA) 
implementing the exemption from minimum wage and overtime pay for 
executive, administrative, professional, outside sales and computer 
employees. These exemptions are often referred to as the FLSA's ``white 
collar'' exemptions. To be considered exempt, employees must meet 
certain minimum tests related to their primary job duties and be paid 
on a salary basis at not less than specified minimum amounts. The basic 
``duties'' tests were originally established in 1938 and revised in 
1940. The duties tests were last modified in 1949 and have remained 
essentially unchanged since that time. The ``salary basis'' test has 
remained essentially unchanged since 1954. The salary levels required 
for exemption were last updated in 1975, and the amounts adopted at 
that time were intended as an interim adjustment. Suggested changes to 
the part 541 regulations have been the subject of public commentary for 
years, including a review of the regulations by the U.S. General 
Accounting Office (GAO) in 1999. GAO recommended that the Secretary of 
Labor comprehensively review and make necessary changes to the part 541 
regulations to better meet the needs of both employers and employees in 
the modern work place, and to anticipate future work place trends. 
During 2002, the Department of Labor convened a series of stakeholder 
meetings, and heard suggestions for changes from over 40 interest 
groups representing employees and employers. The Department of Labor 
has carefully examined issues of concern raised by various interested 
parties in developing this proposed rule. The Department now invites 
public comment on all aspects of the proposed rule.

DATES: Submit written comments on or before June 30, 2003.

ADDRESSES: Address written comments to Tammy D. McCutchen, 
Administrator, Wage and Hour Division, Employment Standards 
Administration, U.S. Department of Labor, Room S-3502, 200 Constitution 
Avenue, NW., Washington, DC 20210. Commenters who would like to be 
notified that their comments were received should include with their 
comments a self-addressed, stamped postcard or submit them certified 
mail, return receipt requested. As a convenience, comments of 20 pages 
or less may be submitted by facsimile (``FAX'') machine to (202) 693-
1432, which is not a toll-free number, or by e-mail to: whd-
reg@fenix2.dol-esa.gov. Because we continue to experience delays in 
receiving mail in our area, commenters are encouraged to submit any 
comments by mail early, or to transmit them electronically by FAX or e-
mail.

FOR FURTHER INFORMATION CONTACT: Richard M. Brennan, Deputy Director, 
Office of Enforcement Policy, Wage and Hour Division, Employment 
Standards Administration, U.S. Department of Labor, Room S-3506, 200 
Constitution Avenue, NW., Washington, DC 20210. Telephone: (202) 693-
0745 (this is not a toll-free number). Copies of this proposed rule may 
be obtained in alternative formats (Large Print, Braille, Audio Tape or 
Disc), upon request, by calling (202) 693-0023 (not a toll-free 
number). TTY/TDD callers may dial toll-free 1-877-889-5627 to obtain 
information or request materials in alternative formats.
    Questions of interpretation and/or enforcement of regulations 
issued by this agency or referenced in this notice may be directed to 
the nearest Wage and Hour Division District Office. Locate the nearest 
office by calling our toll-free help line at 1-866-4USWAGE (1-866-487-
9243) between 8 a.m. and 5 p.m. in your local time zone, or log onto 
the Wage and Hour Division's Web site for a nationwide listing of Wage 
and Hour District and Area Offices at: http://www.dol.gov/esa/contacts/whd/america2.htm
.

SUPPLEMENTARY INFORMATION:

I. Paperwork Reduction Act

    This proposed rule contains no new information collection 
requirements subject to review and approval by the Office of Management 
and Budget under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501, 
et seq.). The information collection requirements for employers who 
claim exemption under 29 CFR part 541 are contained in the general FLSA 
recordkeeping requirements codified at 29 CFR part 516, which were 
approved by the Office of Management and Budget under OMB Control 
number 1215-0017. See 29 CFR 516.0 and 516.3.

II. Background

    The FLSA generally requires covered employers to pay their 
employees at least the federal minimum wage (which is currently $5.15 
an hour), and overtime premium pay of time-and-one-half the regular 
rate of pay for all hours worked over 40 in a work week. However, the 
FLSA includes a number of exemptions from the minimum wage and overtime 
requirements. Section 13(a)(1) of the FLSA, codified at 29 U.S.C. 
213(a)(1), exempts from both minimum wage and overtime pay ``any 
employee employed in a bona fide executive, administrative, or 
professional capacity * * * or in the capacity of outside salesman (as 
such terms are defined and delimited from time to time by regulations 
of the Secretary, subject to the provisions of the Administrative 
Procedure Act * * *.)''
    The FLSA does not define the terms ``executive,'' 
``administrative,'' ``professional,'' or ``outside salesman.'' However, 
pursuant to Congress' grant of rulemaking authority, implementing 
regulations have been issued, at 29 CFR part 541, defining the scope of 
the section 13(a)(1) exemptions. Because the FLSA delegates to the 
Secretary of Labor the power to define and delimit the specific terms 
of the exemptions through notice-and-comment rulemaking, the 
regulations so issued have the binding effect of law.\1\
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    \1\ See Batterton v. Francis, 432 U.S. 416, 425 n. 9 (1977).
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    These exemptions have engendered considerable confusion over the 
years regarding who is, and who is not, exempt. The implementing 
regulations generally require each of three tests to be met for the 
exemption to apply: (1) The employee must be paid a predetermined and 
fixed salary, not an hourly wage that is subject to reductions because 
of variations in the quality or quantity of work performed (the 
``salary basis test''); (2) the amount of salary paid must meet minimum 
specified amounts (the ``salary level test''); and (3) the employee's 
job duties must primarily involve managerial, administrative or 
professional skills as defined by the regulations (the ``duties 
tests'').

Legislative History

    Section 13(a)(1) was included in the original FLSA of 1938, and was 
based on provisions contained in the earlier

[[Page 15561]]

National Industrial Recovery Act and state law precedents. Specific 
references in the legislative history to the employee exemptions 
contained in section 13(a)(1) are scant. However, the exemptions were 
premised on the belief that the workers exempted typically earned 
salaries well above the minimum wage, and they were presumed to enjoy 
other compensatory privileges such as above average fringe benefits, 
greater job security and better opportunities for advancement, setting 
them apart from the nonexempt workers entitled to overtime pay.\2\ 
Further, the type of work they performed was difficult to standardize 
to any time frame and could not be easily spread to other workers after 
40 hours in a week, making enforcement of the overtime provisions 
difficult and generally precluding the potential job expansion intended 
by the FLSA's time-and-a-half overtime premium.\3\
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    \2\ Report of the Minimum Wage Study Commission, Volume IV, pp. 
236 and 240 (June 1981).
    \3\ Id.
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    Initially, persons employed in a ``local retailing capacity'' were 
also exempt, but Congress eliminated that language from the section 
13(a)(1) exemptions in 1961 when the FLSA was expanded to cover retail 
and service enterprises.\4\ Teachers and academic administrative 
personnel were added to the exemption when elementary and secondary 
schools were made subject to the FLSA in 1966. The Education Amendments 
of 1972 made the Equal Pay provisions, section 6(d) of the FLSA, 
expressly applicable to employees who were otherwise exempt from the 
FLSA under section 13(a)(1). A 1990 enactment expanded the exemption to 
include computer systems analysts, computer programmers, software 
engineers, and similarly skilled professional workers, including those 
paid on an hourly basis if paid at least 6\1/2\ times the minimum 
wage.\5\ The compensation test for computer-related occupations was 
subsequently capped at $27.63 an hour (6\1/2\ times the former $4.25 
minimum wage) when Congress increased the minimum wage to its current 
$5.15 rate and enacted the new section 13(a)(17) exemption for such 
computer employees as part of the 1996 FLSA Amendments.\6\
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    \4\ Public Law 87-30, 75 Stat. 65 (May 5, 1961). Although 
Congress eliminated the separate, broad exemption for retail 
employees in 1961, such employees could still qualify as exempt 
executive, administrative or professional employees if they met the 
requirements for these exemptions, and Congress relaxed the duties 
tests solely to make it easier for such firms to meet the exemption 
requirements.
    \5\ Public Law 101-583, 104 Stat. 2871 (Nov. 15, 1990).
    \6\ 29 U.S.C. 213(a)(17), as added by the 1996 FLSA Amendments 
(sec. 2105(a), Public Law 104-188, 110 Stat. 1755 (Aug. 20, 1996)).
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Regulatory History

    The FLSA became law on June 25, 1938, and the first version of part 
541 was issued later that year in October (3 FR 2518; Oct. 20, 1938). 
In 1940, after receiving many comments on the original regulations, the 
Wage and Hour Division convened a series of public hearings for 
interested parties to express views on the regulations and to propose 
amendments. Revised regulations were issued in October 1940 (5 FR 4077; 
Oct. 15, 1940).\7\ Further hearings were initiated in 1947, leading to 
revised regulations that were issued in December 1949 (14 FR 7705; Dec. 
24, 1949).\8\ An explanatory bulletin interpreting some of the terms 
used in the regulations was published as subpart B of part 541 on 
December 28, 1949 (14 FR 7730), and became effective on January 25, 
1950. On March 9, 1954, the Department issued proposed revisions to the 
regulatory interpretations of ``salary basis'' (19 FR 1321), followed 
by a final rule issued on July 17, 1954 (19 FR 4405). The regulations 
were revised in 1958 to adjust the salary levels (23 FR 8962; Nov. 18, 
1958).\9\ Further changes were made to accommodate statutory amendments 
to the FLSA and/or to increase the salary levels in 1961, 1963, 1967, 
1970, 1973, and 1975.\10\ The existing salary rates were last revised 
on an interim basis in 1975 (see 40 FR 7092; Feb. 19, 1975). Revisions 
to increase the salary rates in January 1981 (issued at the end of the 
Carter Administration) were stayed indefinitely by the incoming Reagan 
Administration (46 FR 11972; Feb. 12, 1981). Based on petitions from 
industry groups to address other parts of the rules, and developing 
case law, the Department began a more comprehensive review leading to a 
1985 Advance Notice of Proposed Rulemaking (ANPRM) that reopened the 
public comment period and broadened the review to all aspects of the 
regulations (50 FR 47696; Nov. 11, 1985).
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    \7\ See, ``Executive, Administrative, Professional * * * Outside 
Salesman'' Redefined, Wage and Hour Division, U.S. Department of 
Labor, Report and Recommendations of the Presiding Officer (Harold 
Stein) at Hearings Preliminary to Redefinition (Oct. 10, 1940) 
(``Stein Report'').
    \8\ See, Report and Recommendations on Proposed Revisions of 
Regulations, part 541, by Harry Weiss, Presiding Officer, Wage and 
Hour and Public Contracts Divisions, U.S. Department of Labor (June 
30, 1949) (``Weiss Report'').
    \9\ See, Report and Recommendations on Proposed Revisions of 
Regulations, part 541, under the Fair Labor Standards Act, by Harry 
S. Kantor, Presiding Officer, Wage and Hour and Public Contracts 
Divisions, U.S. Department of Labor (March 3, 1958) (``Kantor 
Report'').
    \10\ See, 26 FR 8635 (Sept. 15, 1961); 28 FR 9505 (Aug. 30, 
1963); 32 FR 7823 (May 30, 1967); 35 FR 883 (Jan. 22, 1970); 38 FR 
11390 (May 7, 1973); and 40 FR 7091 (Feb. 15, 1975).
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    The Department revised these regulations in the early 1990s to 
address two specific issues. A 1990 law (Pub. L. 101-583; Nov. 15, 
1990) required regulations to be issued permitting computer systems 
analysts, computer programmers, software engineers, and other 
similarly-skilled workers in the computer field to be exempt, including 
those paid on an hourly basis if the hourly rate exceeded 6\1/2\ times 
the applicable minimum wage. (57 FR 46744; Oct. 9, 1992). Also, in 
1992, the Department issued a final rule to modify the exemption's 
requirement for payment on a ``salary basis'' as applied in the public 
sector for otherwise exempt employees paid according to pay and leave 
systems based on principles of public accountability. Under 29 CFR 
541.5d (57 FR 37677; Aug. 19, 1992), an otherwise exempt public sector 
employee does not lose exempt status under a regulated public sector 
pay and leave system that requires partial-day (or hourly) deductions 
from pay for employee absences not covered by accrued leave, or for 
budget-driven furloughs.

Overview of Existing Requirements

    The implementing regulations in part 541 contain specific criteria 
that define each category of exemption provided by section 13(a)(1). 
The applicability of any particular exemption is not presumed under the 
FLSA, but must be affirmatively established. Job titles, nomenclature, 
or job descriptions do not determine the exemptions, nor does paying a 
``salary'' rather than an hourly rate. Rather, whether an exemption 
applies depends on the specific duties and responsibilities of each 
employee's job, how much salary the employee is paid, and whether the 
salary is guaranteed without regard to the quality or quantity of work 
performed, as defined by the regulations.
    The duties tests differ for each category of exemption. Two 
different salary (or fee) levels exist for each of the exemptions for 
executive, administrative, and professional employees. The salary 
requirements do not apply to certain licensed or certified doctors, 
lawyers and teachers, or to outside sales employees. Employees paid 
below the applicable lower salary rate are not exempt regardless of 
their duties. Those paid above the higher (or

[[Page 15562]]

``upset'') salary rate are exempt if they meet a ``short'' duties test. 
Those paid between the higher and lower salary rates must meet a more 
detailed ``long'' duties test.
    The salary tests were originally designed to operate as a ready 
guide to assist employers in deciding which employees were more likely 
to meet the duties tests in the exemptions. In fact, the salary levels 
specified in the regulations were once viewed as the best indicator of 
exempt status. As last revised effective April 1, 1975, the salary 
required for executive and administrative employees under the current 
``long'' test is $155 per week; professional employees are exempt at 
$170 per week. The short test salary level (requiring fewer duties to 
be satisfied) for all three exemptions is $250 per week. Because these 
salary levels have not been raised in 28 years, virtually all employees 
are tested for exemption today under the ``short'' duties tests. 
Moreover, while the existing salary tests ($155, $170, and $250 per 
week) still reflect the interim 1975 rates, a full-time minimum wage 
worker today earns $206 per week for a 40-hour work week. Consequently, 
the existing salary tests no longer provide employees or employers any 
help in distinguishing between bona fide executive, administrative, and 
professional employees and those who should not be considered for 
exemption. Moreover, the outdated salary tests and complex duties tests 
in the current regulation cause employees to be erroneously 
misclassified as exempt and thus not paid properly.
    Under the currently applicable ``short'' test exemption 
requirements, an exempt ``executive'' employee must be paid at least 
$250 per week on a salary basis, have a primary duty to manage the 
enterprise or a customarily recognized department or subdivision 
thereof, and regularly direct the work of two or more other employees. 
An exempt ``administrative'' employee must be paid at least $250 per 
week on a salary or fee basis, have a primary duty of office or non-
manual work directly related to management policies or general business 
operations of the employer or the employer's customers (or similar 
functions in the administration of a school system or educational 
institution in work directly related to academic instruction), and 
perform work requiring the exercise of discretion and independent 
judgment. An exempt ``professional'' employee must be paid at least 
$250 per week on a salary or fee basis; have a primary duty of (1) work 
requiring knowledge of an advanced type in a field of science or 
learning customarily acquired by prolonged, specialized, intellectual 
instruction and study, or (2) work that is original and creative in a 
recognized field of artistic endeavor, or (3) teaching in a school 
system or educational institution, or (4) work as a computer systems 
analyst, computer programmer, software engineer, or other similarly-
skilled worker in the computer software field; and perform work 
requiring the consistent exercise of discretion and judgment, or work 
requiring invention, imagination, or talent in a recognized field of 
artistic endeavor. Under the professional exemption, the salary or fee 
requirement does not apply to certain licensed or certified doctors, 
lawyers and teachers; or to certain computer-related occupations if 
paid on an hourly basis at $27.63 or more per hour. An ``outside 
sales'' employee who is customarily and regularly engaged away from the 
employer's places of business making sales or obtaining orders or 
contracts for services or use of facilities, and who does not exceed a 
twenty percent tolerance per work week performing duties unrelated to 
his or her own outside sales or solicitations, is exempt. There are no 
salary or fee requirements for outside sales employees.
    Employees meeting the foregoing requirements are excluded from the 
Act's minimum wage and overtime protections. Thus, they may work any 
number of hours in the work week and are not subject to the Federal 
law's overtime pay requirements. Some state laws have stricter 
exemption standards than those just described. The FLSA does not 
preempt any such stricter State standards. If a State or local law 
establishes a higher standard than the provisions of the FLSA, the 
higher standard applies. See section 18 of the FLSA, 29 U.S.C. 218.
    The executive and administrative exemptions apply generally to 
certain management and staff-level positions within an employer's 
organization. For example, department heads with management as their 
primary duty, who regularly supervise two or more full time employees 
in their department, may qualify as executives if they are paid a 
predetermined salary of $250 or more per week. An administrative 
employee must primarily perform office or nonmanual work of substantial 
importance to the management of the business, but is not required to 
supervise other employees. Persons with functional (rather than 
departmental) management authority, or who perform ``staff'' rather 
than production or sales work, may qualify as administrative employees 
if their duties include ``discretion and independent judgment'' or 
decision-making responsibilities on important matters in managing the 
employer's general business operations (e.g., if they primarily 
determine or affect management policies in a particular area, such as 
credit, personnel, or labor relations). Executive assistants delegated 
decision-making authority to carry out parts of an exempt executive or 
administrative employee's management responsibilities may also qualify 
as exempt administrative employees.
    The professional exemption (aside from the artistic, teaching, and 
computer-related categories) applies to the recognized professions 
requiring advanced knowledge in a field of science or learning 
customarily acquired by a prolonged course of specialized intellectual 
instruction and study (i.e., the ``learned'' professions, such as 
doctor, lawyer, architect, engineer, etc.), and is typically 
characterized by possession of the appropriate academic degree for the 
particular profession. Outside sales employees must regularly work away 
from their employer's place of business making sales or obtaining 
orders or contracts; they may not exceed a 20 percent tolerance for 
performing duties unrelated to their own outside sales work. ``Inside 
sales'' employees are not included within the scope of the exemption 
for ``outside sales'' employees.
    Under the regulatory ``salary basis'' test codified at 29 CFR 
541.118, partial-day deductions from pay based on the number of hours 
worked (``pay-docking'') are generally not allowed in the private 
sector (unless made in the first or last weeks of employment or due to 
unpaid leave taken pursuant to the Family and Medical Leave Act, 29 
U.S.C. 2601 et seq.). Disciplinary deductions from pay also violate the 
``salary basis'' test (except for safety rules of major significance, 
such as no-smoking rules in oil refineries and coal mines). These 
concepts clarify the intended meaning of the requirements for payment 
of a guaranteed salary--i.e., the predetermined salary amount may not 
be reduced because of variations in either the quality or quantity of 
the work performed by the employee. Pay practices not meeting the 
guaranteed ``salary basis'' requirements cause the exemption to be 
declared inapplicable, in some cases for entire classes of 
employees.\11\
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    \11\ As noted, a special rule applies to employees of public 
agencies paid according to regulated pay and leave systems that 
require deductions for partial-day absences not covered by accrued 
leave, and for budget-driven furloughs (see 29 CFR 541.5d).

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[[Page 15563]]

Public Commentary and the GAO Report

    Suggested changes to the part 541 regulations have been the subject 
of extensive public commentary for years, including a report issued by 
the General Accounting Office (GAO) in September 1999.\12\ In this 
report, GAO chronicled the background and history of the exemptions, 
estimated the number of workers who might be included within the scope 
of the exemptions, identified the major concerns of employers and 
employees regarding the exemptions, and suggested possible solutions to 
the issues of concern raised by the affected interests. In general, the 
employers contacted by GAO were concerned that the regulatory tests are 
too complicated, confusing, and outdated for the modern work place, and 
create potential liability for violations when errors in classification 
occur.\13\
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    \12\ Fair Labor Standards Act: White Collar Exemptions in the 
Modern Work Place (GAO/HEHS-99-164, September 30, 1999).
    \13\ Under the FLSA, employees may sue their employer 
(individually or collectively) for up to two, or in some cases 
three, years of back wages, plus an equal amount in liquidated 
damages and attorney fees and court costs, for violations of the 
FLSA's minimum wage and overtime requirements.
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    Employers were particularly concerned about potential liability for 
violations of the complex ``salary basis'' test and the exacting 
requirements of the so-called ``no-docking'' rule, which has been the 
focus of lawsuits against employers in recent years brought 
collectively by groups of highly paid managerial and professional 
employees. This test in effect limits employers' ability to ``dock'' 
exempt employees'' pay for partial-day personal absences and 
disciplinary violations, which limits employers' ability to hold exempt 
employees accountable for their time and actions. In addition, 
employers believed that limiting the administrative and professional 
exemptions to ``nonproduction'' employees did not account for the 
effects of modern technology on employment today. They also noted the 
traditional limits of the exemptions have blurred in the modern work 
place, citing highly skilled and highly paid technical workers without 
college degrees who do not qualify as exempt professionals but who 
perform essentially the same job as exempt engineers who have the 
required academic degrees. Manufacturing employers pointed to new 
technology used in factories, which requires advanced technical skills 
but far less traditional ``manual'' labor. They also told GAO that, 
while these workers may have to follow precise written guidelines to 
perform their work, prescribed procedures were important to modern 
quality control. Employers also believed adherence to precise written 
guidelines--one major distinction between exempt and nonexempt workers 
under the existing regulations--is necessary in a modern, efficient 
work place. Employers also complained that the discretion and 
independent judgment requirements for administrative and professional 
employees are confusing and applied inconsistently by Wage and Hour 
Division investigators in classifying similarly-situated employees, and 
are particularly difficult to apply. Thus, employers were unsure how to 
classify administrative personnel. GAO's discussions with employers and 
Wage and Hour Division investigators, and its review of compliance 
cases, confirmed that this part of the duties test involved 
particularly difficult and subjective determinations, for both the 
employers and the investigators, and that it was a source of contention 
in Department audits.
    Employee representatives contacted by GAO, in contrast, were most 
concerned that the use of the exemptions be limited to preserve 
existing overtime work hour limits and the 40-hour standard work week 
for as many employees as possible. They believed the tests have become 
weakened as applied today by judicial rulings and do not adequately 
restrict employers' use of the exemptions. When combined with the low 
salary test levels, the employee representatives felt that few 
protections remain, particularly for low-income supervisory employees. 
They believed that inflation has severely eroded the salary-level 
limitations originally envisioned by the regulations. Because of 
inflation, according to the employee representatives, the current 
salary test levels are now near the minimum wage level, rendering 
application of the regulations to the current work force virtually 
meaningless.
    GAO's report noted that the conflicting interests affected by these 
rules have made consensus difficult and that, since the FLSA was 
enacted, the interests of employers to expand the white collar 
exemptions have competed with those of employees to limit use of the 
exemptions. To resolve the issues presented, GAO suggested that 
employers' desires for clear and unambiguous regulatory standards must 
be balanced with employees' desires for fair and equitable treatment in 
the work place. The GAO recommended that the Secretary of Labor 
comprehensively review the regulations and restructure the exemptions 
to better accommodate today's workplace and to anticipate future work 
place trends.
    The House Subcommittee on Workforce Protections of the Committee on 
Education and the Workforce held a hearing in May 2000 to receive 
testimony from GAO and other interested parties on GAO's September 1999 
report. Testimony provided by the GAO, representatives of business and 
labor organizations, and the Department of Labor confirmed GAO's 
assessment of the issues and the difficulty in moving forward with 
constructive changes due to the differing views of the many affected 
and interested parties, and the potential impact of possible changes. 
Representatives of worker interests opposed making changes that would 
remove overtime protections for workers now covered, while business 
interests and employer groups advocated modernizing the regulations to 
exempt more classifications of workers from overtime pay.

III. Summary of Current Regulatory Proposal

Structure and Organization

    Part 541 presently contains two subparts. Subpart A provides the 
regulatory tests that define each category of the exemption (executive, 
administrative, professional, and outside sales). Subpart B provides 
interpretations of the terms used in the exemptions. Subpart B was 
first issued as an explanatory bulletin effective in January 1950 to 
provide guidance to the public on how the Wage and Hour Division 
interpreted and applied the exemption criteria when enforcing the FLSA. 
The Department proposes to eliminate the current distinction between 
the ``regulations'' in subpart A and the ``interpretations'' in subpart 
B. This will consolidate and streamline the regulatory text, reduce 
redundancies, and make the regulations more understandable and easier 
to decipher when applying them to particular factual situations, 
providing much-requested simplification. In addition, eliminating the 
distinction between the subpart A ``regulations'' and the subpart B 
``interpretations'' will eliminate confusion regarding the appropriate 
level of deference to be given to the provisions in each subpart.
    The proposed rule reorganizes the subparts according to each 
category of exemption, and consolidates common elements (such as a new 
subpart containing common definitions), in order to eliminate 
unnecessary duplication and repetition of regulatory

[[Page 15564]]

text. Thus, after several introductory provisions in subpart A, the 
proposed new subpart B would pertain to the executive exemption; 
subpart C would pertain to the administrative exemption; subpart D 
would pertain to the professional exemption; subpart E would contain 
provisions regarding computer employees; and subpart F would contain 
provisions regarding outside sales employees. The proposed subpart G 
would include provisions regarding salary requirements applicable to 
most of the exemptions, including salary levels and the salary basis 
test. Subpart G would also include a section on highly compensated 
employees. Proposed subpart H would contain definitions and other 
miscellaneous provisions applicable to all or several of the 
exemptions. Finally, numerous editorial changes are proposed throughout 
the rule to streamline and improve its clarity, delete outdated 
references and illustrations, and remove gender-specific references.
    Current section 541.6, entitled ``Petition for amendment of 
regulations,'' has been deleted in this proposed rule. The substance of 
that section, originally adopted in 1938 and providing for interested 
persons to petition the Administrator for desired changes in these 
regulations, has been superseded and supplanted by enactment of the 
Administrative Procedure Act, 5 U.S.C. 553(e).
    Finally, the proposed rule deletes a number of discussions 
regarding application of the exemption to specific occupations. These 
discussions appeared to be outdated, relating to occupations and duties 
which may not exist in the 21st century economy. However, because most 
stakeholders find such examples useful in applying the regulations to 
specific occupations, we invite comments on specific occupations and 
duties which should be discussed in the regulations. In particular, we 
invite comments on occupations the exempt status of which has been the 
subject of confusion and litigation including but not limited to 
pilots, athletic trainers, funeral directors, insurance salespersons, 
loan officers, stock brokers, hotel sales and catering managers, and 
dietary managers in retirement homes. The Department anticipates that 
the final rule will include additional provisions on the application of 
the exemptions to such borderline occupations, but requires more 
information about the particular job duties and responsibilities 
generally found in such occupations. We invite comments on which 
occupations should be included in the final rule and whether such 
occupations should be treated as exempt or nonexempt, including 
detailed information about job duties in such occupations.

Subpart A, General Regulations, Sec. Sec.  541.000--.002

    The current regulations have several general, introductory 
provisions scattered in various locations. The proposed regulations 
would gather these provisions together into proposed subpart A. Thus, 
the proposed section 541.000 combines an introductory statement 
currently located at section 541.99 and information currently located 
at section 541.5b regarding the application of the equal pay provisions 
in section 6(d) of the FLSA to employees exempt from the minimum wage 
and overtime provisions of the FLSA under section 13(a)(1). Proposed 
section 541.000 also contains new language to reflect legislative 
changes to the FLSA regarding computer employees and information 
regarding the new organizational structure of the proposed regulations. 
Proposed section 541.001 relocates definitions of ``Act'' and 
``Administrator'' from their current location in section 541.0. 
Finally, proposed section 541.002 contains a general statement that job 
titles alone are insufficient to establish the exempt status of an 
employee. This fundamental concept, equally applicable to all the 
exemption categories, currently appears in section 541.201(b) regarding 
administrative employees.

Subpart B, Executive Employees, Sec. Sec.  541.100--.107

    To qualify as an exempt executive under the current regulations, an 
employee must be compensated on a salary basis at a rate of not less 
than $155 per week and meet the ``long'' duties test, or at a rate of 
not less than $250 per week and meet an abbreviated ``short'' duties 
test. The long test requires that an exempt executive employee: Have a 
primary duty of managing the enterprise (or a recognized department or 
subdivision thereof); customarily and regularly direct the work of two 
or more other employees; have authority to hire or fire other employees 
or have particular weight given to suggestions and recommendations as 
to hiring, firing, advancement, promotion or other change of status; 
customarily and regularly exercise discretionary powers; and devote no 
more than 20 percent (or as much as 40 percent in retail or service 
establishments) of hours worked per week to activities that are not 
directly and closely related to performing exempt managerial work. The 
percentage restrictions on performing nonexempt work in the long test 
do not apply to an employee who is in sole charge of an independent or 
physically separate branch establishment, or to an owner of at least a 
20 percent interest in the enterprise in which the employee is 
employed. The executive short duties test requires that the employee 
have a primary duty of managing the enterprise (or a recognized 
department or subdivision thereof) and customarily and regularly direct 
the work of two or more other employees.
    The proposed regulations would streamline the current regulations 
by eliminating the separate long and short tests, and substituting a 
single standard duties test in proposed Sec.  541.100. The proposed 
standard duties test would provide that an exempt executive employee 
must: (1) Have a primary duty of managing the enterprise in which the 
employee is employed or of a customarily recognized department or 
subdivision thereof; (2) customarily and regularly direct the work of 
two or more other employees; and (3) have the authority to hire or fire 
other employees or have particular weight given to suggestions and 
recommendations as to the hiring, firing, advancement, promotion or any 
other change of status of other employees. This standard test, 
consisting of the current short test requirements plus a third 
objective requirement taken from the long test, represents a middle 
ground between the current long and short tests.
    This streamlining and simplification of the current executive 
exemption regulations will eliminate the long test subsections 
regarding the percentage restrictions on nonexempt work and the 
discretionary powers requirement. We propose to eliminate these 
subsections for several reasons. Because of its outdated salary level, 
the long test has, as a practical matter, not been operative for many 
years. Reintroducing its requirements now would add new complexity and 
burdens to the exemption tests. The tests are complex and require time-
testing managers for the duties they perform, hour-by-hour in a typical 
work week. Employers are not generally required to maintain any records 
of daily or weekly hours worked by exempt employees (see 29 CFR 516.3), 
let alone perform a moment-by-moment examination of an employee's 
specific duties performed or discretionary powers exercised. Yet 
reactivating the long test's limitations on nonexempt work could impose 
such significant new monitoring requirements (and, indirectly, new 
recordkeeping burdens) for employers to analyze the substance of each 
particular

[[Page 15565]]

employee's daily and weekly tasks in order to be confident of any 
claimed exemption. Further, historically, deciding which specific 
activities were not inherently an ``essential part of and necessarily 
incident to'' the exempt work proved to be a subjective and difficult 
standard to apply for employers, employees, as well as Wage and Hour 
Division investigators. The discretionary powers test has similarly 
proved to be a subjective and difficult standard to apply. Moreover, 
making such finite determinations would be made even more difficult in 
the aftermath of the decisions in Donovan v. Burger King, Corp., 675 
F.2d 516 (2nd Cir. 1982), Donovan v. Burger King Corp., 672 F.2d 221 
(1st Cir. 1982), and similar judicial rulings which hold that an exempt 
employee's managerial duties can be carried out at the same time the 
employee performs nonexempt manual tasks. Accordingly, given these 
developments in judicial construction of the law, the Department is of 
the view that the discretionary powers provision and the percentage 
limitations on particular duties formerly applied under the now dormant 
long test are not useful criteria that should be reintroduced for 
defining the executive exemption in today's work place.
    The proposed regulations at Sec.  541.101 would recognize as an 
exempt executive any employee who owns at least a 20 percent equity 
interest in the enterprise in which the employee is employed. Section 
541.102 of the proposed regulations would continue the principle that 
an employee in ``sole charge'' of an independent establishment or a 
physically separated branch establishment may qualify as an exempt 
executive. ``Sole charge'' of an establishment is defined to include 
the senior employee with authority to make decisions regarding day-to-
day operations and to direct the work of other employees. These 
provisions appear in the current regulations as exceptions to the 
percentage restrictions on non-exempt work under the former long test, 
in recognition of the due weight to be given the freedom from direct 
supervision and the high degree of executive responsibility enjoyed by 
the top person in charge of a separate business location, as well as 
the special status of a partial equity owner of an enterprise. The 
Department believes that these continue to be valid concepts for 
special status as executives under the proposed restructured 
regulations as well. The Department seeks comments on whether the 
salary level and/or salary basis requirements should be eliminated as 
unnecessary for sole charge executives and business owners. We have 
proposed to eliminate those requirements only for the 20 percent owner, 
based upon our belief that such an individual likely will share in the 
profits of the enterprise and that this is an adequate substitute 
indicator of exempt status.
    The proposed regulations also would reorganize, simplify, 
streamline and update the regulations in other ways. The proposed 
regulations utilize objective, plain language in an attempt to make the 
regulations understandable to employees and employee representatives, 
small business owners and human resource professionals. We also propose 
to eliminate outdated and uninformative examples and to update 
definitions of key terms and phrases. The proposed regulations would 
move a number of sections pertaining to salary issues (current 
Sec. Sec.  541.117, 541.118) to a new subpart G (discussed below), 
where all such provisions will be consolidated. Other sections relevant 
to several or all of the exemption categories (such as the definition 
of primary duty and a section regarding application of the exemptions 
to trainees) would move to a proposed new subpart H (Definitions and 
Miscellaneous Provisions) to eliminate unnecessary repetition. The 
following sections of the current regulations have been edited and 
moved to proposed new subpart H:

------------------------------------------------------------------------
                                                                Proposed
             Current Section . . . Moved to . . .               section
------------------------------------------------------------------------
541.101 General..............................................    541.702
541.103 Primary duty.........................................    541.700
541.108 Work directly and closely related....................    541.703
541.109 Emergencies..........................................    541.705
541.110 Occasional tasks.....................................    541.706
541.111 Nonexempt work generally.............................    541.702
541.116 Trainees.............................................    541.704
------------------------------------------------------------------------

    Section 541.102 of the current regulations, entitled 
``Management,'' has been modified and moved to proposed section 
541.103.
    Section 541.115 of the current regulations, entitled ``Working 
foremen,'' has been moved to proposed Sec.  541.106 and renamed, 
``Working supervisors,'' although no substantive changes are intended. 
A new provision on supervisors in retail establishments has been added 
as proposed Sec.  541.107. Both 541.106 and 541.107 address the 
difficult issue of classifying employees who have both exempt 
supervisory duties and non-exempt duties, and the Department invites 
comments on whether these sections have appropriately distinguished 
exempt and non-exempt employees. Section 541.106 provides, as in the 
current regulation, that an employee with a primary duty of ordinary 
production work is not exempt even if the employee also has some 
supervisory responsibilities. This situation often occurs in a factory 
setting where a collective bargaining unit employee who works on a 
production line also has some responsibility to direct the work of 
other bargaining unit employees. Another example is a police officer 
who directs the work of other police officers on the conduct of an 
investigation but is also a member of a bargaining unit. Bargaining 
unit members do not become exempt employees simply because they are 
given some supervisory responsibilities.
    The definition of the term ``department or subdivision'' remains at 
Sec.  541.104, and the definition of ``two or more employees'' remains 
at Sec.  541.105. The Department invites comments on whether the 
supervision of ``two or more employees'' required for exemption should 
be modified to include ``the customary or regular leadership, alone or 
in combination with others, of two or more other employees.''
    Section 541.106 of the current regulations, entitled ``Authority to 
hire or fire,'' is proposed to be deleted. The text in this section 
does not contribute to any further explanation of the requirement, and 
no further explanation seems necessary. Section 541.107 of the current 
regulations, entitled ``Discretionary powers,'' and Sec.  541.112 of 
the current regulations, ``Percentage limitations on nonexempt work,'' 
are also deleted from the proposed rule for the reasons discussed 
above.

Subpart C, Administrative Employees, Sec. Sec.  541.200-.207

    To qualify as an exempt administrative employee under the current 
regulations, an employee must be paid on a salary or fee basis at a 
rate of not less than $155 per week and meet the ``long'' duties test, 
or earn $250 per week and meet the ``short'' duties test. The long test 
requires that an exempt administrative employee have a primary duty of 
either performing office or non-manual work directly related to 
management policies or general business operations of the employer or 
the employer's customers; or performing functions in the administration 
of a school system, or educational establishment or institution, in 
work directly related to academic instruction or training. In addition, 
the current regulations require that an administrative employee: 
Customarily and regularly exercise discretion and

[[Page 15566]]

independent judgment; regularly and directly assist another exempt 
employee or perform work along specialized or technical lines requiring 
special training, experience or knowledge under only general 
supervision or perform special assignments and tasks under only general 
supervision; and devote no more than 20 percent (or as much as 40 
percent in retail or service establishments) of work hours in a week to 
activities that are not directly and closely related to the performance 
of exempt work. The short test requires that the employee have a 
primary duty of performing office or non-manual work directly related 
to management policies or general business operations, which must 
include work requiring the exercise of discretion and independent 
judgment. Under both tests, when considering whether an employee's work 
is ``directly related to management policies or general business 
operations'' the regulations and the courts assess whether the work is 
``related to the administrative operations of the business as 
distinguished from production''--known as the ``production versus staff 
dichotomy''--and whether the work is ``of substantial importance to the 
management or operation of the business.''
    The current duties test for administrative employees is the most 
difficult to apply of all the duties tests. The requirement that the 
employee exercise ``discretion and independent judgment,'' for 
instance, has generated significant confusion and litigation, as noted 
in the GAO report discussed above. This rule has been interpreted to 
deny the exemption to an employee who follows a procedures manual, even 
though most employees in the modern workplace are required to operate 
within standard procedures. The ``production versus staff dichotomy'' 
also is difficult to apply uniformly in the 21st century workplace.
    The proposed regulations at Sec.  541.200 would retain the 
requirement that an exempt administrative employee have a ``primary 
duty'' of ``performing office or non-manual work related to the 
management or general business operations of the employer or the 
employer's customers,'' but replace the ``discretion and independent 
judgment'' requirement with a new requirement that the employee hold 
``a position of responsibility'' with the employer.
    The primary duty requirement of ``performing office or non-manual 
work related to the management or general business operations'' is 
defined in a new Sec.  541.201. New Sec.  541.201 clarifies that this 
requirement refers to the type of work performed by the employee and 
includes an illustrative list of the types of work areas that meet this 
requirement: tax, finance, accounting, auditing, quality control, 
purchasing, procurement, advertising, marketing, research, safety and 
health, personnel management, human resources, employee benefits, labor 
relations, public relations, government relations and similar 
activities. The Department invites comments on any other areas that 
should be included in this list and on any areas that should be 
deleted. Like the proposed changes to the executive exemption, the 
proposed administrative exemption focuses on ``primary duty'' and 
eliminates the percentage restrictions on non-exempt work currently 
required by the now-inoperative long duties test, for the same reasons 
discussed above under the executive exemption.
    The proposed rule would also reduce the emphasis on the so-called 
``production versus staff'' dichotomy in distinguishing between exempt 
and non-exempt workers, while retaining the concept that an exempt 
administrative employee must be engaged in work related to the 
management or general business operations of the employer or of the 
employer's customers. These changes are needed to reflect emerging case 
law in this area. For example, the court in Piscione v. Ernst & Young, 
171 F.3d 527 (7th Cir. 1999), examined whether an employee's duties 
were directly related to Ernst & Young's management policies or general 
business operations or those of the firm's clients. The employee worked 
as a consultant in the firm's Human Resources Consulting Group on 
several multi-million dollar defined benefit plans and defined 
contribution plans in which thousands of individuals participated. The 
employee's work involved benefits calculations, actuarial valuations, 
government filings, compliance testing, and client advice. The court 
stated that this work influenced the internal business operations and 
policies of Ernst & Young's clients with regard to their benefit plans. 
The employee was the primary contact for several clients; the employee 
identified problems with their plans and suggested solutions, and the 
employee offered suggestions to clients regarding how to improve their 
efficiency. The court rejected the argument that, because the employee 
provided clients with reports and government forms to file, the work 
was production work. Rather, the employee was an advisory specialist or 
consultant whose work was exempt. In addition, the court found that the 
employee contributed to the management policies of Ernst & Young 
because the employee played a major role in developing new methods for 
improving client services and the timeliness of firm operations.
    The proposed Sec.  541.200 also contains a second requirement for 
the administrative exemption relating to the importance of the work 
performed or the high level of competence required by the work 
performed--a requirement that an exempt employee must hold a ``position 
of responsibility.'' The term ``position of responsibility'' is defined 
in the proposed regulations at new Sec.  541.202. To meet this new 
``position of responsibility'' requirement, an employee must either (1) 
perform work of substantial importance, or (2) employ a high level of 
skill or training. The concept of ``work of substantial importance'' 
has been in the interpretive regulations since 1950, as a factor for 
determining whether a worker is an exempt administrative employee. The 
proposed regulations at new Sec.  541.204 define this phrase based on 
language in the current regulations and include a revised list 
illustrating the types of activities that are generally considered of 
``substantial importance'' for purposes of the exemption including: 
Formulating or interpreting management policies; providing consultation 
and expert advice to management; making or recommending decisions that 
have a substantial impact on business operations or finances; analyzing 
and recommending changes to operating practices; planning long or 
short-term business objectives; analyzing data, drawing conclusions and 
recommending changes; and handling complaints, arbitrating disputes or 
resolving grievances. The Department invites comments on any additional 
activities that should be included in this list and on any activities 
that should be deleted. The second alternative for meeting the 
``position of responsibility'' requirement, ``work requiring a high 
level of skill or training,'' defined in the proposed regulations at 
new Sec.  541.205, would ensure that the administrative exemption is 
not denied to a highly trained and skilled employee who performs 
administrative functions merely because the employee uses a procedures 
manual, so long as the manual contains information that can only be 
interpreted properly by someone with a high level of specialized skills 
or training, as opposed to a manual in which the employee simply looks 
up the correct answer for a particular set of circumstances. As 
reflected in the GAO report noted above,

[[Page 15567]]

it has become commonplace for employees in the modern work place to use 
procedures manuals and written guidelines as standard practices for 
achieving quality control and efficiency.
    The administrative exemption is the most challenging of the Sec.  
13(a)(1) exemptions to define and delimit, and the ``discretion and 
independent judgment'' requirement has become increasingly difficult to 
apply with uniformity in the 21st century workplace. Thus, the 
Department proposes to delete this requirement and replace it with the 
requirement that an employee hold a ``position of responsibility.'' The 
Department specifically seeks comments on whether the ``discretion and 
independent judgment'' requirement should be deleted entirely, retained 
as a third alternative for meeting the ``position of responsibility'' 
requirement, or retained by itself but modified to provide better 
guidance on distinguishing exempt administrative employees. The 
Department invites commenters to submit alternative proposed regulatory 
language for either ``discretion and independent judgment'' or 
``position of responsibility.'' The Department solicits comment on how 
employers currently interpret the ``discretion and independent 
judgment'' requirement, and whether individuals currently exempt under 
that requirement would continue to be exempt under the new ``position 
of responsibility'' requirement.
    Finally, the proposed regulations also would reorganize, simplify, 
streamline and update the regulations in other ways. The proposed 
regulations utilize objective, plain language; eliminate outdated and 
uninformative examples; and update definitions of key terms and 
phrases. As with the executive exemption, the proposal for the 
administrative exemption would move a number of sections pertaining to 
salary issues (current Sec. Sec.  541.211, 541.212 and 541.213) to 
subpart G, and other sections relevant to several or all of the 
exemption categories would move to the proposed subpart H (Definitions 
and Miscellaneous Provisions) to eliminate unnecessary repetition. For 
example, current Sec.  541.203 entitled ``Nonmanual work'' is moved to 
proposed new Sec.  541.703. Current Sec.  541.206 entitled ``Primary 
duty'' is merged with current Sec.  541.103 and moved to proposed new 
Sec.  541.700. Current Sec.  541.208 entitled ``Directly and closely 
related'' is combined with current Sec. Sec.  541.108, 541.202, and 
541.307 and moved to proposed new Sec.  541.702. Current Sec.  541.210 
entitled ``Trainees, administrative'' is combined with current Sec.  
541.116 (``Trainees, executive'') and current Sec.  541.310 
(``Trainees, professional'') and moved to proposed new Sec.  541.704. 
Provisions related to the administration of educational institutions in 
current Sec. Sec.  541.2, 541.201(c), 541.202(e), and 541.215 have been 
consolidated and moved to new Sec.  541.206; no substantive changes are 
intended by this consolidation.

Subpart D, Professional Employees, Sec. Sec.  541.300-.304

    The current regulations pertaining to the professional exemption 
contain four separate categories of exempt employees: learned 
professionals, artistic professionals, teachers, and computer 
professionals. As with the executive and administrative exemptions, the 
regulations contain both ``short'' and ``long'' duties tests, depending 
upon the salary level of the employee. The long test contains a 
separate primary duty requirement for each of the four categories of 
employees. The long test for learned professionals requires that the 
primary duty consist of work requiring knowledge of an advanced type in 
a field of science or learning customarily acquired by a prolonged 
course of specialized intellectual instruction and study, as 
distinguished from a general academic education and from an 
apprenticeship, and from training in the performance of routine mental, 
manual, or physical processes. For creative professionals, the primary 
duty must consist of work that is original and creative in character in 
a recognized field of artistic endeavor (as opposed to work which can 
be produced by a person endowed with general manual or intellectual 
ability and training), and the result of which depends primarily on the 
invention, imagination, or talent of the employee. For teachers, the 
primary duty must consist of teaching, tutoring, instructing, or 
lecturing in the activity of imparting knowledge by an employee who is 
employed and engaged in this activity as a teacher in the school system 
or educational establishment or institution by which the person is 
employed. The duties tests for computer employees are discussed in 
subpart E. The long test also requires that an exempt employee: Perform 
work requiring the consistent exercise of discretion and judgment; do 
work that is predominantly intellectual and varied in character, such 
that the output produced or the result accomplished cannot be 
standardized in relation to a given period of time; and devote no more 
than 20 percent of work hours in a week to activities that are not an 
essential part of and necessarily incident to exempt work. The short 
test in the current regulations for both learned professionals and 
teachers contains the specific primary duty requirement discussed 
above, and requires that the employee perform work requiring the 
consistent exercise of discretion and judgment. For artistic 
professionals, the work must require invention, imagination or talent 
in a recognized field of artistic endeavor.
    The proposed regulations pertaining to the professional employee 
exemption would make changes similar to those we propose for the 
executive and administrative exemptions. The goal is to clarify and 
simplify the regulations defining the professional employee exemption, 
while remaining consistent with the purposes of the FLSA. For ease of 
reference, and making no substantive changes, we propose to move the 
provisions pertaining to computer professionals to new subpart E, which 
will contain all information pertinent to such employees. We also 
propose to simplify the regulations by eliminating the separate short 
and long tests for each of the remaining three categories and 
substituting a single standard duties test for each. This restructuring 
and simplification would eliminate the percentage limitation on 
nonexempt work and the consistent exercise of discretion and judgment 
requirement. As discussed above in connection with similar proposed 
changes to the executive and administrative exemptions, we are 
proposing to eliminate these subsections because they have proven 
difficult standards to apply uniformly.
    For learned professionals, the proposed new standard test in Sec.  
541.301 would provide that employees qualify for exemption as a learned 
professional if they have a primary duty of performing office or non-
manual work requiring advanced knowledge in a field of science or 
learning customarily acquired by a prolonged course of specialized 
intellectual instruction, but which also may be acquired by an 
equivalent combination of intellectual instruction and work experience. 
This proposed standard test for learned professionals would focus on 
the knowledge of the employee and how that knowledge is used in 
everyday work, not on the educational path followed to obtain that 
knowledge. Although some flexibility to focus on the worker's knowledge 
exists in the current regulation, it is very limited and rarely used. 
The clarified test reflects changes in the 21st century workplace in 
how some ``knowledge workers'' acquire specialized learning and skills: 
in the modern workplace, some

[[Page 15568]]

employees acquire advanced knowledge through a combination of formal 
college-level education, training and work experience, even where other 
employees in that field customarily acquire advanced knowledge by 
obtaining a baccalaureate or advanced degree. The proposed changes 
would clarify that, so long as such an employee's level of advanced 
knowledge is equivalent to the knowledge possessed by an employee with 
the typical academic degree generally required by the profession, the 
employee may qualify as an exempt professional. Thus, for example, an 
employee who obtained advanced knowledge by completing college courses 
in a field such as engineering, and who worked in that field for a 
number of years, could qualify for exemption if the knowledge acquired 
was equivalent to that of an employee with a baccalaureate degree in 
engineering. We have not proposed any specific formula in the 
regulations for determining the equivalencies of intellectual 
instruction and qualifying work experience, although some examples from 
the current rule have been included and expanded. Public comments are 
invited on whether the regulations should specify such equivalencies.
    The view that several years of specialized training plus intensive 
on-the-job training for a number of additional years may be equated 
with a college degree in certain fields has found support in reported 
judicial decisions. For example, the professional exemption has been 
applied to employees with a combination of training and academics in 
Leslie v. Ingalls Shipbuilding, Inc., 899 F. Supp. 1578 (D. Miss. 
1995). In Leslie, the court concluded that an employee who had 
completed three years of engineering study at a university and had many 
years of experience in the field of engineering was properly classified 
as a professional employee, even though the employee did not satisfy 
one of the usual minimum qualifications for an engineering position of 
having a bachelor's degree in an engineering discipline. The court 
considered the employee's combination of education and experience as 
satisfying the requirement for a prolonged course of specialized 
intellectual instruction and study.
    For creative professionals, we propose to adopt the current short 
test, slightly modified, as the new standard test in proposed Sec.  
541.302. This new standard test would apply the creative professional 
exemption to any employee with the primary duty of ``performing work 
requiring invention, imagination, originality or talent in a recognized 
field of artistic or creative endeavor.'' This language, although 
simplified, is not intended to make any material changes from the 
existing regulations. This standard was applied in the case of Freeman 
v. National Broadcasting Company, Inc., 80 F.3d 78 (2nd Cir. 1996), in 
which employees who researched facts, developed story elements, 
interviewed subjects, wrote scripts, and supervised the editing of 
videotape were deemed to have been correctly classified as artistic 
professional employees. On the other hand, employees of small news 
organizations who spent their time gathering facts about routine 
community events such as municipal, school board, and city council 
meetings, and gathering information from the police blotter and real 
estate transaction reports, and then reporting those facts in a 
standard format were deemed not to be artistic professional employees 
in Reich v. Newspapers of New England, 44 F.3d 1060 (1st Cir. 1995) and 
Reich v. Gateway Press, Inc., 13 F.3d 685 (3d Cir. 1994).
    The standard test for teachers in proposed section 541.303 would be 
unchanged from the current short test, with the exception of the 
deletion of the requirement that the employee's work require the 
consistent exercise of discretion and judgment, a requirement that, as 
discussed above, has engendered significant confusion. Provisions on 
teachers from current Sec. Sec.  541.3, 541.301(g), and 541.314 have 
been consolidated into proposed new Sec.  541.303. The minor editorial 
changes are not intended to cause any substantive changes.
    In addition, the proposed regulations utilize objective, plain 
language that can be easily understood by employees, small business 
owners and human resource professionals, and eliminate outdated and 
uninformative examples. The proposed regulations also would address a 
number of specific occupations that have been the subject of ambiguity 
and litigation. For example, we propose to update and clarify the 
circumstances under which employees working as newspaper journalists or 
as radio or television commentators are exempt, because the case law 
regarding such employees has been evolving over the years, and the 
existing regulations discussing such employees are outdated.
    Provisions of the current regulations in Sec. Sec.  541.3 and 
541.314 that provide an exception to the salary or fee requirements for 
physicians and lawyers have been consolidated and moved to proposed 
Sec.  541.304. Current Sec.  541.307 entitled ``Essential part of and 
necessarily incident to'' has been combined with current Sec.  541.108 
(``Work directly and closely related''), 541.202 (``Categories of 
work''), and Sec.  541.208 (``Directly and closely related''), and 
moved to proposed new Sec.  541.702 (``Directly and closely related''), 
for a streamlined discussion of the principles for distinguishing 
exempt and nonexempt work. Although these sections have been 
consolidated and simplified, we do not intend any substantive changes.
    Finally, we propose to move sections that pertain to salary issues 
(Sec. Sec.  541.311, 541.312 and 541.313) to subpart G, where all such 
issues will be consolidated. Other sections relevant to several or all 
of the exemption categories (such as the definition of primary duty, a 
section regarding application of the exemption to trainees, and a 
section discussing nonexempt work generally) would move to the proposed 
subpart H (Definitions and Miscellaneous Provisions) to eliminate 
unnecessary repetition. Current Sec.  541.305 entitled ``Discretion and 
judgment'' and current Sec.  541.309 entitled ``20-percent nonexempt 
work limitation'' have been deleted from the proposed regulations for 
the same reasons similar changes are being proposed in the executive 
and administrative exemptions as discussed above.

Subpart E, Computer Employees Exemption, Sec. Sec.  541.400-.403

    The exemption for employees in computer occupations has a unique 
legislative and regulatory history. Prior to 1991, the interpretative 
regulations acknowledged that employees in various computer-related 
occupations could have supervisory or managerial duties meeting the 
exemption for ``executive'' or ``administrative'' employees, provided 
that all the applicable regulatory tests were otherwise met. However, 
the regulations did not recognize computer employees as exempt 
``learned'' professionals absent a showing that specialized, prolonged 
academic education and training was an essential prerequisite for entry 
into the computer field. At the time, colleges and universities did not 
consistently recognize computer sciences as a bona fide academic 
discipline under which standard licensing, certification, or 
registration procedures were being followed. Thus, before 1990, 
employees in computer occupations were rarely recognized as exempt 
``learned'' professionals and many also did not perform duties

[[Page 15569]]

meeting all the requirements for the executive or administrative 
exemptions. Of course, much has changed since then, and today 
``computer scientists'' who possess advanced academic degrees in the 
computer field are routinely recognized as exempt professionals.
    In November 1990, Congress enacted legislation directing the 
Department to issue regulations permitting computer systems analysts, 
computer programmers, software engineers, and other similarly-skilled 
professional workers to qualify for exemption under FLSA section 
13(a)(1). This enactment also extended the exemption to employees in 
such computer occupations if paid on an hourly basis at a rate at least 
6\1/2\ times the minimum wage. Final implementing regulations were 
issued in 1992 following public notice and comment procedures (see 29 
CFR 541.3(a)(4) and 541.303; 57 FR 46744, Oct. 9, 1992; 57 FR 47163, 
Oct. 14, 1992). However, when Congress increased the minimum wage in 
1996, that law included some of the Department's regulatory language as 
a separate statutory exemption under a new FLSA section 13(a)(17). The 
1996 enactment also froze the hourly compensation test at $27.63 (which 
equaled 6\1/2\ times the former $4.25 minimum wage). The original 1990 
statute was not affected by the 1996 enactment.
    Accordingly, under the current regulations, an exempt computer 
employee must have a primary duty of performing work requiring 
theoretical and practical application of highly-specialized knowledge 
in computer systems analysis, programming, or software engineering. In 
addition, an exempt computer employee must be engaged in performing 
these activities as a computer systems analyst, computer programmer, 
software engineer, or other similarly-skilled worker in the computer 
software field. Finally, under the current regulations, an exempt 
computer employee must consistently exercise discretion and judgment, 
and be paid not less than $250 per week on a salary basis or not less 
than $27.63 an hour if paid an hourly rate.
    The proposed regulations would consolidate and condense all of the 
regulatory guidance on the computer occupations exemption into a new 
regulatory subpart E by combining provisions of the current regulations 
found at Sec. Sec.  541.3(a)(4), 541.205(c)(7), and 541.303. This new 
subpart will collect in one place the substance of the original 1990 
enactment, the 1992 final regulations, and the 1996 enactment. The key 
regulatory language that resulted from the 1990 enactment is now 
substantially codified in section 13(a)(17) of the Act, and thus no 
substantive changes have been made to that language. However, 
consistent with changes in the professional exemption, the proposal 
deletes the additional requirement that an exempt computer employee 
must consistently exercise discretion and judgment. Further, the former 
regulatory text has been edited and streamlined to provide a more 
concise presentation, and the structure has been modified to conform to 
similar changes proposed in the professional exemption. Because of the 
tremendously rapid pace of significant changes occurring in the 
information technology industry, we have avoided citing specific job 
titles as examples of exempt workers, as they tend to quickly become 
outdated once included in the regulatory text. The Department 
recognizes that the computer employee exemption has been particularly 
confusing, and invites comments on any further clarifications possible 
under the statute.

Subpart F, Outside Sales Employees, Sec. Sec.  541.500-.504

    Section 13(a)(1) of the FLSA contains a specific and separate 
exemption for any employee employed ``in the capacity of outside 
salesman.'' Under the existing regulations, outside sales employees 
must be customarily and regularly engaged away from the employer's 
places of business making sales or obtaining orders or contracts for 
services or the use of facilities. (``Inside sales'' employees are not 
within the scope of this statutory exemption for ``outside sales'' 
employees.) The regulatory interpretations examine whether any given 
employee's chief duty or primary function is to make sales or take 
orders while away from the employer's premises, by analyzing the 
character of the job as a whole, to distinguish exempt outside sales 
employees from other nonexempt occupations (e.g., route delivery 
personnel).
    Under the current regulations, outside sales employees also may not 
exceed a 20 percent tolerance, per work week, performing duties 
unrelated to their own outside sales or solicitations. Activities that 
are incidental to, and in conjunction with, their own outside sales or 
solicitations, including incidental deliveries and collections, are not 
counted against the 20 percent nonexempt work limitation. The 20 
percent limit is based not upon the employee's own hours of work 
performed, but upon the hours worked by other nonexempt employees of 
the employer who perform the kind of nonexempt work performed by the 
outside sales employee. If no one else performs such nonexempt work, 
the base applied is 40 hours, and the amount of nonexempt work allowed 
is eight hours per week. There is no salary or fee requirement for the 
outside sales employee exemption.
    In keeping with similar proposed changes to the other exemptions in 
this part, and to simplify the outside sales exemption, the Department 
proposes to adopt a primary duty concept similar to the other 
exemptions, and to eliminate the particularly confusing 20 percent 
restriction on nonexempt work by outside sales employees. By 
eliminating this percentage limitation, the Department proposes to 
avoid any necessity that the employer track hours of outside sales 
employees. This will provide a consistent approach between this 
exemption and the exemptions for executive, administrative and 
professional employees. The essential elements required for exemption 
would continue, i.e., the outside sales employee's primary duty must be 
to make sales or obtain orders or contracts for services or the use of 
facilities, and the employee must be customarily and regularly engaged 
away from the employer's place of business performing such duty. 
Outdated illustrations and redundant examples have also been deleted 
from the regulations, but no substantive changes are intended by these 
deletions. Finally, although the FLSA refers to the ``outside 
salesman,'' we propose replacing this gender-specific term and refer 
instead to the ``outside sales employee.'' The discussion of nonexempt 
work generally in current Sec.  541.506 has been incorporated into 
proposed new Sec.  541.701, and the discussion of outside sales 
trainees in current Sec.  541.508 has been incorporated into proposed 
new Sec.  541.704. As noted above and in connection with similar 
proposed changes to the executive, administrative and professional 
exemptions, the 20-percent limitation on nonexempt work in current 
Sec.  541.507 is proposed to be deleted.

Subpart G, Compensation Requirements, Sec. Sec.  541.600-.606

Salary Levels
    Salary level tests have been included as part of the exemption 
criteria since the original regulations of 1938. Under the current 
rules, most executive, administrative and professional employees must 
earn a minimum salary

[[Page 15570]]

level to qualify for the exemption.\14\ Employees paid below the 
minimum salary level are not exempt, irrespective of their job duties 
and responsibilities. Employees paid a salary above the minimum level 
in the regulations may be exempt if they also meet the salary basis and 
job duties tests.
---------------------------------------------------------------------------

    \14\ There is no salary level test for outside sales employees 
and some professional employees (teachers, doctors, lawyers). Such 
employees are exempt regardless of their salary.
---------------------------------------------------------------------------

    To qualify for exemption under the existing regulations, an 
employee currently must earn a minimum salary of $155 per week for the 
executive and administrative exemptions, and $170 per week for the 
professional exemption. Employees paid above these minimum salary 
levels must meet a ``long'' duties test to qualify for the exemption. 
The current regulations also provide that employees paid above a higher 
(or ``upset'') salary rate of $250 per week are exempt if they meet a 
``short'' duties test. As explained above, the short tests contain 
fewer requirements and are less burdensome to meet.\15\ The most recent 
updates to these minimum salary levels were in 1975. In January 1981, 
revisions to increase the salary rates by the outgoing Carter 
Administration were stayed indefinitely by the incoming Reagan 
Administration. Because the salary levels have not been increased since 
1975, the existing salary levels are outdated and no longer useful in 
distinguishing between exempt and nonexempt employees.
---------------------------------------------------------------------------

    \15\ Also, in 1996, Congress amended the FLSA to exempt certain 
hourly-paid computer professionals paid at least $27.63 per hour 
($57,470 per year, assuming 40 hours per week).
---------------------------------------------------------------------------

    Proposed Standard Test. Under the proposal, the minimum salary 
level to qualify for exemption from the FLSA minimum wage and overtime 
requirements as an executive, administrative, or professional employee 
would be increased from $155 per week to $425 per week. This salary 
level would be referred to as the ``standard test,'' thus eliminating 
the ``short test'' and ``long test'' terminology. The separate, higher 
salary level test for professional employees also would be eliminated.
    Most stakeholders agreed that the salary levels need to be 
increased. A full-time minimum wage worker earns $206 per week ($5.15/
hour x 40 hours)--an amount above the current long test levels and 
closely approaching the current short test level. As a result, under 
the current regulations, no full-time salaried worker is automatically 
exempt by earning below the long test level, and most salaried 
employees are tested for exemption under the short tests. Salary level 
was once viewed as being the best indicator of exempt status. Today, 
the existing salary level tests are of no help in distinguishing exempt 
employees from non-exempt workers. Accordingly, the question is not 
whether the Department should raise the salary levels, but by how much.
    One suggestion for increasing the current salary levels is to 
adjust the existing rates, adopted in 1975, to account for inflation. 
The 1999 General Accounting Office report adjusted the 1975 salary 
levels for inflation based on 1998 BLS Consumer Price Index (CPI) data, 
resulting in the following salary levels: $470/week for the executive 
and administrative long test; $515/week for the professional long 
tests; and $757/week for the short test.\16\ In January 2001, the 
Department published a report that applied 1999 CPI data to inflation 
adjust the current salary levels to $480/week for the long test and 
$774/week for the short test.\17\
---------------------------------------------------------------------------

    \16\ Fair Labor Standards Act: White Collar Exemptions in the 
Modern Work Place, GAO/HEHS-99-164, September 30, 1999.
    \17\ The ``New Economy'' and Its Impact on Executive, 
Administrative and Professional Exemptions to the Fair Labor 
Standards Act (FLSA), January 2001, pp. 71-73.
---------------------------------------------------------------------------

    However, several considerations weigh against mechanically 
adjusting the 1975 salary levels for inflation. First, the Department 
is proposing a different, standard duties test. Consequently, 
equivalency to either the current long and short test salary levels is 
not appropriate. Second, although adjusting the existing rates for 
inflation might provide the simplest, mechanical approach, the 
Department is concerned about the impact such adjusted salary levels 
would have on certain segments of industry and geographic areas of the 
country, particularly in the retail industry and in rural areas in the 
South, which tend to pay lower salaries. Third, mechanically adjusting 
for inflation presumes that the salary levels set in 1975 are precisely 
the appropriate baseline; and that the nature of work and the 
relationship between job duties and compensation practices have not 
changed in the intervening years since 1975. Fourth, the regulatory 
history has looked to information on actual salaries and incomes, not 
inflation-adjusted amounts. The 1949 Weiss Report, for example, 
considered and rejected proposals to increase salary levels based upon 
the change in the cost of living from the 1940 levels.\18\
---------------------------------------------------------------------------

    \18\ ``Actual data showing the increases in the prevailing 
minimum salary levels of bona fide executive, administrative and 
professional employees since October 1940 would be the best evidence 
of the appropriate salary increases for the revised regulations. * * 
* The change in the cost of living which was urged by several 
witnesses as a basis for determining the appropriate levels is, in 
my opinion, not a measure of the rise in prevailing minimum salary 
levels.'' Weiss Report, p. 12.
---------------------------------------------------------------------------

    Because of these concerns, the Department believes it would be more 
appropriate to examine available data on actual salary levels currently 
being paid in the economy. We reviewed a preliminary report on actual 
salary levels based on the BLS year 2000 Current Population Survey 
(CPS) Outgoing Rotations data set. This data included full-time, 
salaried workers aged 16 and above, but excluded the self-employed, 
agricultural workers, volunteers and federal employees (who are all not 
subject to the salary level tests in the part 541 regulations), broken 
out by industry and geographic area.
    In considering this data and various salary levels in the 
development of this proposal, the Department was guided by the 
prescient analysis of a 1958 Department of Labor report recommending 
changes to the salary levels:

    The salary tests have thus been set for the country as a whole * 
* * with appropriate consideration given to the fact that the same 
salary cannot operate with equal effect as a test in high-wage and 
low-wage industries and regions, and in metropolitan and rural 
areas, in an economy as complex and diversified as that of the 
United States. Despite the variation in effect, however, it is clear 
that the objectives of the salary tests will be accomplished if the 
levels selected are set at points near the lower end of the current 
range of salaries for each of the categories. Such levels will 
assist in demarcating the ``bona fide'' executive, administrative 
and professional employees without disqualifying any substantial 
number of such employees.
* * * * *
    It is my conclusion, from all the evidence, that the lower 
portion of the range of prevailing salaries will be most nearly 
approximated if the tests are set at about the levels at which no 
more than about 10 percent of those in the lowest-range region, or 
in the smallest size establishment group, or in the smallest-sized 
city group, or in the lowest-wage industry of each of the categories 
would fail to meet the tests. Although this may result in loss of 
exemption for a few employees who might otherwise qualify for 
exemption, * * * in the light of the objectives discussed above, 
this is a reasonable exercise of the Administrator's authority to 
``delimit'' as well as define.\19\
---------------------------------------------------------------------------

    \19\ Report and Recommendations on Proposed Revision of 
Regulations, Part 541 under the Fair Labor Standards Act, March 3, 
1958, by Harry S. Kantor, Assistant Administrator, Presiding 
Officer.

    As in the 1958 analysis, the Department looked to ``points near the

[[Page 15571]]

lower end of the current range of salaries'' to determine an 
appropriate salary level for the standard test--although we settled 
upon on the lowest 20 percent, rather than the lowest 10 percent, 
because of the proposed change from the ``short'' and ``long'' test 
structure in the proposed rule and because the data included some 
salaried employees who would not meet the duties tests for exemption. 
Applying this analysis, and also considering adjustments to the current 
salary levels for inflation, the Department proposes a standard salary 
level test of $425/week. Under this level, approximately the bottom 20 
percent of salaried employees would fall below the minimum salary 
requirement and be automatically entitled to overtime pay.
    Proposed special rule for highly compensated employees. The 
proposed regulations also include in Sec.  541.601 a special, 
streamlined rule for employees paid $65,000 or more annually. Under 
this proposed rule for highly compensated employees, employees paid 
$65,000 or more annually and performing non-manual work would be exempt 
if they have an identifiable executive, administrative or professional 
function as described in the standard duties tests. These highly 
compensated employees would not have to meet all the elements of the 
standard duties test to qualify for the exemption as a highly 
compensated employee. For example, an employee who supervises two 
workers but does not participate in any hiring or termination decisions 
in the company would still be exempt because the employee has a 
function that is identifiable as an executive function. In addition, 
the proposed special rule for highly compensated employees would permit 
counting base salary, commissions, non-discretionary bonuses and other 
non-discretionary compensation in determining whether an employee earns 
$65,000 or more annually. To qualify as a highly compensated employee 
under the proposed regulation, any commissions or non-discretionary 
bonuses would have to be settled and paid out to the employee as due on 
at least a monthly basis. An employee who works only a portion of a 
year, whether because the employee begins work during the year or 
leaves before the end of the year, must be guaranteed a pro rata 
portion of the $65,000 annual guarantee. The pro rata portion should be 
based upon the number of weeks the employee works in such a position. 
If an employee's total annual compensation does not total at least the 
guaranteed $65,000 by the end of the year, the proposed regulation 
would allow the employer to make a payment by the next pay period 
sufficient to bring the employee to the guaranteed level. The employer 
is not required to make this payment; however, if the employer elects 
not to make the one-time payment, the employee is not exempt as a 
highly compensated employee.\20\
---------------------------------------------------------------------------

    \20\ Of course, if all of the requirements in either the 
executive, administrative or professional employee tests established 
in Sec. Sec.  541.100, 541.200 or 541.300 are satisfied, the 
employer still would be able to claim the appropriate exemption.
---------------------------------------------------------------------------

    To determine an appropriate salary level for highly compensated 
employees, the Department looked to points near the higher end of the 
current range of salaries and found that the top 20 percent of all 
salaried employees earned above $65,000 annually. This level is 
consistent with setting the proposed standard test salary level at the 
bottom 20 percent of salaried employees.
    Puerto Rico, Virgin Islands and American Samoa. Prior to the Fair 
Labor Standards Amendments of 1989 (Pub. L. 101-157), Puerto Rico, the 
Virgin Islands, and American Samoa were subject to wage order 
proceedings under the Act, in lieu of the FLSA minimum wage, and 
consequently lower salary test levels traditionally were established 
for employees in these jurisdictions. The 1989 Amendments removed 
Puerto Rico and the Virgin Islands from the Act's wage order 
proceedings, and provided that the U.S. mainland minimum hourly wage 
rates under section 6(a)(1) of the Act would apply in Puerto Rico and 
the Virgin Islands. For this reason, the proposed regulations would 
apply the mainland salary test level of $425 per week in Puerto Rico 
and the Virgin Islands. Employees in American Samoa remain subject to 
wage order proceedings under the Act. Consequently, the proposed 
regulations would apply a special, lower salary test level of $360 per 
week for executive, administrative and professional employees in 
American Samoa. This special salary level maintains approximately the 
same ratio to the mainland test in the current regulations (84% for 
executive and administrative workers). Similarly, the proposal would 
apply a special test for highly compensated employees in American Samoa 
of $55,000 annually. Comments are invited on whether the 84 percent 
ratio is appropriate.
    Comments on salary levels. The Department invites comments on these 
proposed salary levels and on any alternative salary level amounts or 
methodologies for determining the appropriate salary level. In 
addition, the Department invites comments on the alternative of 
removing the salary tests from the regulations entirely and on how the 
regulations could be structured without the need for any specific 
salary amounts (relying only on duties tests, for example). The 
Department also invites comments on the alternative of adopting a 
``salary only'' test for highly compensated employees. Under such an 
alternative, for example, employees performing non-manual or office 
work and earning a total annual compensation over a certain amount 
would automatically be considered exempt, without any reference to the 
employee's duties.
Salary Basis Test
    Under the current regulations, to qualify for the executive, 
administrative or professional exemption, an employee must be paid on a 
``salary basis'' as defined in Sec.  541.118. The employee must 
regularly receive a predetermined amount of salary, on a weekly or less 
frequent basis, that ``is not subject to reduction because of 
variations in the quality or quantity of the work performed.'' Thus, 
with a few exceptions described below, the employee must receive the 
full salary for any week in which the employee performs any work 
without regard to the number of days or hours worked.
    The salary basis test prohibits an employer from making deductions 
from the salary ``for absences occasioned by the employer or by the 
operating requirements of the business.'' In other words, ``if the 
employee is ready, willing, and able to work, deductions may not be 
made for time when work is not available.'' However, the employee does 
not have to be paid for any work week in which he or she performs no 
work.
    The current salary basis test also prohibits deductions from pay 
for disciplinary problems, performance issues or for absences caused by 
jury duty, attendance as a witness, or temporary military leave 
(although employers may take offsets for jury or military pay) in any 
week in which an employee performs any work.
    The current regulations contain several exceptions to these salary 
basis rules: An employer may make deductions from the guaranteed pay 
``when the employee absents himself from work for a day or more for 
personal reasons, other than sickness or accident.'' Deductions also 
are permitted for absences of a day or more due to sickness or 
disability, if taken in accordance with a bona fide plan, policy or law 
(workers compensation, for example) providing wage

[[Page 15572]]

replacement benefits. Employers also may make deductions from an exempt 
employee's salary for any hours not worked in the initial and final 
weeks of employment or for hours taken as unpaid FMLA leave without 
affecting the exempt status of the employee. Finally, less than full 
week deductions from pay are permitted for violations of major safety 
rules.
    Under the current rules, an employer can lose the exemption for an 
entire class of employees for making improper deductions from 
guaranteed pay, even for highly paid employees. Depending on the facts, 
improper deductions can ``indicate that there was no intention to pay 
the employee on a salary basis. In such a case, the exemption would not 
be applicable to him during the entire period when such deductions were 
being made.'' For inadvertent mistakes, however, the regulations 
provide employers with a ``window of correction.'' If the facts 
demonstrate that the prohibited deduction from guaranteed pay was 
inadvertent, the exemption is not lost if the employer reimburses the 
employee for such deductions and promises to comply in the future.
    In developing options for its proposed rule, the Department 
considered whether to eliminate the salary basis test. We carefully 
weighed the need for the salary basis test and concluded that the 
underlying concept of the test `` guaranteed pay, not subject to 
reduction because of variations in the quality or quantity of the work 
performed `` should be retained. The nearly universal practice of 
paying employees with the requisite status to be bona fide executive, 
administrative, or professional employees on a salary basis, as the 
1949 hearings on the exemption revealed, reflected the understanding 
that such employees have discretion to manage their time and are not 
answerable for the number of hours worked or the number of tasks 
performed. Such employees are not paid by the hour or task, but for the 
general value of services performed. The salary basis test also 
describes the quid pro quo enjoyed by exempt employees, which 
distinguishes them from non-exempt workers. Exempt employees are not 
paid overtime for working over 40 hours in a week. In exchange, the 
employer must provide a guaranteed salary that cannot be reduced when 
an employee works less than 40 hours.
    The Department also considered amending the salary basis test to 
permit deductions from pay for cases in which an exempt employee 
chooses to be absent for a part of a day. But allowing such ``pay 
docking'' for partial-day absences would breach the quid pro quo and 
blur the line between exempt and non-exempt employees. An exempt 
manager, for example, does not receive extra pay for working 16 hours 
on a Thursday to complete a project; thus, as a matter of fundamental 
fairness, an employer should not be allowed to dock the employee's 
salary for leaving work early on Friday. Of course, an employer can 
terminate an employee who abuses this salary arrangement.
    Although the proposed rule retains the salary basis test and its 
concept of guaranteed pay in proposed Sec.  541.602, two significant 
updates are included in the proposal: Disciplinary Deductions. The 
proposed regulations would allow an exception to the no pay-docking 
rule for deductions from pay for full-day disciplinary suspensions. For 
example, an employer would be permitted to suspend an exempt employee 
without pay for reasons such as sexual harassment or workplace 
violence. The current regulations permit such deductions only for 
penalties imposed for infractions of safety rules of major significance 
and for unpaid suspensions for one or more full work weeks (i.e., 
Monday to Friday). The proposed change would allow employers to suspend 
exempt employees without pay for discriminatory harassment for two 
days, four days or 10 days, as appropriate to respond to the 
misconduct. The Department believes this is a common-sense change that 
will permit employers to uniformly hold exempt employees to the same 
standards of conduct as that required of nonexempt, hourly workers. 
Safe Harbor Provision. Under the current regulations, an employer who 
makes improper deductions from pay can lose the exemption for an entire 
class of employees. However, as mentioned above, the current rules also 
include a ``window of correction'' provision at 541.118(a)(6) under 
which an employer who inadvertently makes impermissible deductions can, 
in some circumstances, retain the exemption by reimbursing employees 
for any improper deductions. Unfortunately, the ``window of 
correction'' has proved difficult for the Department to administer and 
has been the source of considerable litigation. The proposed rule, at 
541.603, would clarify the circumstances and the extent to which an 
improper deduction causes an employee or groups of employees to become 
nonexempt. The proposed rule maintains the underlying purpose of the 
current rule that an employer does not lose the FLSA exemption because 
of isolated incidents of improper pay deductions. Under the proposal, 
the exemption would be lost only if there is a pattern and practice of 
improper deductions, and then only for employees in the same job 
classification and working for the same manager who is responsible for 
the improper pay docking decision or policy. For example, if one 
manager at a single company facility routinely docks the pay of 
engineers for partial-day absences, then all engineers at that one 
facility whose pay could have been docked by that same manager are not 
exempt. Engineers at other facilities or working for other managers 
would remain exempt. Further, the proposed rule would create a new 
``safe harbor'' provision: if an employer has a written policy 
prohibiting improper pay deductions, notifies employees of that policy 
and reimburses employees for any improper deductions, then that 
employer would not lose the exemption for any employees unless the 
employer's policy prohibiting improper deductions is repeatedly and 
willfully violated. The Department believes this approach would be much 
easier to apply uniformly and more consistent with the purposes of the 
FLSA.
    Proposed section 541.604 continues the guidance from current 
541.118(b) on allowing payments of additional compensation besides the 
salary as not being inconsistent with the salary basis of payment, and 
on pay plans that compute an exempt employee's salary from daily or 
shift rates if accompanied by the minimum guarantee. The language has 
been clarified to add hourly compensation plans that include such 
guarantees, consistent with established enforcement practices, if a 
reasonable relationship exists between the guaranteed amount and an 
employee's usual earnings for a normal scheduled work week.
    Proposed Sec.  541.605 contains updated guidance on the ``fee 
basis'' of payment permitted for administrative and professional 
employees, taken from current sections 541.213 and 541.313. Proposed 
Sec.  541.606 provides guidance on payment of required salary amounts 
``exclusive of board, lodging or other facilities'' or ``free and 
clear,'' taken from Sec. Sec.  541.117(c), 541.211(d), and 541.311(d) 
of the current regulations and expanded to cross-reference 29 CFR 
531.32 for more guidance on qualifying ``other facilities'' similar to 
board and lodging.
    The former ``upset salary'' provisions that were part of the short 
tests for executive, administrative and professional employees have 
been deleted from this proposed rule (current Sec. Sec.  541.119, 
541.214, and 541.315).

[[Page 15573]]

Subpart H, Definitions and Miscellaneous Provisions, Sec. Sec.  
541.700-.708

    To eliminate unnecessary repetition, the proposed regulations would 
move definitions and other provisions applicable to several or all of 
the exemption categories to a new subpart H, Definitions and 
Miscellaneous Provisions. The proposed subpart H would define ``primary 
duty'' in proposed Sec.  541.700; ``directly and closely related'' in 
proposed Section 541.702; ``exempt and nonexempt work'' in proposed 
Sec.  541.701; and ``office or non-manual work'' in proposed Sec.  
541.703. Subpart H would also contain provisions regarding trainees, 
emergencies and occasional tasks, combination exemptions, the motion 
picture producing industry, and employees of public agencies. Most of 
these provisions have been moved from the existing regulations without 
substantial change, although some changes have been made to simplify 
and update the current regulations. Current Sec.  541.602, containing 
guidance on the percentage limitations on performing nonexempt work for 
executive and administrative employees in multi-store retailing 
operations, is proposed to be deleted for the same reasons noted above 
for eliminating those former long duties test requirements from the 
executive and administrative exemptions.

IV. Executive Order 12866 and the Small Business Regulatory Enforcement 
Fairness Act

    This proposed rule has been drafted and reviewed in accordance with 
Executive Order 12866, section 1(b), Principles of Regulation. The 
Department has determined that the proposed rule is an economically 
significant regulatory action under section 3(f)(1) of Executive Order 
12866. Based on a preliminary analysis of the data the rule could have 
an annual effect on the economy of $100 million or more. However, the 
proposed rule is not likely to adversely affect in a material way the 
economy, a sector of the economy, productivity, competition, jobs, the 
environment, public health or safety, or state, local, or tribal 
governments or communities; create a serious inconsistency or otherwise 
interfere with an action taken or planned by another agency; or 
materially alter the budgetary impact of entitlements, grants, user 
fees, or loan programs or the rights and obligations of recipients 
thereof.
    For similar reasons, the Department has concluded that this 
proposed rule also is a major rule under the Small Business Regulatory 
Enforcement Fairness Act of 1996 (5 U.S.C. 801 et seq.). Although it 
could result in an annual effect on the economy of $100 million or 
more, it is not likely to result in a major increase in costs or prices 
for consumers, individual industries, Federal, State or local 
government agencies, or geographic regions; or have significant adverse 
effects on competition, employment, investment, productivity, 
innovation, or on the ability of United States-based enterprises to 
compete with foreign-based enterprises in domestic or export markets.
    As a result, the Department has prepared a Preliminary Regulatory 
Impact Analysis (PRIA) in connection with this proposed rule as 
required under section 6(a)(3) of the Order and the Office of 
Management and Budget has reviewed the rule. Copies of the complete 
PRIA may be obtained from the Department by contacting the Wage and 
Hour Division at the address and telephone number provided above. The 
results of the PRIA are summarized below.

Preliminary Regulatory Impact Analysis

Overview
    The proposed changes in the rules for determining whether an 
employee is exempt as an executive, administrative, or professional 
(EAP) worker under the Fair Labor Standards Act (FLSA) will affect 
virtually all employers covered by the FLSA that employ workers within 
the scope of the exemptions in 29 CFR part 541. Employers will be 
affected unless all of their employees are expressly excluded from FLSA 
coverage by the statute. Excluded from these regulations are the self-
employed, agricultural workers, railroad workers, selected occupations 
in the transportation industries and in automobile dealerships, and 
most Federal employees subject to separate rules administered by the 
U.S. Office of Personnel Management. However, 29 CFR part 541 
regulations apply to the following Federal agencies: Library of 
Congress, U.S. Postal Service, Postal Rate Commission, and Tennessee 
Valley Authority (see 29 U.S.C. 204(f)).
    Therefore, employers in all industrial sectors except agriculture, 
railroads, and private households are subject to the existing and 
proposed regulations. The regulations also apply to State and local 
governmental employees.
    The PRIA indicates that there are 6.5 million establishments with 
109.5 million employees, annual payrolls totaling $2.8 trillion, annual 
sales revenues of $17.9 trillion, and annual pre-tax profits of $769.5 
billion in the industry sectors affected by the proposed rule. 
Corresponding data based on SBA's size standards for small business 
entities indicates that over 5.2 million of these establishments are 
considered to be small businesses. These small firms employ 
approximately 38.7 million workers with an annual payroll of $940.0 
billion. Their total annual sales are estimated to be $5.7 trillion and 
their annual pre-tax profits are estimated to be $233.9 billion. 
Approximately 79.8 percent of the affected establishments are 
considered to be small businesses and they account for 38.8 percent of 
the employment, 33.7 percent of the payroll, 31.8 percent of the annual 
sales, and 30.4 percent of the annual pre-tax profits.
    Over 87,400 state and local governmental entities will be affected 
by the proposed rule (3,043 county governments, 19,372 municipal 
governments, 16,629 township governments, 34,683 special district 
governments, and 13,726 school district governments). Nationwide, these 
entities receive more than $1.4 trillion in general revenues, including 
revenues from taxes, some categories of fees and charges, and 
intergovernmental transfers. Their direct expenditures exceed $1.6 
trillion in the aggregate. State and local governments employ more than 
4 million workers and their payrolls exceed $12.6 billion per month.
    The following tables summarize the provisions of the current 29 CFR 
part 541 and the proposed rule that were analyzed in the PRIA.

    Table 1.--Weekly Salary Levels in the Current and Proposed Rules
------------------------------------------------------------------------
                                                                Dollars
------------------------------------------------------------------------
                         Current Rule

Long Test:
  Executives.................................................        155
  Administrative.............................................        155
  Professionals..............................................        170
Short Test...................................................        250

                        Proposed Rule

Standard Test................................................        425
Highly Compensated...........................................      1,250
------------------------------------------------------------------------


[[Page 15574]]


 Table 2.--The Current and Proposed Duties Tests for Executive Employees
------------------------------------------------------------------------
                                                      Proposed standard
  Current long test (salary    Current short test     test (salary and
         and duties)           (salary and duties)         duties)
------------------------------------------------------------------------
$155 per week...............  $250 per week.......  $425 per week.
Primary duty of the           Primary duty of the   Primary duty of
 management of the             management of the     management of the
 enterprise or a recognized    enterprise or a       enterprise or a
 department or subdivision.    recognized            recognized
                               department or         department or
                               subdivision.          subdivision.
Customarily and regularly     Customarily and       Customarily and
 directs the work of two or    regularly directs     regularly directs
 more other employees.         the work of two or    the work of two or
                               more other            more other
                               employees.            employees.
Has authority to hire or                            Has authority to
 fire other employees (or                            hire or fire other
 recommendations as to                               employees (or
 hiring, firing, promotion                           recommendations as
 or other change of status                           to hiring, firing,
 of employees is given                               promotion or other
 particlar weight).                                  change of status of
                                                     other employees is
                                                     given particlar
                                                     weight).
Customarily and regularly
 exercises discretionary
 powers.
Does not devote more than 20
 percent (40 percent 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
------------------------------------------------------------------------
                                                      Proposed standard
  Current long test (salary    Current short test     test (salary and
         and duties)           (salary and duties)         duties)
------------------------------------------------------------------------
$155 per week...............  $250 per week.......  $425 per week.
Primary duty of performing    Primary duty of       Primary duty of
 office or non-manual work     performing office     performing office
 directly related to           or non-manual work    or non-manual work
 management policies or        directly related to   directly related to
 general business operations   management policies   the management or
 of the employer or the        or general business   general business
 employer's customers.         operations of the     operations of the
                               employer or the       employer or the
                               employer's            employer's
                               customers.            customers.
Customarily and regularly     Customarily and       Holds a ``position
 exercises discretion and      regularly exercises   of responsibility''
 independent judgment.         discretion and        with the employer,
                               independent           defined as either
                               judgment.             (1) performing work
                                                     of substantial
                                                     importance or (2)
                                                     performing 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 requiring
 special knowledge under
 only general supervision;
 or executes special
 assignments under only
 general supervision.
Does not devote more than 20
 percent (40 percent 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
------------------------------------------------------------------------
                                                      Proposed standard
 Current long test  (salary    Current short test     test  (salary and
         and duties)           (salary and duties)         duties)
------------------------------------------------------------------------
$170 per week...............  $250 per week.......  $425 per week.
Primary duty of performing    Primary duty of       Primary duty of
 work requiring knowledge of   performing work       performing office
 an advanced type in a field   requiring knowledge   or non-manual work
 of science or learning        of an advanced type   requiring knowledge
 customarily acquired by a     in a field of         of an advanced type
 prolonged course of           science or learning   in a field of
 specialized intellectual      customarily           science or learning
 instruction and study.        acquired by a         customarily
Consistently exercises         prolonged course of   acquired by a
 discretion and judgment..     specialized           prolonged course of
Performs work that is          intellectual          specialized
 predominantly intellectual    instruction and       intellectual
 and varied in character and   study                 instruction, but
 is of such character that    Consistently           which also may be
 the output produced or        exercises             acquired by
 result accomplished cannot    discretion and        alternative means
 be standardized in relation   judgment.             such as an
 to a given period of time..                         equivalent
Does not devote more than 20                         combination of
 percent of time to                                  intellectual
 activities that are not an                          instruction and
 essential part of and                               work experience.
 necessarily incident to
 exempt work.
------------------------------------------------------------------------


      Table 5.--The Current and Proposed Duties Tests for Creative
                         Professional Employees
------------------------------------------------------------------------
                                                      Proposed standard
 Current long test  (salary    Current short test     test  (salary and
         and duties)           (salary and duties)         duties)
------------------------------------------------------------------------
$170 per week...............  $250 per week.......  $425 per week.

[[Page 15575]]


Primary duty of performing    Performs work         Primary duty of
 work that is original and     requiring             performing work
 creative in character in a    invention,            requiring
 recognized field of           imagination, or       invention,
 artistic endeavor, and the    talent in a           imagination,
 result of which depends       recognized field of   originality or
 primarily on the invention,   artistic endeavor.    talent in a
 imagination, or talent of                           recognized field of
 the employee.                                       artistic or
Consistently exercises                               creative endeavor.
 discretion and judgment..
Performs work that is
 predominantly intellectual
 and varied in character and
 is of such character that
 the 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
 related to exempt work.
------------------------------------------------------------------------


                     Table 6.--The Current and Proposed Duties Tests for Computer Employees
----------------------------------------------------------------------------------------------------------------
    Current long test  (salary and        Current short test     Section 13(a)(17) test   Proposed Standard Test
               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          Primary duty of (A)      Primary duty of (A)
 requiring theoretical and practical    performing work          application of systems   application of systems
 application of highly-specialized      requiring theoretical    analysis techniques      analysis techniques
 knowledge in computer systems          and practical            and procedures,          and procedures,
 analysis, programming, and software    application of highly-   including consulting     including consulting
 engineering.                           specialized knowledge    with users, to           with users, to
                                        in computer systems      determine hardware,      determine hardware,
                                        analysis, programming,   software of system       software of system
                                        and software             functional               functional
                                        engineering.             applications; or (B)     applications; or (B)
                                                                 design, development,     design, development,
                                                                 documentation            documentation
                                                                 analysis, creation,      analysis, creation,
                                                                 testing, or              testing, or
                                                                 modification of          modification of
                                                                 computer systems or      computer systems or
                                                                 programs, including      programs, including
                                                                 prototypes, based on     prototypes, based on
                                                                 and related to user of   and related to user of
                                                                 system design            system design
                                                                 specifications; or (C)   specifications; or (C)
                                                                 design, documentation,   design, documentation,
                                                                 testing , creation or    testing , creation or
                                                                 modification of          modification of
                                                                 computer programs        computer programs
                                                                 related to machine       related to machine
                                                                 operating systems; or    operating systems; or
                                                                 (D) a combination of     (D) a combination of
                                                                 duties described in      duties described in
                                                                 (A), (B) and (C), the    (A), (B) and (C), the
                                                                 performance of which     performance of which
                                                                 requires the same        requires the same
                                                                 level of skills.         level of skills.
Employed as a computer systems         Employed as a computer   Employed as a computer   Employed as a computer
 analyst, computer programmer,          systems analyst,         systems analyst,         systems analyst,
 software engineer, or other            computer programmer,     computer programmer,     computer programmer,
 similarly skilled worker in the        software engineer, or    software engineer, or    software engineer, or
 computer software field.               other similarly          other similarly          other similarly
                                        skilled worker in the    skilled worker in the    skilled worker in the
                                        computer software        computer software        computer software