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ESA Final Rule

Defining and Delimiting the Exemptions for Executive, Administrative, Professional,
Outside Sales and Computer Employees; Final Rule [04/23/2004]

Preamble

[PDF Version]

Volume 69, Number 79, Page 22121-22191

[[Page 22121]]
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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; Final Rule


[[Page 22122]]


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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: Final rule.

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SUMMARY: This document provides the text of final regulations under the 
Fair Labor Standards Act 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 ``white collar'' exemptions. To be considered exempt, employees 
must meet certain minimum tests related to their primary job duties 
and, in most cases, must be paid on a salary basis at not less than 
minimum amounts as specified in pertinent sections of these 
regulations.

EFFECTIVE DATE: These rules are effective on August 23, 2004.

FOR FURTHER INFORMATION CONTACT: Richard M. Brennan, Senior Regulatory 
Officer, 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). For an electronic copy of this rule, go to DOL/ESA's Web 
site (http://www.dol.gov), select ``Federal Register'' under ``Laws 

and Regulations,'' and then ``Final Rules.'' Copies of this 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/whd/america2.htm.


SUPPLEMENTARY INFORMATION:

I. Summary of Major Changes and Economic Impact

    The minimum wage and overtime pay requirements of the Fair Labor 
Standards Act (FLSA) are among the nation's most important worker 
protections. These protections have been severely eroded, however, 
because the Department of Labor has not updated the regulations 
defining and delimiting the exemptions for ``white collar'' executive, 
administrative and professional employees. By way of this rulemaking, 
the Department seeks to restore the overtime protections intended by 
the FLSA.
    Under section 13(a)(1) of the FLSA and its implementing 
regulations, employees cannot be classified as exempt from the minimum 
wage and overtime requirements unless they are guaranteed a minimum 
weekly salary and perform certain required job duties. The minimum 
salary level was last updated in 1975, almost 30 years ago, and is only 
$155 per week. The job duty requirements in the regulations have not 
been changed since 1949--almost 55 years ago.
    Revisions to both the salary tests and the duties tests are 
necessary to restore the overtime protections intended by the FLSA 
which have eroded over the decades. In addition, workplace changes over 
the decades and federal case law developments are not reflected in the 
current regulations. Under the existing regulations, an employee 
earning only $8,060 per year may be classified as an ``executive'' and 
denied overtime pay. By comparison, a minimum wage employee earns about 
$10,700 per year. The existing duties tests are so confusing, complex 
and outdated that often employment lawyers, and even Wage and Hour 
Division investigators, have difficulty determining whether employees 
qualify for the exemption. The existing regulations are very difficult 
for the average worker or small business owner to understand. The 
regulations discuss jobs like key punch operators, legmen, straw bosses 
and gang leaders that no longer exist, while providing little guidance 
for jobs of the 21st Century.
    Confusing, complex and outdated regulations allow unscrupulous 
employers to avoid their overtime obligations and can serve as a trap 
for the unwary but well-intentioned employer. In addition, more and 
more, employees must resort to lengthy court battles to receive their 
overtime pay. In the Department's view, this situation cannot be 
allowed to continue. Allowing more time to pass without updating the 
regulations contravenes the Department's statutory duty to ``define and 
delimit'' the section 13(a)(1) exemptions ``from time to time.''
    Accordingly, on March 31, 2003, the Department published a Notice 
of Proposed Rulemaking (68 FR 15560) suggesting changes to the Part 541 
regulations, including the largest increase of the salary levels in the 
65-year history of the FLSA. The proposed changes to the duties tests 
were designed to ensure that employees could understand their rights, 
employers could understand their legal obligations, and the Department 
could vigorously enforce the law.
    During a 90-day comment period, the Department received 75,280 
comments from a wide variety of employees, employers, trade and 
professional associations, small business owners, labor unions, 
government entities, law firms and others. In addition, the 
Department's proposal prompted vigorous public policy debate in 
Congress and the media. The public commentary revealed significant 
misunderstandings regarding the scope of the ``white collar'' 
exemptions, but also provided many helpful suggestions for improving 
the proposed regulations.
    After carefully considering all of the relevant comments, and as 
detailed in this preamble, the Department has made numerous changes 
from the proposed rule to the final rule, including the following:

Scope of the Exemptions

     New section 541.3(a) states that exemptions do 
not apply to manual laborers or other ``blue collar'' workers who 
perform work involving repetitive operations with their hands, physical 
skill and energy. Thus, for example, non-management production-line 
employees and non-management employees in maintenance, construction and 
similar occupations such as carpenters, electricians, mechanics, 
plumbers, iron workers, craftsmen, operating engineers, longshoremen, 
construction workers and laborers have always been, and will continue 
to be, entitled to overtime pay.
     New section 541.3(b) states that the exemptions 
do not apply to police officers, fire fighters, paramedics, emergency 
medical technicians and similar public safety employees who perform 
work such as preventing, controlling or extinguishing fires of any 
type; rescuing fire, crime or accident victims; preventing or detecting 
crimes; conducting investigations or inspections

[[Page 22123]]

for violations of law; performing surveillance; interviewing witnesses; 
interrogating and fingerprinting suspects; preparing investigative 
reports; and similar work.
     New section 541.4 clarifies that the FLSA 
provides minimum standards that may be exceeded, but cannot be waived 
or reduced. Employers must comply with State laws providing additional 
worker protections (a higher minimum wage, for example), and the Act 
does not preclude employers from entering into collective bargaining 
agreements providing wages higher than the statutory minimum, a shorter 
workweek than the statutory maximum, or a higher overtime premium 
(double time, for example).

Salary

     The final rule nearly triples the current $155 
per week minimum salary level required for exemption to $455 per week--
a $30 per week increase over the proposal and a $300 per week increase 
over the existing regulations.
     The ``highly compensated'' test in the final 
rule applies only to employees who earn at least $100,000 per year, a 
$35,000 increase over the proposal.
     The ``highly compensated'' test in the final 
rule applies only to employees who receive at least $455 per week on a 
salary basis.
     The final regulation adds a new requirement that 
exempt highly compensated employees also must ``customarily and 
regularly'' perform exempt duties.

Executive

     The final rule deletes the special rules for 
exemption applicable to ``sole charge'' executives.
     The final rule adds the requirement that 
employees who own at least a bona fide 20-percent equity interest in an 
enterprise are exempt only if they are ``actively engaged in its 
management.''
     The final rule retains the ``long'' duties test 
requirement that an exempt executive must have authority to ``hire or 
fire'' other employees or must make recommendations as to the ``hiring, 
firing, advancement, promotion or any other change of status'' which 
are ``given particular weight,'' but provides a new definition of 
``particular weight.''

Administrative

     The final rule eliminates the proposed 
``position of responsibility'' test for the administrative exemption.
     The final rule eliminates the proposed ``high 
level of skill or training'' standard under the administrative 
exemption.
     The final rule retains the existing requirement 
(deleted in the proposed regulations) that exempt administrative 
employees must exercise discretion and independent judgment.

Professional

     The final section 541.301(e)(2) states that 
licensed practical nurses and other similar health care employees do 
not qualify as exempt professionals. The final rule retains the 
provisions of the existing regulations regarding registered nurses.
     As intended in the proposal, the final rule does 
not make any changes to the educational requirements for the 
professional exemption. Further, the Department never intended to allow 
the professional exemption for any employee based on veterans' status. 
The final rule has been modified to avoid any such misinterpretations. 
The references to training in the armed forces, attending a technical 
school and attending a community college have been removed from final 
section 541.301(d).
     The final rule defines ``work requiring advanced 
knowledge,'' one of the three essential elements of the professional 
primary duties test, as ``work which is predominantly intellectual in 
character, and which includes work requiring the consistent exercise of 
discretion and judgment.''
    As a result of these changes, made in response to public 
commentary, the final Part 541 regulations strengthen overtime 
protections for millions of low-wage and middle-class workers, while 
reducing litigation costs for employers. Both employees and employers 
benefit from the final rules. Employees will be better able to 
understand their rights to overtime pay, and employees who know their 
rights are better able to complain if they are not being paid 
correctly. Employers will be able to more readily determine their legal 
obligations and comply with the law. The Department's Wage and Hour 
Division will be better able to vigorously enforce the law.
    The economic analysis found in section VI of this preamble 
concludes that the final rule guarantees overtime protection for all 
workers earning less than the $455 per week ($23,660 annually), the new 
minimum salary level required for exemption. Because of the increased 
salary level, overtime protection will be strengthened for more than 
6.7 million salaried workers who earn between the current minimum 
salary level of $155 per week ($8,060 annually) and the new minimum 
salary level of $455 per week ($23,660 annually). These 6.7 million 
salaried workers include:
     1.3 million currently exempt white-collar 
workers who will gain overtime protection;
     2.6 million nonexempt salaried white-collar 
workers who are at particular risk of being misclassified; and
     2.8 million nonexempt workers in blue-collar 
occupations whose overtime protection will be strengthened because 
their protection, which is based on the duties tests under the current 
rules, will be automatic under the final rules regardless of their job 
duties.
    The standard duties tests adopted in the final regulation are 
equally or more protective than the short duties tests currently 
applicable to workers who earn between $23,660 and $100,000 per year. 
The final ``highly compensated'' test might result in 107,000 employees 
who earn $100,000 or more per year losing overtime protection.
    Because the rules have not been adjusted in decades, the final rule 
does impose additional costs on employers, including up to $375 million 
in additional annual payroll and $739 million in one-time 
implementation costs. However, updating and clarifying the rule will 
reduce Part 541 violations and are likely to save businesses at least 
an additional $252.2 million every year that could be used to create 
new jobs. The final rule is not likely to have a substantial impact on 
small businesses, state and local governments, or any other geographic 
or industry sector.

II. Background

    The FLSA generally requires covered employers to pay employees at 
least the federal minimum wage for all hours worked, and overtime 
premium pay of time-and-one-half the regular rate of pay for all hours 
worked over 40 in a single workweek. However, the FLSA includes a 
number of exemptions from the minimum wage and overtime requirements. 
Section 13(a)(1) of the FLSA provides an exemption from both minimum 
wage and overtime pay for ``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 * * *).'' 29 U.S.C. 
213(a)(1).
    Congress has never defined the terms ``executive,'' 
``administrative,'' ``professional,'' or ``outside salesman.'' Although 
section 13(a)(1) was included in the original FLSA enacted in 1938, 
specific references to the exemptions in the legislative history are 
scant. The legislative history indicates that the

[[Page 22124]]

section 13(a)(1) 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 and better opportunities for advancement, 
setting them apart from the nonexempt workers entitled to overtime pay. 
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 compliance with the overtime provisions 
difficult and generally precluding the potential job expansion intended 
by the FLSA's time-and-a-half overtime premium. See Report of the 
Minimum Wage Study Commission, Volume IV, pp. 236 and 240 (June 1981).
    Pursuant to Congress' specific grant of rulemaking authority, the 
Department of Labor has issued implementing regulations, 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 these exemptions through notice-and-
comment rulemaking, the regulations so issued have the binding effect 
of law. See Batterton v. Francis, 432 U.S. 416, 425 n. 9 (1977).
    The existing Part 541 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 that is not 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 executive, administrative or 
professional duties as defined by the regulations (the ``duties 
tests'').\1\
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    \1\ A number of states arguably have more stringent exemption 
standards than those provided by Federal law. 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. Sec.  
218.
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    The major substantive provisions of the Part 541 regulations have 
remained virtually unchanged for 50 years. 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). After receiving many comments on 
the original regulations, the Wage and Hour Division issued revised 
regulations in 1940. 5 FR 4077 (Oct. 15, 1940). See also, ``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) (``1940 Stein Report''). The Department 
issued the last major revision of the duties test regulatory provisions 
in 1949. 14 FR 7705 (Dec. 24, 1949). Also in 1949, an explanatory 
bulletin interpreting some of the terms in the regulatory provisions 
was published as Subpart B of Part 541. 14 FR 7730 (Dec. 28, 1949). See 
also, 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) (``1949 
Weiss Report''). In 1954, the Department issued the last major 
revisions to the regulatory interpretations of the ``salary basis'' 
test. 19 FR 4405 (July 17, 1954). After the initial minimum salary 
levels were set at $30 per week in 1938, the Department revised the 
Part 541 regulations to increase the salary levels in 1940, 1949, 1958, 
1963, 1970 and 1975. 5 FR 4077 (Oct. 15, 1940); 14 FR 7705 (Dec. 24, 
1949); 23 FR 8962 (Nov. 18, 1958); 28 FR 9505 (Aug. 30, 1963); 35 FR 
883 (Jan. 22, 1970); 40 FR 7092 (Feb. 15, 1975). See also, 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) (``1958 Kantor Report'').\2\
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    \2\ Revisions to increase the salary rates in January 1981 were 
stayed indefinitely. 46 FR 11972 (Feb. 12, 1981). The Department 
also revised the regulations to accommodate statutory amendments to 
the FLSA in 1961, 1967, 1973, and 1992. 26 FR 8635 (Sept. 15, 1961); 
32 FR 7823 (May 30, 1967); 38 FR 11390 (May 7, 1973); 57 FR 37677 
(Aug. 19, 1992); 57 FR 46744 (Oct. 9, 1992).
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    The framework of the existing Part 541 regulation is based upon the 
1940 Stein Report, the 1949 Weiss Report and the 1958 Kantor report, 
which reflect the best evidence of the American workplace a half-
century ago. The existing regulation, therefore, reflects the structure 
of the workplace, the type of jobs, the education level of the 
workforce, and the workplace dynamics of an industrial economy that has 
long been altered. As the workplace and structure of our economy has 
evolved, so, too, must Part 541 be modernized to remain current and 
relevant. This necessary adaptation forms the philosophical 
underpinnings of this update and reflects the Department's efforts to 
remain true to the intent of Congress, which mandated that the DOL 
``from time to time'' define and delimit these exemptions and the 
myriad terms contained therein.
    The Department notes, however, that much of the reasoning of the 
Stein, Weiss and Kantor reports remains as relevant as ever. This 
preamble notes such instances, and articulates why the reasoning is 
still sound. However, while the Department carefully has reviewed these 
reports in undertaking this update, it is not bound by the reports. The 
Department is responsible for updating regulations that, with each 
passing decade of inattention, have become increasingly out of step 
with the realities of the workplace. Indeed, under this rulemaking, the 
Department is charged with utilizing record evidence submitted in 2003 
* * * not in the 1940s or 1950s * * * in exercising its discretion to 
update the terms of this Part.
    Suggested changes to the Part 541 regulations have been the subject 
of extensive public commentary for two decades, including public 
comments responding to an Advance Notice of Proposed Rulemaking issued 
by the Department in November 1985,\3\ a March 1995 oversight hearing 
by the Subcommittee on Workforce Protections of the Committee on 
Economic and Educational Opportunities, U.S. House of Representatives, 
a report issued by the General Accounting Office (GAO) in September 
1999,\4\ and a May 2000 hearing before the Subcommittee on Workforce 
Protections of the Committee on Education and the Workforce, U.S. House 
of Representatives. In its 1999 report to Congress and at the May 2000 
hearing, the 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 the GAO were 
concerned that the regulatory tests are too complicated, confusing, and 
outdated for the modern workplace, and create potential liability for 
violations when errors in classification occur. Employers were 
particularly concerned about potential liability for violations of the 
complex ``salary basis'' test, and complained that the ``discretion and 
independent judgment'' standard for administrative employees is 
confusing and applied inconsistently by the Wage

[[Page 22125]]

and Hour Division. They also noted the traditional limits of the 
exemptions have blurred in the modern workplace. Employee 
representatives contacted by the 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 workweek 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. The GAO 
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, the GAO suggested that employers' desires 
for clear and unambiguous regulatory standards must be balanced with 
employees' desires for fair and equitable treatment in the workplace. 
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 workplace trends.
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    \3\ 50 FR 47696 (Nov. 11, 1985).
    \4\ Fair Labor Standards Act: White Collar Exemptions in the 
Modern Work Place, GAO/HEHS-99-164, September 30, 1999 (GAO Report).
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    Responding to the extensive public commentary, on March 31, 2003, 
the Department published proposed revisions to these regulations in the 
Federal Register inviting public comments for 90 days (see 68 FR 15560; 
March 31, 2003). In response to the proposed rule, the Department 
received a total of 75,280 comments during the official comment period. 
The Department received comments from a wide variety of individuals, 
employees, employers, trade and professional associations, labor 
unions, governmental entities, Members of Congress, law firms, and 
others.
    Most of the comments received were form letters submitted by e-mail 
or facsimile. Form letters expressing general support of the proposal 
were received, for example, from members of the Society for Human 
Resource Management and from individuals who identified themselves as 
being in agreement with the HR Policy Association or the National 
Funeral Directors Association. More than 90 percent of the comments 
were form letters generated by organizations affiliated with the 
American Federation of Labor and Congress of Industrial Organizations 
(AFL-CIO) expressing general opposition to the proposal. These largely 
identical submissions raise concerns that the proposal would, for 
example, ``diminish the application of overtime pay and seriously erode 
the 40 hour workweek'' and lead to ``[c]utting overtime pay'' which 
``would really hurt America's working families.'' The form letters, 
however, do not address any particular aspect of the changes being 
proposed to the existing regulations. Indeed, some letters and emails 
appear to be from individuals who clearly perform non-exempt duties and 
are not covered by the Part 541 exemptions.
    Approximately 600 of the comments include substantive analysis of 
the proposed revisions. Virtually all of these 600 comments favor some 
change to the existing regulations. Among the commenters there are a 
wide variety of views on the merits of particular sections of the 
proposed regulations. Acknowledging that there are strong views on the 
issues presented in this rulemaking, the Department has carefully 
considered all of the comments and the arguments made for and against 
the proposed changes.
    The major comments received on the proposed regulatory changes are 
summarized below, together with a discussion of the changes that have 
been made in the final regulatory text in response to the comments 
received. In addition to the more substantive comments discussed below, 
the Department received some editorial suggestions, some of which have 
been adopted and some of which have not. A number of other minor 
editorial changes have been made to better organize or structure the 
regulatory text. Finally, a number of comments were received on issues 
that go beyond the scope or authority of these regulations (such as 
eliminating all exemptions from overtime, lowering the overtime 
threshold to fewer hours worked per week or per day, banning all 
mandatory overtime, and basing overtime on a two-week/80-hour limit), 
which the Department will not address in the discussion that follows.

III. Authority of the Secretary of Labor

    Section 13(a)(1) of the FLSA provides exemptions from the minimum 
wage and overtime requirements for employees ``employed in a bona fide 
executive, administrative, or professional capacity or in the capacity 
of outside salesman * * *.'' 29 U.S.C. 213(a)(1). Congress included 
these exemptions in the original enactment of the FLSA in 1938, but the 
statute contains no definitions, guidance or instructions as to their 
meaning.
    Rather than define the section 13(a)(1) exemptions in the statute, 
Congress granted the Secretary of Labor broad authority to ``define and 
delimit'' these terms ``from time to time by regulations.'' Id. A 
unanimous Supreme Court reaffirmed the broad nature of this delegation 
in Auer v. Robbins, 519 U.S. 452, 456 (1997), stating that the ``FLSA 
grants the Secretary broad authority to `defin[e] and delimi[t]' the 
scope of the exemption for executive, administrative and professionals 
employees.'' See also Addison v. Holly Hill Fruit Products, Inc., 322 
U.S. 607, 613 n.6 (1944) (authority given to define and delimit the 
terms ``bona fide executive, administrative, professional''); Spradling 
v. City of Tulsa, Oklahoma, 95 F.3d 1492, 1495 (10th Cir. 1996) (the 
Department ``is responsible for determining the operative definitions 
of these terms through interpretive regulations''), cert. denied, 519 
U.S. 1149 (1997); Dalheim v. KDFW-TV, 918 F.2d 1220, 1224 (5th Cir. 
1990) (the FLSA ``empowers the Secretary of Labor'' to define by 
regulation the terms executive, administrative, and professional).
    Several commenters, including the AFL-CIO, claim that the proposal 
exceeds the authority of the Secretary and will not be entitled to 
judicial deference. They assert that the proposal improperly broadens 
the exemptions, fails to safeguard employees from being misclassified, 
and is not consistent with Congressional intent. As an initial matter, 
the Supreme Court's decision in Auer confirmed the Secretary's ``broad 
authority'' to define and delimit these exemptions. 519 U.S. at 456. 
Moreover, as this preamble establishes, the final rule will simplify, 
clarify and better organize the regulations defining and delimiting the 
exemptions for administrative, executive and professional employees. 
Rather than broadening the exemptions, the final rule will enhance 
understanding of the boundaries and demarcations of the exemptions 
Congress created. The final rule will protect more employees from being 
misclassified and reduce the likelihood of litigation over employee 
classifications because both employees and employers will be better 
able to understand and follow the regulations.
    Other commenters contend that the proposal violates the rule of 
interpretation articulated in Arnold v. Ben Kanowsky, Inc., 361 U.S. 
388, 392 (1960), that FLSA exemptions are to be ``narrowly construed.'' 
However, in Auer v. Robbins, 519 U.S. at 462-63, the Supreme Court 
addressed the difference between the ``narrowly construed'' rule of 
judicial interpretation and the broad

[[Page 22126]]

authority possessed by the Secretary to promulgate these regulations:

Petitioners also suggest that the Secretary's approach contravenes 
the rule that FLSA exemptions are to be ``narrowly construed against 
* * * employers'' and are to be withheld except as to persons 
``plainly and unmistakably within their terms and spirit.'' Arnold 
v. Ben Kanowsky, Inc., 361 U.S. 388, 392, 80 S. Ct. 453, 456, 4 L. 
Ed. 2d 393 (1960). But that is a rule governing judicial 
interpretation of statutes and regulations, not a limitation on the 
Secretary's power to resolve ambiguities in his own regulations. A 
rule requiring the Secretary to construe his own regulations 
narrowly would make little sense, since he is free to write the 
regulations as broadly as he wishes, subject only to the limits 
imposed by the statute.

Thus, the commenters' contentions are unfounded because the ``narrowly 
construed'' standard does not govern or limit the Secretary's broad 
rulemaking authority.

IV. Summary of Major Comments

Effective Date

    There were very few comments concerning the effective date of the 
regulations. The National Association of Convenience Stores (NACS) 
recommends that the rules become effective 180 days after they are 
published, but in no event before the passage of 90 days. NACS asserts 
that ``employers will need considerable time to make and implement 
important business decisions about how to arrange their affairs in 
light of the revisions,'' and that a ``relatively long period is 
certainly justified.'' The Department has set an effective date that is 
120 days after the date of publication of these final regulations. The 
Department believes that a period of 120 days will provide employers 
ample time to make any changes necessary to ensure compliance with the 
final regulations. Moreover, a 120-day effective date exceeds the 30-
day minimum required under the Administrative Procedure Act, 5 U.S.C. 
553(d), and the 60 days mandated for a ``major rule'' under the 
Congressional Review Act, 5 U.S.C. 801(a)(3)(A).
    The law firm of Morgan Lewis & Bockius and the Information 
Technology Industry Council request that the Department establish a 
``short-term `amnesty' program'' that would exist for two years after 
the regulations'' effective date. The program, the commenters suggest, 
would either allow or require employees seeking unpaid overtime wages 
based on a misclassification occurring prior to the effective date of 
the final regulations to submit their claims to the Department for 
resolution. Under the program, the Department would request that the 
employer conduct a self-audit of past compliance concerning the 
positions at issue and would supervise payments of up to two years of 
back wages, excluding liquidated damages. The statute of limitations 
would be tolled during this administrative procedure. If the employer 
refused to perform a self-audit, or did not pay the back wages due, the 
employee could then bring a lawsuit. The commenters cite FLSA section 
16(b) as the source of the Department's authority to implement such a 
program. Section 16(b) provides aggrieved employees a private right of 
action that terminates upon the Department's filing a lawsuit for back 
wages for such employees under section 17. Nothing in section 16(b) or 
in any other section of the statute authorizes the Department to create 
the proposed amnesty program.

Structure and Organization

    The existing Part 541 contains two subparts. Current Subpart A 
provides the regulatory tests that define each category of the 
exemption (executive, administrative, professional, and outside sales). 
Current Subpart B provides interpretations of the terms used in the 
exemptions. Subpart B was first issued as an explanatory bulletin in 
1949 (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 proposed to eliminate this distinction between the 
``regulations'' in Subpart A and the ``interpretations'' in Subpart B. 
The proposed rule also reorganized the subparts according to each 
category of exemption, eliminated outdated and uninformative examples, 
updated definitions of key terms and phrases, and consolidated 
provisions relevant to several or all of the exemption categories into 
unified, common sections to eliminate unnecessary repetition (e.g., a 
number of sections pertaining to salary issues were proposed to be 
consolidated into a new Subpart G, Salary Requirements, discussed 
below). The proposed rule also streamlined, reorganized, and updated 
the regulations in other ways. The proposed regulations utilized 
objective, plain language in an attempt to make the regulations more 
understandable to employees and employee representatives, small 
business owners and human resource professionals. This proposed 
restructuring of Part 541 was intended to consolidate and streamline 
the regulatory text, reduce unnecessary duplication and redundancies, 
make the regulations easier to understand and decipher when applying 
them to particular factual situations, and eliminate the confusion 
regarding the appropriate level of deference to be given to the 
provisions in each subpart.
    The proposed regulations also streamlined the existing regulations 
by adopting a single standard duties test for each exemption category, 
rather than the existing ``long'' and ``short'' duties tests structure. 
Because of the outdated salary levels, the ``long'' duties tests have, 
as a practical matter, become effectively dormant. As the American 
Payroll Association states, the ``long'' duties tests have ``become 
`inoperative' because of the extremely low minimum salary test ($155 
per week) and federal courts' refusal to apply the percentage 
restrictions on nonexempt work in the modern workplace.'' The U.S. 
Chamber of Commerce similarly notes that the ``elements unique to the 
long test have largely been dormant for some time due to the 
compensation levels.'' The U.S. House of Representatives' Committee on 
Education and the Workforce also comments that the ``long'' duties 
tests have ``become rarely, if ever, used.'' The Fisher & Phillips law 
firm notes that ``the `long' test has played little role in the 
executive exemption's application for many years.'' Similarly, the 
American Bakers Association notes that the ``long'' duties tests 
``lack[] current relevance.'' Finally, the National Association of 
Federal Wage Hour Consultants states that the ``long'' duties tests are 
``seldom used today in the business community.'' Faced with this 
reality, the Department decided that elimination of most of the 
``long'' duties tests requirements is warranted, especially since the 
relatively small number of employees currently earning from $155 to 
$250 per week, and thus tested for exemption under the ``long'' duties 
tests, will gain stronger protections under the increased minimum 
salary level which, under the final rule, guarantees overtime 
protection for all employees earning less than $455 per week ($23,660 
annually). Further, as explained in the preamble to the proposed rule, 
the former tests are complicated and require employers to time-test 
managers for the duties they perform, hour-by-hour in a typical 
workweek. Reintroducing these effectively dormant requirements now 
would add new complexity and burdens to the exemption tests that do not 
currently apply. For example, employers are not generally required to 
maintain any records of daily or weekly hours worked by exempt 
employees (see 29 CFR 516.3), nor are they required to

[[Page 22127]]

perform a moment-by-moment examination of an exempt employee's specific 
duties to establish that an exemption is available. Yet reactivating 
the former strict percentage limitations on nonexempt work in the 
existing ``long'' duties tests could impose significant new monitoring 
requirements (and, indirectly, new recordkeeping burdens) and require 
employers to conduct a detailed analysis of the substance of each 
particular employee's daily and weekly tasks in order to determine if 
an exemption applied. When employers, employees, as well as Wage and 
Hour Division investigators applied the ``long'' test exemption 
criteria in the past, distinguishing which specific activities were 
inherently a part of an employee's exempt work proved to be a 
subjective and difficult evaluative task that prompted contentious 
disputes. Moreover, making such finite determinations would become even 
more difficult in light of developments in case law that hold that an 
exempt employee's managerial duties can be carried out at the same time 
the employee performs nonexempt manual tasks. See, e.g., Jones v. 
Virginia Oil Co., 2003 WL 21699882, at *4 (4th Cir. 2003) (assistant 
manager who spent 75 to 80 percent of her time performing basic line-
worker tasks held exempt because she ``could simultaneously perform 
many of her management tasks''); Donovan v. Burger King Corp., 672 F.2d 
221, 226 (1st Cir. 1982) (``an employee can manage while performing 
other work,'' and ``this other work does not negate the conclusion that 
his primary duty is management''). Accordingly, given these 
developments, the Department believed that the percentage limitations 
on particular duties formerly applied under the ``long'' tests were not 
useful criteria that should be reintroduced for defining the ``white 
collar'' exemptions in today's workplace, and that employees who would 
have been tested under the ``long'' tests are better protected by the 
final rule's guarantee of overtime protection to all employees earning 
less than $455 per week.
    Most comments addressing the structure and organization of the 
proposed rule generally favor the proposed restructuring, indicating 
the consolidation of the former regulations and interpretations into a 
unified set of rules and other proposed changes provide needed 
simplification and more clarity to a complex regulation. The weight of 
comments support replacing the former ``long'' and ``short'' test 
structure with the proposed standard tests and deleting the former 
``long'' test percentage limits on performing nonexempt duties.\5\ For 
example, the U.S. Chamber of Commerce comments that it was their 
members' experience that the percentage limitations have been difficult 
to apply and have been of little utility. The Associated Prevailing 
Wage Contractors states that the percentage requirements created 
additional and needless recordkeeping requirements. The National Small 
Business Association comments that a move away from a percentage basis 
test will alleviate the burden on small business owners.
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    \5\ See, e.g., Comments of American Bakers Association; American 
Corporate Counsel Association; American Hotel and Lodging 
Association; American Insurance Association; American Nursery and 
Landscape Association; American Payroll Association; American 
Network of Community Options and Resources (ANCOR); Associated 
Builders and Contractors; Associated Prevailing Wage Contractors; 
Colley & McCoy Company; Contract Services Association of America; 
Financial Services Roundtable; Grocery Manufacturers of America; 
National Association of Chain Drug Stores; National Association of 
Manufacturers; National Council of Agricultural Employers; National 
Grocers Association; National Newspaper Association; National 
Restaurant Association; National Small Business Association; New 
Jersey Restaurant Association; Pennsylvania Credit Union 
Association; Public Sector FLSA Coalition; Society for Human 
Resource Management; State of Oklahoma Office of Personnel 
Management; Tennessee Valley Authority; the U.S. Chamber of 
Commerce; and Virginia Department of Human Resource Management.
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    However, some commenters oppose these changes, asserting that they 
weakened the requirements for exemption, would allow manipulation of 
job titles to evade paying overtime to lower-level employees, would 
open the floodgates to misclassification of employees, and lead to more 
lawsuits. Some commenters state that the proposed language is too 
simple for this complex subject or that the proposed language continues 
to be vague in some areas, making it susceptible to differing 
interpretations and a continuation of an overly complex subject under 
the law. Other dissenting comments point to a loss of judicial and 
opinion letter interpretative precedent that would occur by changing 
the duties tests as the Department proposed.\6\
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    \6\ See, e.g., Comments of 9-5 National Association of Working 
Women; AFL-CIO; American Federation of State, County and Municipal 
Employees; American Federation of Teachers; Building and 
Construction Trades Department, AFL-CIO; Communication Workers of 
America; International Association of Fire Fighters; International 
Association of Machinists and Aerospace Workers; International 
Federation of Professional & Technical Engineers; National 
Employment Law Project; New York State Public Employees Federation; 
United Food and Commercial Workers Union; Weinberg, Roger and 
Rosenfeld; and World at Work.
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    The Department has carefully considered these arguments, and 
continues to believe that reducing the inherent complexity of the 
exemption criteria by replacing the subjective and effectively dormant 
``long'' test requirements is an essential goal to be pursued in this 
rulemaking. Streamlining and simplification of the applicable standards 
is critical to ensuring correct interpretations and proper application 
of the exemptions in the workplace today. It serves no productive 
interest if a complicated regulatory structure implementing a statutory 
directive means that few people can arrive at a correct conclusion, or 
that many people arrive at different conclusions, when trying to apply 
the standards to widely varying and diverse employment settings. The 
extensive public comments on the difficulties experienced under the 
existing regulatory standards amply demonstrate the need for change, in 
the Department's view. The comments suggesting there is no need to 
change the current regulatory ``long'' and ``short'' test structure are 
not persuasive when contrasted with the described difficulties under 
the existing regulatory standards, as confirmed by many other 
commenters. The Department also does not agree with the comments 
suggesting that elimination of the ``long'' test percentage limitations 
on nonexempt work, which are rarely applied today, and retention of the 
primary duty approach as currently interpreted by federal courts, will 
somehow increase litigation or decrease the protections currently 
afforded to employees. Rather, we believe that employees are more 
clearly protected by the final rule, which guarantees overtime 
protection to all employees earning less than $455 per week, than by 
the existing rule which contains confusing and differing requirements 
for employees earning between $155 and $455 per week. Moreover, as 
explained in more detail in Subpart B of the preamble, the Department's 
final ``standard'' duties test for the executive exemption incorporates 
the ``authority to hire or fire'' requirement from the existing long 
test.
    A number of commenters suggest that the 20-percent limitation on 
nonexempt work is mandated by the FLSA itself because, when amending 
the FLSA in 1961 to cover retail and service establishments, Congress 
added in section 13(a)(1) that ``an employee of a retail or service 
establishment shall not be excluded from the definition of employee 
employed in a bona fide executive or administrative capacity because of 
the number of hours in his workweek which he devotes to activities

[[Page 22128]]

not directly or closely related to the performance of executive or 
administrative activities, if less than 40 per centum of his hours 
worked in the workweek are devoted to such activities.''
    The Department does not believe that eliminating the 20-percent 
rule from the new standard test contravenes Congress' intent. By adding 
the 40-percent language in 1961, Congress intended that the 20-percent 
limitation in the ``long'' tests would not be used to prohibit 
employers from applying the exemption to retail and service employees, 
even if they spent more than 20 percent of their time in nonexempt 
work. Thus, this statutory language is a limitation on the Department's 
authority to define certain employees as nonexempt--not a Congressional 
declaration that the Department can never reconsider the 20-percent 
limitation. Congress could have imposed the 20-percent rule on all 
employees in 1961, but it did not. In fact, the primary duty approach 
of the final regulations was first adopted by the Department as part of 
the ``short'' tests in 1949. When Congress amended the FLSA in 1961, 
the primary duty tests were in effect and did not contain mandatory 
percentage limitations on nonexempt work. See 29 CFR 541.103 (50 
percent is ``rule of thumb''); Jones, 2003 WL 21699882, at *3 (the 50-
percent ``rule of thumb'' is not dispositive). Congress did not act to 
abrogate the primary duty tests, and the Department believes that the 
``short'' duties tests are in no way inconsistent with section 13(a)(1) 
of the Act.
    In reaching its regulatory decisions, the Department is mindful of 
its obligations under the delegated statutory authority applicable in 
this situation, and other laws and Executive Orders that apply to the 
regulatory process, to define and delimit the ``white collar'' 
exemption criteria in ways that reduce unnecessary burdens (e.g., the 
Paperwork Reduction Act, the Regulatory Flexibility Act, the Unfunded 
Mandates Reform Act, and Executive Orders 12866, 13272, and 13132). 
Under currently applicable guidelines, implementation of regulatory 
standards should, to the maximum extent possible within the limits of 
controlling statutory authority and intent, strike an appropriate 
balance and be compatible with existing recordkeeping and other prudent 
business practices, not unduly disruptive of them. Regulatory standards 
should also strive to apply plain, coherent, and unambiguous 
terminology that is easily understandable to everyone affected by the 
rules. Consequently, the Department has decided to adopt the proposed 
restructuring of the regulations into separate subparts containing 
standard tests under each category of the exemption, which do not 
include the former ``long'' test requirements that require calculating 
the 20-percent (or 40-percent in retail or service establishments) 
limits on the amount of time devoted to nonexempt tasks.

Subpart A, General Regulations

    Proposed Subpart A included several general, introductory 
provisions scattered throughout the existing regulations. Proposed 
section 541.0 combined an introductory statement from existing 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 541.0 also provided 
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 541.1 provided 
definitions of ``Act'' and ``Administrator'' from their current 
location in section 541.0. Finally, proposed section 541.2 provided 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) of the existing regulations regarding administrative 
employees.
    The Department received few comments on these general regulations. 
Thus, Subpart A is adopted as proposed, except for the addition of a 
new section 541.3 entitled ``Scope of the section 13(a)(1) exemptions'' 
and a new section 541.4 entitled ``Other laws and collective bargaining 
agreements.'' The Department adds these new sections in response to 
public commentary which evidenced general confusion, especially among 
employees, regarding the scope of the exemptions and the impact of 
these regulations on state laws and collective bargaining agreements.
    The subsection 541.3(a) clarifies that the section 13(a)(1) 
exemptions and the Part 541 regulations do not apply to manual laborers 
or other ``blue collar'' workers who ``perform work involving 
repetitive operations with their hands, physical skill and energy.'' 
Such employees ``gain the skills and knowledge required for performance 
of their routine manual and physical work through apprenticeships and 
on-the-job training, not through the prolonged course of specialized 
intellectual instruction required of exempt learned professional 
employees such as medical doctors, architects and archeologists. Thus, 
for example, non-management production-line employees and non-
management employees in maintenance, construction and similar 
occupations such as carpenters, electricians, mechanics, plumbers, iron 
workers, craftsmen, operating engineers, longshoremen, construction 
workers and laborers are entitled to minimum wage and overtime premium 
pay under the Fair Labor Standards Act, and are not exempt under the 
regulations in this part no matter how highly paid they might be.''
    The new Sec.  541.3(a) responds to comments revealing a fundamental 
misunderstanding of the scope and application of the Part 541 
regulations among employees and employee representatives. To ensure 
employees understand their rights, the new subsection 541.3(a) clearly 
states that manual laborers and other ``blue collar'' workers cannot 
qualify for exemption under section 13(a)(1) of the FLSA. The 
description of a ``blue collar'' worker as an employee performing 
``work involving repetitive operations with their hands, physical skill 
and energy'' was derived from a standard dictionary definition of the 
word ``manual.'' See, e.g., Adam v. United States, 26 Cl. Ct. 782, 792-
93 (1992) (``dictionary definition of `manual' is, `requiring or using 
physical skill and energy' ''). The illustrative list of such ``blue 
collar'' occupations included in this subsection is the same language 
included in the proposed and final section 541.601 on highly 
compensated employees.
    Section 541.3(b)(1) provides that the section 13(a)(1) exemptions 
and these regulations also do not apply to ``police officers, 
detectives, deputy sheriffs, state troopers, highway patrol officers, 
investigators, inspectors, correctional officers, parole or probation 
officers, park rangers, fire fighters, paramedics, emergency medical 
technicians, ambulance personnel, rescue workers, hazardous materials 
workers and similar employees, regardless of rank or pay level, who 
perform work such as preventing, controlling or extinguishing fires of 
any type; rescuing fire, crime or accident victims; preventing or 
detecting crimes; conducting investigations or inspections for 
violations of law; performing surveillance; pursuing, restraining and 
apprehending suspects; detaining or supervising suspected and convicted 
criminals, including those on probation

[[Page 22129]]

or parole; interviewing witnesses; interrogating and fingerprinting 
suspects; preparing investigative reports; or similar work.'' Final 
subsection 541.3(b)(2) provides that such employees do not qualify as 
exempt executive employees because their primary duty is not management 
of the enterprise in which the employee is employed or a customarily 
recognized department or subdivision thereof as required under section 
541.100. Thus, for example, ``a police officer or fire fighter whose 
primary duty is to investigate crimes or fight fires is not exempt 
under section 13(a)(1) of the Act merely because the police officer or 
fire fighter also directs the work of other employees in the conduct of 
an investigation or fighting a fire.'' Final subsection 541.3(b)(3) 
provides that such employees do not qualify as exempt administrative 
employees because their primary duty is not the performance of work 
directly related to the management or general business operations of 
the employer or the employer's customers as required under section 
541.200. Final subsection 541.3(b)(4) provides that such employees do 
not qualify as exempt learned professionals because their primary duty 
is not the performance 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 or the performance of 
work requiring invention, imagination, originality or talent in a 
recognized field of artistic or creative endeavor as required under 
section 541.300. Final subsection 541.3(b)(4) also states that 
``although some police officers, fire fighters, paramedics, emergency 
medical technicians and similar employees have college degrees, a 
specialized academic degree is not a standard prerequisite for 
employment in such occupations.''
    This new subsection 541.3(b) responds to commenters, most notably 
the Fraternal Order of Police, expressing concerns about the impact of 
the proposed regulations on police officers, fire fighters, paramedics, 
emergency medical technicians (EMTs) and other first responders. The 
current regulations do not explicitly address the exempt status of 
police officers, fire fighters, paramedics or EMTs. This silence in the 
current regulations has resulted in significant federal court 
litigation to determine whether such employees meet the requirements 
for exemption as executive, administrative or professional employees.
    Most of the courts facing this issue have held that police 
officers, fire fighters, paramedics and EMTs and similar employees are 
not exempt because they usually cannot meet the requirements for 
exemption as executive or administrative employees. In Department of 
Labor v. City of Sapulpa, Oklahoma, 30 F.3d 1285, 1288 (10th Cir. 
1994), for example, the court held that fire department captains were 
not exempt executives because they were not in charge of most fire 
scenes; had no authority to call additional personnel to a fire scene; 
did not set work schedules; participated in all the routine manual 
station duties such as sweeping and mopping floors, washing dishes and 
cleaning bathrooms; and did not earn much more than the employees they 
allegedly supervised. In Reich v. State of New York, 3 F.3d 581, 585-87 
(2nd Cir. 1993), cert. denied, 510 U.S. 1163 (1994), the court granted 
overtime pay to police investigators whose duties included 
investigating crime scenes, gathering evidence, interviewing witnesses, 
interrogating and fingerprinting suspects, making arrests, conducting 
surveillance, obtaining search warrants, and testifying in court. The 
court held that such police officers are not exempt administrative 
employees because their primary duty is conducting investigations, not 
administering the affairs of the department itself. See also Bratt v. 
County of Los Angeles, 912 F.2d 1066, 1068-70 (9th Cir. 1990) 
(probation officers who conduct investigations and make recommendations 
to the court regarding sentencing are not exempt administrative 
employees), cert. denied, 498 U.S. 1086 (1991); Mulverhill v. State of 
New York, 1994 WL 263594 (N.D.N.Y. 1994) (investigators of 
environmental crimes who carry firearms, patrol a sector of the state 
and conduct covert surveillance, and rangers who prevent and suppress 
forest fires, are not exempt administrative employees).
    Similarly, federal courts have held that police officers, 
paramedics, EMTs, and similar employees are not exempt professionals 
because they do not perform work in a ``field of science or learning'' 
requiring knowledge ``customarily acquired by a prolonged course of 
specialized intellectual instruction'' as required under the current 
and final section 541.301 of the regulations. The paramedic plaintiffs 
in Vela v. City of Houston, 276 F.3d 659, 674-676 (5th Cir. 2001), for 
example, were required to complete 880 hours of classroom training, 
clinical experience and a field internship. The EMT plaintiffs were 
required to complete 200 hours of classroom training, clinical 
experience and a field internship. The court held that the paramedics 
and EMTs were not exempt professionals because they were not required 
to have a college degree. See also Dybach v. State of Florida 
Department of Corrections, 942 F.2d 1562, 1564-65 (11th Cir. 1991) 
(probation officer held not exempt professional because the required 
college degree could be in any field--`` `nuclear physics, or * * * 
corrections, or * * * physical education or basket weaving'''--not in a 
specialized field); Fraternal Order of Police, Lodge 3 v. Baltimore 
City Police Department, 1996 WL 1187049 (D. Md. 1996) (police sergeants 
and lieutenants held not exempt professionals, even though some 
possessed college degrees, because college degrees were not required 
for the positions); Quirk v. Baltimore County, Maryland, 895 F. Supp. 
773, 784-86 (D. Md. 1995) (certified paramedics required to have a high 
school education and less than a year of specialized training are not 
exempt professionals).
    The Department has no intention of departing from this established 
case law. Rather, for the first time, the Department intends to make 
clear in these revisions to the Part 541 regulations that such police 
officers, fire fighters, paramedics, EMTs and other first responders 
are entitled to overtime pay. Police sergeants, for example, are 
entitled to overtime pay even if they direct the work of other police 
officers because their primary duty is not management or directly 
related to management or general business operations; neither do they 
work in a field of science or learning where a specialized academic 
degree is a standard prerequisite for employment.\7\
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    \7\ In addition to the case law and comments cited above, when 
drafting this new section, the Department also looked to the 
definitions of ``fire protection activities'' and ``law enforcement 
activities'' contained in Sections 3(y) and 7(k) of the FLSA, and 
their implementing regulations at 29 CFR 553.210 and 553.211, which 
allow public agencies to pay overtime to fire and law enforcement 
employees based on a 7 to 28 day period, rather than the 40-hour 
workweek. These sections do not govern exempt status under section 
13(a)(1) and, thus, are illustrative but not determinative of duties 
performed by nonexempt fire and law enforcement employees. See 29 
CFR 553.216.
---------------------------------------------------------------------------

    Finally, such police officers, fire fighters, paramedics, EMTs and 
other public safety employees also cannot qualify as exempt under the 
highly compensated test in final section 541.601. As discussed below, 
final section 541.601(b) provides that the highly compensated test 
``applies only to employees whose primary duty includes performing 
office or non-manual work.'' Federal courts have recognized that

[[Page 22130]]

such public safety employees do not perform ``office or non-manual'' 
work. Adam v. United States, 26 Cl. Ct. at 792-93, for example, 
involved border patrol agents who spent a significant amount of time in 
the field, wore ``uniforms and black work boots,'' and used ``a 
handgun, a baton, night-vision goggles, and binoculars.'' Their work 
required ``frequent and recurring walking and running over rough 
terrain, stooping, bending, crawling in restricted areas such as 
culverts, climbing fences and freight car ladders, and protecting one's 
self and others from physical attacks.'' Their work also involved 
``high speed pursuits, boarding moving trains and vessels, and physical 
threat while detaining and arresting illegal aliens, smugglers, and 
other criminal elements.'' The court held that these border patrol 
agents are not exempt from the FLSA overtime requirements, stating that 
the ``level of physical effort required in the environment described 
plainly cannot be characterized as `office or other predominately 
nonmanual work.' A dictionary definition of `manual' is, `requiring or 
using physical skill and energy.' * * * Non-manual work, therefore, 
would not call for significant use of physical skill or energy. 
Certainly, the agents' job duties do not fit that definition.'' See 
also, Roney v. United States, 790 F. Supp. 23, 25 (D.D.C. 1992) (Deputy 
U.S. Marshal entitled to overtime pay where position requires `` 
`physical strength and stamina to perform such activities as long 
periods of surveillance, pursuing and restraining suspects, carrying 
heavy equipment' '' and the employee `` `may be subject to physical 
attack, including the use of lethal weapons' '') (citation omitted).
    Federal courts have found high-level police and fire officials to 
be exempt executive or administrative employees only if, in addition to 
satisfying the other pertinent requirements, such as directing the work 
of two or more other full time employees as required for the executive 
exemption, their primary duty is performing managerial tasks such as 
evaluating personnel performance; enforcing and imposing penalties for 
violations of the rules and regulations; making recommendations as to 
hiring, promotion, discipline or termination; coordinating and 
implementing training programs; maintaining company payroll and 
personnel records; handling community complaints, including determining 
whether to refer such complaints to internal affairs for further 
investigation; preparing budgets and controlling expenditures; ensuring 
operational readiness through supervision and inspection of personnel, 
equipment and quarters; deciding how and where to allocate personnel; 
managing the distribution of equipment; maintaining inventory of 
property and supplies; and directing operations at crime, fire or 
accident scenes, including deciding whether additional personnel or 
equipment is needed. See, e.g., West v. Anne Arundel County, Maryland, 
137 F.3d 752 (4th Cir.) (EMT captains and lieutenants), cert. denied, 
525 U.S. 1048 (1998); Smith v. City of Jackson, Mississippi, 954 F.2d 
296 (5th Cir. 1992) (fire chiefs); Masters v. City of Huntington, 800 
F. Supp. 363 (S.D.W. Va. 1992) (fire deputy chiefs and captains); 
Simmons v. City of Fort Worth, Texas, 805 F. Supp. 419 (N.D. Tex. 1992) 
(fire deputy and district chiefs); Keller v. City of Columbus, Indiana, 
778 F. Supp. 1480 (S.D. Ind. 1991) (fire captains and lieutenants). 
Another important fact considered in at least one case is that exempt 
police and fire executives generally are not dispatched to calls, but 
rather have discretion to determine whether and where their assistance 
is needed. See, e.g., Anderson v. City of Cleveland, Tennessee, 90 F. 
Supp.2d 906, 909 (E.D. Tenn. 2000) (police lieutenants ``monitor the 
radio in order to keep tabs on their men and determine where their 
assistance is needed'').\8\
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    \8\ Some police officers, fire fighters, paramedics and EMTs 
treated as exempt executives under the current regulations may be 
entitled to overtime under the final rule because of the additional 
requirement in the standard duties test that an exempt executive 
must have the authority to ``hire or fire'' other employees or make 
recommendations given particular weight on hiring, firing, 
advancement, promotion or other change of status.
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    A new section 541.4 highlights that the FLSA establishes a minimum 
standard that may be exceeded, but cannot be waived or reduced. See 
Brooklyn Savings Bank v. O'Neil, 324 U.S. 697, 706 (1945). Section 18 
of the FLSA states that employers must comply ``with any Federal or 
State law or municipal ordinance establishing a minimum wage higher 
than the minimum * * * or a maximum workweek lower than the maximum 
workweek established under the Act.'' 29 U.S.C. 218. Similarly, 
employers, on their own initiative or in collective bargaining 
negotiations with a labor union, are not precluded by the FLSA from 
providing a wage higher than the statutory minimum, a shorter workweek 
than provided by the FLSA, or a higher overtime premium (double time, 
for example) than provided by the FLSA. See, e.g., Barrentine v. 
Arkansas-Best Freight System, Inc., 450 U.S. 728, 739 (1981) (``In 
contrast to the Labor Management Relations Act, which was designed to 
minimize industrial strife and to improve working conditions by 
encouraging employees to promote their interests collectively, the FLSA 
was designed to give specific minimum protections to individual workers 
and to ensure that each employee covered by the Act would receive `[a] 
fair day's pay for a fair day's work' and would be protected from `the 
evil of overwork as well as underpay.' '') (citation omitted); NLRB v. 
R & H Coal Co., 992 F.2d 46 (4th Cir. 1993) (purpose of FLSA is to 
guarantee minimum level of compensation to workers, regardless of 
outcome of bargaining process; by contrast, purpose of National Labor 
Relations Act is to facilitate collective bargaining process and ensure 
that its outcome is enforced). Thus, the new section 541.4 states: 
``The Fair Labor Standards Act provides minimum standards that may be 
exceeded, but cannot be waived or reduced. Employers must comply, for 
example, with any Federal, State or municipal laws, regulations or 
ordinances establishing a higher minimum wage or lower maximum workweek 
than those established under the Act. Similarly, employers, on their 
own initiative or under a collective bargaining agreement with a labor 
union, are not precluded by the Act from providing a wage higher than 
the statutory minimum, a shorter workweek than the statutory maximum, 
or a higher overtime premium (double time, for example) than provided 
by the Act. While collective bargaining agreements cannot waive or 
reduce the Act's protections, nothing in the Act or the regulations in 
this part relieves employers from their contractual obligations under 
collective bargaining agreements.''

Subpart B, Executive Employees

Section 541.100 General Rule for Executive Employees
    The Department's proposal streamlined the existing regulations by 
adopting a single standard duties test in proposed section 541.100. The 
proposed standard duties test provided that an exempt executive 
employee must: have a primary duty of managing the enterprise in which 
the employee is employed or of a customarily recognized department or 
subdivision thereof; customarily and regularly direct the work of two 
or more other employees; and 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

[[Page 22131]]

employees. This standard test, consisting of the current short test 
requirements plus a third objective requirement taken from the long 
test, was more protective than the existing ``short'' duties test 
applied to employees earning $250 or more per week ($13,000 annually).
    The Department has retained this standard test for the final rule 
but has made minor changes to section 541.100(a)(2). Subsection 
541.100(a)(2) has been modified now to read ``whose primary duty is 
management of the enterprise in which the employee is employed or of a 
customarily recognized department or subdivision thereof.'' This change 
was made in response to several commenters, such as the AFL-CIO, who 
felt that the change from ``whose'' primary duty as written in the 
existing regulations to ``a'' primary duty as written in the proposal 
weakened this prong of the test by allowing for more than one primary 
duty and not requiring that the most important duty be management. As 
the Department did not intend any substantive change to the concept 
that an employee can only have one primary duty, the final rule uses 
the introductory phrasing from the existing regulations.
    Several commenters state that the phrases ``change in status'' and 
``particular weight'' contained in both the existing regulations and 
proposed 541.100(a)(4) are vague and should be defined. The Department 
has added a definition of ``particular weight'' based on case law, 
which now appears in section 541.105, as discussed below. Although the 
Department has not added a definition of ``change of status'' to the 
final regulation, the Department intends that this phrase be given the 
same meaning as that given by the Supreme Court in defining the term 
``tangible employment action'' for purposes of Title VII liability. In 
Burlington Industries, Inc. v. Ellerth, 524 U.S. 742, 761-62 (1998), 
the Supreme Court defined ``tangible employment action'' as ``a 
significant change in employment status, such as hiring, firing, 
failing to promote, reassignment with significantly different 
responsibilities, or a decision causing a significant change in 
benefits.'' The Department believes that this discussion provides the 
necessary guidance to reflect the types of employment actions a 
supervisor would have to make recommendations regarding, other than 
hiring, firing or promoting, to meet this prong of the executive test. 
Because the Department intends to follow the Supreme Court's 
disjunctive definition of ``tangible employment action'' in Ellerth, we 
also reject comments from the AFL-CIO and others requesting that 
proposed subsection 541.100(a)(4) be changed to requiring ``hiring or 
firing and advancement, promotion or any other change of status.'' An 
employee who provides guidance on any one of the specified changes in 
employment status may meet the section 541.100(a)(4) requirement.
    The New York State Public Employees Federation suggests that the 
Department should provide a definition of the phrase ``authority to 
hire or fire'' which would require that a significant part of the 
employee's responsibility must involve either hiring or firing. The 
Department believes that these terms are straightforward and should be 
interpreted in accordance with their customary definition, i.e., to 
engage or disengage an individual for employment. Therefore, the 
Department has determined that such a definition need not be 
incorporated into the final regulation.
    Several commenters from the public sector, such as the Metropolitan 
Transportation Authority, the New York State Police, and the Public 
Sector FLSA Coalition, indicate that the requirement in the proposal 
that an employee have the authority to hire or fire will cause many 
exempt employees to lose exempt status since employees in the public 
sector do not have authority to make such decisions. According to the 
Metropolitan Transportation Authority, ``the authority to hire or fire 
(or to have his recommendation to change an employee's employment 
status given strong consideration) only exists at the highest levels in 
public employment'' because of such factors as ``unionization within 
the state and local public sector and statutory constraints, such as 
civil service laws, which have been developed to protect employees in 
the public sector from various factors, including the political 
process, favoritism or for other reasons.'' The Society for Human 
Resource Management (SHRM) similarly states that this requirement would 
be ``particularly troublesome'' for public entities governed by civil 
service rules that dictate the use of a board to make hiring or firing 
decisions. SHRM recommends that this requirement be deleted or that the 
Department define the term ``particular weight'' in the regulations. 
The Johnson County Government also asks for clarification of the term 
``particular weight.'' The Department has evaluated these comments and, 
as noted above, has included a definition of the term ``particular 
weight'' in section 541.105. That definition clarifies that an 
executive does not have to possess full authority to make the ultimate 
decision regarding an employee's status, such as where a higher level 
manager or a personnel board makes the final hiring, promotion or 
termination decision. With this clarification, and with the 
clarification that this rule encompasses other tangible employment 
actions, we have determined that this requirement should not pose a 
hardship since public sector supervisory employees provide 
recommendations as to hiring, firing or other personnel decisions that 
are given ``particular weight'' to the extent allowed under civil 
service laws and thus may meet this requirement for exemption. As the 
National School Board Association comments, although state law may vest 
the school board with the exclusive authority to discharge an employee, 
such an action is precipitated by a department supervisor who evaluates 
the employee's performance and recommends the action, and the 
superintendent's recommendation to the board is based on the department 
supervisor's recommendations. In addition, such employees may also 
qualify for exemption as administrative or professional employees.
    A number of employer groups urge the Department to eliminate 
proposed 541.100(a)(4) entirely. These commenters argue that this 
requirement will cause many employees to lose their exempt executive 
status because the ``hire or fire'' requirement is not contained in the 
current short test and therefore has been effectively dormant for 
practical purposes as a measure of exempt executive status. The 
Department carefully reviewed these comments and believes that this 
requirement may result in some currently exempt employees becoming 
nonexempt; however, the number is too small to estimate quantitatively. 
Subsection 541.100(a)(4) is an important and objective measure of 
executive exempt status which is simple to understand and easy to 
administer. As the 1940 Stein Report stated at page 12: ``[i]t is 
difficult to see how anyone, whether high or low in the hierarchy of 
management, can be considered as employed in a bona fide executive 
capacity unless he is directly concerned either with the hiring or the 
firing and other change of status of the employees under his 
supervision, whether by direct action or by recommendation to those to 
whom the hiring and firing functions are delegated.'' Although this new 
requirement may exclude a few employees from the executive exemption, 
the Department has determined that it will have a minimal impact on 
employers. Most supervisors

[[Page 22132]]

and managers should at least have their suggestions and recommendations 
as to the hiring, firing, advancement, promotion or any other change of 
status of other employees be given particular weight. Further, 
employees who cannot meet the ``hire or fire'' requirement in section 
541.100(a)(4) may nonetheless qualify for exemption as administrative 
or professional employees.
Section 541.101 Business Owner
    Section 541.101 of the proposed rule provided that an employee 
``who owns at least a 20-percent equity interest in the enterprise in 
which the employee is employed, regardless of whether the business is a 
corporate or other type of organization,'' is exempt as an executive 
employee.
    The Department made two modifications to the provision in the final 
rule. First, we inserted the term ``bona fide'' before the phrase ``20-
percent equity interest.'' Second, we added a duties requirement that 
the 20-percent business owner must be ``actively engaged in its 
management.''
    These changes were made to address commenter concerns that this 
section could be subject to abuse. For example, the McInroy & Rigby law 
firm argues that the exemption would be subject to ``great abuse.'' The 
firm speculates that ``[s]mall business employers could grant employees 
an illusory ownership interest and avoid having to even pay the minimum 
wage to such employees. One would anticipate many sham transactions 
conveying illusory ownership interests if the provision is adopted.'' 
Adding the modifier ``bona fide'' before the phrase ``20-percent equity 
interest'' serves to emphasize that the employee's ownership stake in 
the business must be genuine. The AFL-CIO argues that this section 
``cannot stand'' because it would allow the exemption for employees who 
perform no management duties: ``an individual may have a 20 percent 
interest in an independent gas station, or a small food mart. In order 
to break even, the business stays open through the night, and as the 
minority owner that person keeps the operations going during those 
hours. He makes no management decisions, supervises no one, and has no 
authority over personnel, and could make less than the minimum wage. 
Under the Department's proposal, this employee meets the test for the 
bona fide executive.'' The Department agrees that such an employee 
should not qualify for the exemption. Thus, we have added the duties 
requirement that the 20-percent owner be actively engaged in 
management. See 1949 Weiss Report at 42 (section is ``intended to 
recognize the special status of an owner, or partial owner, of an 
enterprise who is actively engaged in its management'') (emphasis 
added).
    The proposed rule contained no salary level or salary basis 
requirements for the business owner. The Department requested comments 
on whether the salary level and/or salary basis tests should be 
included in the provision. 65 FR 15560, 15565 (March 31, 2003). 
Commenters typically favor the exemption and agree with the Department 
that the salary requirements are not necessary, given the likelihood 
that an employee who owns a bona fide 20-percent equity interest in the 
enterprise will share in its profits. Thus, this ownership interest is 
an adequate substitute for the salary requirements. Additionally, 
several commenters, for example, the Workplace Practices Group, note 
that business owners at this level are able to receive compensation in 
other ways and have sufficient control over the business to prevent 
abuse. Thus, in the final rule, as in the proposal, the salary 
requirements do not apply to a 20-percent equity owner. However, 
requiring a ``bona fide'' ownership interest and that the 20-percent 
owner be actively engaged in management will prevent abuses such as 
that described by commenters and in Lavian v. Haghnazari, 884 F. Supp. 
670, 678 (E.D.N.Y. 1995). In Lavian, an uncle invested more than 
$70,000 in his nephew's pharmacy business in exchange for a promise of 
49 percent stock ownership interest in the closely-held corporation. 
After working at the pharmacy for two years without compensation, and 
never receiving share certificates, the uncle sued. The court denied a 
motion to dismiss an FLSA claim, noting that the court must accept as 
true the uncle's allegations that his duties were ``clerical, and 
lacking in actual supervisory and discretionary authority in relation 
to the enterprise.'' Id., at 680. The final rule ensures that employees 
with such limited job duties in a company would not meet the definition 
of ``actively engaged in its management.''
Section 541.102 Management (Proposed Sec.  541.103, ``Management of the 
Enterprise'' and Proposed Sec.  541.102, ``Sole Charge Executive'')
    The proposed regulations at section 541.102 provided a modified 
test for the executive exemption for an employee who is in sole charge 
of an independent establishment or a physically separated branch 
establishment. Proposed section 541.103 defined the term ``management 
of the enterprise.'' For the reasons discussed below, the final rule 
deletes the ``sole charge'' provision and renumbers the remaining 
sections of Subpart B.
    Under proposed section 541.102, an employee in sole charge of an 
independent or branch establishment would qualify for the executive 
exemption if the employee (1) is compensated on a salary basis at a 
rate of not less than $425 per week (or $360 per week, if employed in 
American Samoa by employers other than the Federal Government), 
exclusive of board, lodging or other facilities; (2) is the top and 
only person in charge of the company activities at the location where 
employed; and (3) has authority to make decisions regarding the day-to-
day operations of the establishment and to direct the work of any other 
employees at the establishment or branch. Under the proposal, an 
``independent establishment or physically separated branch 
establishment'' was defined as ``an establishment that has a fixed 
location and is geographically separated from other company property.'' 
The proposal permitted a leased department to qualify as a physically 
separated branch establishment when the lessee operated under a 
separate trade name, with its own separate employees and records, and 
in other respects conducted its business independent of the lessor's 
with regard to such matters as hiring and firing of employees, other 
personnel policies, advertising, purchasing, pricing, credit 
operations, insurance and taxes.
    The final rule deletes this section in its entirety.
    Commenters such as the AFL-CIO, the National Employment Law 
Project, the National Employment Lawyers Association and the Goldstein, 
Demchak, Baller, Borgen & Dardarian law firm object to this provision 
as allowing the exemption for employees who perform mostly nonexempt 
tasks (such as opening and closing up the location, ringing up cash 
register sales, stocking shelves, answering phones, serving customers, 
etc.) and few, if any, management functions. These commenters also 
believe that, when no other employees worked at the establishment, the 
provision would allow an employee to qualify for the exemption without 
having supervisory responsibility for any other employees. The 
International Association of Fire Fighters expresses strong concerns 
that the sole charge provision would exempt a low-ranking officer in 
charge of a fire station during a particular shift, even though a 
higher ranking officer is in charge of the overall management of the 
station. The Department agrees with these commenter concerns. In 
addition,

[[Page 22133]]

the Department recognizes that, although not intended, section 541.102 
as proposed could be construed as allowing the exemption for fairly 
low-level employees with fewer management duties than those required 
for ``highly compensated'' employees in final section 541.601.
    Before deciding to eliminate this section entirely, the Department 
considered comments of groups such as the U.S. Chamber of Commerce, the 
National Retail Federation, the National Association of Convenience 
Stores, the Fisher & Phillips law firm, the National Association of 
Chain Drug Stores, the FLSA Reform Coalition, the Illinois Credit Union 
League, the Food Marketing Institute, the National Grocers Association, 
the International Mass Retail Association, the League of Minnesota 
Cities and others that request changes to expand the ``sole charge'' 
provision. For example, these commenters suggest eliminating the salary 
level and salary basis requirements; including in the exemption all 
employees who are in charge of an establishment at any time during the 
day or week; allowing more than occasional visits by the sole charge 
executive's superior; eliminating the requirement that the independent 
establishment must be geographically separate from other company 
property; and eliminating the requirements that a leased department 
must operate under a separate trade name and be responsible for its own 
insurance, advertising, taxes, purchasing, pricing and credit 
operations. In the existing regulations, the ``sole charge'' rule is an 
exception from the 20-percent restriction on nonexempt work in the 
``long'' duties test. After considering all comments, and for the 
reasons stated above, the Department concludes that this rule is not 
appropriate as a stand-alone test for the executive exemption.
    Proposed section 541.103, defining the term ``management of the 
enterprise'' as used in subsection 541.100(a)(2), has been renumbered 
as final section 541.102. The proposed definition of ``management'' 
included the following list of activities that would generally meet 
this definition: ``interviewing, selecting, and training of employees; 
setting and adjusting their rates of pay and hours of work; directing 
the work of employees; maintaining production or sales records for use 
in supervision or control; appraising employees' productivity and 
efficiency; handling employee complaints and grievances; disciplining 
employees; planning the work; determining the techniques to be used; 
apportioning the work among the employees; determining the type of 
materials, supplies, machinery or tools to be used or merchandise to be 
bought, stocked and sold; controlling the flow and distribution of 
materials or merchandise and supplies; and providing for the safety of 
the employees or the property.''
    In response to comments, the Department has amended section 541.102 
to rename the section as ``management,'' add language to make clear 
that the list is not exhaustive, and add the management functions of 
``planning and controlling the budget'' and ``monitoring or 
implementing legal compliance measures.''
    Comments from the Fisher & Phillips law firm and the National 
Association of Convenience Stores ask the Department to change the 
phrase ``management of the enterprise'' to ``management,'' pointing out 
that the current regulatory section is simply entitled ``management'' 
and the name ``management of the enterprise'' suggests that these 
management duties apply to an entity broader than that required by 
section 541.100. Because section 541.100(a)(2) requires that the 
primary duty of the employee involve management of the ``enterprise or 
of a customarily recognized department or subdivision thereof,'' the 
Department has renamed the section ``management'' to avoid any 
confusion.
    The Department also received a number of comments, including from 
the Fisher & Phillips law firm, the National Retail Federation, the 
National Association of Federal Wage Hour Consultants, the National 
Council of Chain Restaurants and the National Association of Chain Drug 
Stores, asking the Department to make clear that the list was not 
exhaustive and other types of functions could constitute ``management'' 
activities. The Department believes that such a change is consistent 
with the current interpretive guidelines which make clear the factors 
listed are just examples, and the final rule has been revised 
accordingly.
    Several commenters did ask that specific functions be added to the 
list. The Morgan Lewis & Bockius law firm comments that the examples 
used in this section were too focused on supervision and suggested that 
this section should recognize management of processes, projects and 
contracts in addition to employees. The Department agrees that 
management activities are not limited to supervisory functions. 
Accordingly, the final rule adds the management functions of ``planning 
and controlling the budget'' and ``monitoring or implementing legal 
compliance measures.'' Further, the Department notes that management of 
processes, projects or contracts are also appropriately considered 
exempt administrative duties. The National Retail Federation asks that 
the list be ``augmented to confirm that additional duties are exempt 
when performed by retail employees in the course of managing: such as 
walking the floor, interacting with customers to determine satisfaction 
* * *, team building, conducting inspections, evaluating efficiency, 
monitoring or implementing legal compliance measures, training * * *, 
attending management meetings, planning meetings and developing meeting 
materials, planning and conducting marketing activities * * *, and 
investigating or otherwise addressing matters regarding personnel, 
proficiency, productivity, staffing or management issues.'' The 
National Council of Chain Restaurants suggests that ``handling customer 
complaints'' is just as much a management function as handling employee 
complaints and therefore should be added to the list of examples, along 
with ``coaching employees in proper job performance techniques and 
procedures.'' The Department believes that it is not appropriate to 
further augment the list. Although many of these suggestions are 
appropriate examples of ``management'' functions, some appear 
duplicative of functions already included in the section and others, 
such as ``handling customer complaints'' and ``conducting 
inspections,'' are functions that could qualify as either management or 
production type functions depending on the specific facts involved. A 
case-by-case analysis would be more appropriate to determine whether 
such functions meet the definition of ``management.'' Moreover, because 
the Department has added language to make clear that the list is not 
exhaustive, such functions could be considered management functions in 
appropriate circumstances. For example, a customer service 
representative may routinely handle customer complaints but not be 
acting in a management capacity. In contrast, a manager in a restaurant 
may be the person responsible for handling such complaints as the 
individual responsible for the functioning of the operation and 
therefore would be operating in a management capacity.
    Finally, the management function listed as ``appraising their 
productivity and efficiency'' has been augmented with the phrase from 
the current regulations, ``for the purpose of recommending promotions 
or other changes in their status.'' The AFL-CIO argues that the 
elimination of this

[[Page 22134]]

phrase would allow the definition of management to include low-level 
personnel functions. As the Department did not intend to change the 
meaning of this phrase, this language has been added to the final rule.
Section 541.103 Department or Subdivision (Proposed Sec.  541.104)
    Proposed section 541.104 stated that the phrase ``department or 
subdivision'' is ``intended to distinguish between a mere collection of 
employees assigned from time to time to a specific job or series of 
jobs and a unit with permanent status and function.'' The section 
defined ``department or subdivision'' as requiring ``a permanent status 
and a continuing function.'' Proposed subsection 541.104(b) recognized 
that ``when an enterprise has more than one establishment, the employee 
in charge of each establishment may be considered in charge of a 
recognized subdivision of the enterprise.'' Proposed subsection 
541.104(c) stated that ``a recognized department or subdivision need 
not be physically within the employer's establishment and may move from 
place to place'' and provided that the ``mere fact that the employee 
works in more than one location does not invalidate the exemption if 
other factors show that the employee is actually in charge of a 
recognized unit.'' Finally, proposed subsection 541.104(d) stated that 
``continuity of the same subordinate personnel is not essential to the 
existence of a recognized unit with a continuing function. An otherwise 
exempt employee will not lose the exemption merely because the employee 
draws and supervises workers from a pool or supervises a team of 
workers drawn from other recognized units, if other factors are present 
that indicate that the employee is in charge of a recognized unit with 
a continuing function.''
    The only changes to proposed section 541.104 are to renumber the 
section as 541.103 in the final rule, and to delete the sentence in 
subsection (b) that ``[t]he employee also may qualify for the sole 
charge exemption, if all of the requirements of Sec.  541.102 are 
satisfied.'' This sentence is no longer necessary because of the 
deletion of the ``sole charge'' exemption in proposed section 541.102. 
No other changes have been made.
    Several commenters request that the Department expand or clarify 
the phrase ``department or subdivision.'' The Morgan Lewis & Bockius 
law firm asks the Department to expand the phrase ``department or 
subdivision'' to include ``grouping.'' The Public Sector FLSA Coalition 
suggests that the phrase be broadened to account for a functional unit 
which would provide for a more flexible or fluid organizational 
philosophy. The National Council of Chain Restaurants asks for 
confirmation of the Department's historic enforcement position that 
``front of the house'' and ``back of the house'' are recognized 
subdivisions. The U.S. Chamber of Commerce states that the phrase 
``department or subdivision'' is outdated and the applicable units 
should provide for project teams. Finally, the League of Minnesota 
Cities questions whether a subdivision would include supervision of a 
day shift.
    The Department has decided not to expand the term ``department or 
subdivision'' because the phrase has not caused confusion or excessive 
litigation. Expanding the definition would unduly complicate this 
requirement and likely lead to unnecessary litigation. Indeed, the 
courts already have provided clarification of the phrase on a number of 
occasions. For example, several courts have stated that a shift can 
constitute a department or subdivision, which responds to the question 
raised by the League of Minnesota Cities. See West v. Anne Arundel 
County, Maryland, 137 F.3d 752, 763 (4th Cir. 1998); Joiner v. City of 
Macon, 647 F. Supp. 718, 721-22 (M.D. Ga. 1986); Molina v. Sea Land 
Services, Inc., 2 F. Supp. 2d 185, 188 (D.P.R. 1998). The Department 
notes that the issue identified by the National Retail Federation as to 
whether ``front of the house'' in a store constitutes a department or 
subdivision was answered by at least one court in the affirmative. See 
Debartolo v. Butera Finer Foods, 1995 WL 516990, at *4 (N.D. Ill. 
1995). Finally, the Department observes that ``groupings'' or ``teams'' 
may constitute a department or subdivision under the existing 
definition, but a case-by-case analysis is required. See Gorman v. 
Continental Can Co., 1985 WL 5208, at *6 (N.D. Ill. 1985) (department 
or subdivision can ``include small groups of employees working on a 
related project within a larger department, such as a group leader of 
four draftsmen in the gauge section of a much larger department''). The 
Department believes these cases correctly define and delimit the term 
``department or subdivision.''
Section 541.104 Two or More Other Employees (Proposed Sec.  541.105)
    Proposed section 541.105 defined the term ``two or more other 
employees'' to mean ``two full-time employees or their equivalent. One 
full-time and two half-time employees, for example, are equivalent to 
two full-time employees. Four half-time employees are also 
equivalent.'' Proposed section 541.105(b) stated that the ``supervision 
can be distributed among two, three or more employees, but each such 
employee must customarily and regularly direct the work of two or more 
other full-time employees or the equivalent. Thus, for example, a 
department with five full-time nonexempt workers may have up to two 
exempt supervisors if each such supervisor customarily and regularly 
directs the work of two of those workers.'' However, under proposed 
subsections (c) and (d), an ``employee who merely assists the manager 
of a particular department and supervises two or more employees only in 
the actual manager's absence does not meet this requirement,'' and 
``[h]ours worked by an employee cannot be credited more than once for 
different executives.'' Thus, ``a shared responsibility for the 
supervision of the same two employees in the same department does not 
satisfy this requirement.''
    Except for renumbering the section as 541.104, no other changes 
were made.
    In its proposal, the Department invited 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.'' See 61 FR 
15565 (March 31, 2003). In response to this request, the Department 
received a large number of comments both in support of and against the 
modification. Commenters such as the U.S. Chamber of Commerce, the 
National Association of Manufacturers, the League of Minnesota Cities, 
the Financial Services Roundtable, the National Automobile Dealers 
Association, the State of Oklahoma, the State of Kansas Department of 
Administration Division of Personnel Services, the Tennessee Valley 
Authority, the Public Sector FLSA Coalition, and the FLSA Reform 
Coalition support the modified language as more applicable to the 
realities of the modern workforce. In contrast, other commenters 
believe this language would compromise the executive exemption or 
create confusion. For example, the National Employment Lawyers 
Association ``disputes that there is any need for modification changing 
the long-established requirement that an exempt executive must 
supervise two or more employees'' because those ``who supervise fewer 
than two employees are, as [a] practical matter, clearly not performing 
exempt activity at a level that could conceivably justify their 
characterization as bona

[[Page 22135]]

fide executives.'' The Contract Services Association of America states 
that the ``word `leadership' has too many connotations to be practical 
in the work environment.''
    After full consideration of these comments, the Department has 
decided to retain the existing and proposed language that the employee 
direct the work of ``two or more other employees'' to qualify as an 
executive under the final rule. The Department agrees with the comments 
opposing this change, and has rejected the ``leadership'' modification 
because the present requirement provides a well established, easily 
applied, bright-line test for exemption, and the ambiguity attached to 
the term ``lead,'' the Department believes, could spark needless 
litigation. Also, an employee whose primary duty is management and who 
customarily and regularly leads other employees, alone or with another, 
may qualify for exemption under the administrative exemption.
    The Department also received a number of other comments and 
requests for clarification on this section. The FLSA Reform Coalition 
asks that the Department clarify what the term ``full-time'' means, and 
requests that the clarification include a statement that the term 
should be defined by the employer's practices. The Department does not 
believe additional clarification is necessary, and stands by its 
current interpretation that an exempt supervisor generally must direct 
a total of 80 employee-hours of work each week. As the Wage and Hour 
Division's Field Operations Handbook (FOH) states, however, 
circumstances might justify lower standards. For example, firms in some 
industries have standard workweeks of 37\1/2\ hours or 35 hours for 
their full-time employees. In such cases, supervision of employees 
working a total of 70 or 75 hours in a workweek will constitute the 
equivalent of two full-time employees. FOH 22c00.
    Several commenters, such as the Financial Services Roundtable and 
the Mortgage Bankers Association of America, urge the Department to 
clarify the phrase ``in the manager's actual absence'' in subsection 
(c). The Department continues to believe that the phrase provides 
useful guidance in defining the exempt executive, and intends that this 
phrase be interpreted to mean that an employee who simply supervises on 
a short-term basis, such as during a lunch break or while a manager is 
on vacation, is not meeting the requirement of customarily and 
regularly supervising two or more employees.
    Several commenters ask that the requirement of directing two or 
more employees be eliminated. Other commenters state that the 
requirement should be lowered to directing only one other employee. Yet 
others argue that the number of employees supervised should be raised. 
For example, the National Association of Federal Wage Hour Consultants 
states that the requirement should be five employees while the Labor 
Board, Inc. suggests the number should be four employees. The 
Department continues to believe that the current requirement of 
directing two or more employees is an appropriate measure of exempt 
status and to raise the threshold would disproportionately harm small 
businesses that may not have a large number of employees. See 1940 
Weiss Report at 45-46.
    Several commenters question whether the requirement that an 
employee direct two or more other ``employees'' includes employees of a 
contractor. Several commenters also urge the Department to expand this 
requirement to two or more ``individuals'' so as to count the 
supervision of volunteers, contractors, and other non-employees. The 
Department has evaluated these comments and determined that no changes 
should be made. The FLSA itself defines the term ``employee'' as an 
``individual employed by an employer,'' and this definition has been 
subject to extensive judicial interpretation. See 29 U.S.C. Sec.  
203(e)(1). The Department also observes, however, that the 
administrative exemption may apply to the employee who supervises 
contractors, volunteers or other non-employees if the other 
requirements for that exemption are met.
Section 541.105 Particular Weight
    Section 541.105 of the final rule contains a new definition of the 
phrase ``particular weight'' as follows:

To determine whether an employee's suggestions and recommendations 
are given ``particular weight,'' factors to be considered include, 
but are not limited to, whether it is part of the employee's job 
duties to make such suggestions and recommendations; the frequency 
with which such suggestions and recommendations are made or 
requested; and the frequency with which the employee's suggestions 
and recommendations are relied upon. Generally, an executive's 
suggestions and recommendations must pertain to employees whom the 
executive customarily and regularly directs. It does not include an 
occasional suggestion with regard to the change in status of a co-
worker. An employee's suggestions and recommendations may still be 
deemed to have ``particular weight'' even if a higher level 
manager's recommendation has more importance and even if the 
employee does not have authority to make the ultimate decision as to 
the employee's change in status.

    This definition has been added in response to comments received 
from groups such as the Society for Human Resource Management, Leggett 
& Platt, the Food Marketing Institute, the League of Minnesota Cities 
and the American Council of Engineering Companies, who indicate that 
this phrase is extremely vague and needs clarification. As one of the 
Department's goals is to provide clarity to the terms contained in the 
regulations, we have defined ``particular weight'' by incorporating 
factors relied on by the courts to define this term under the current 
regulations. See, e.g., Baldwin v. Trailer Inns, Inc., 266 F.3d 1104, 
1116 (9th Cir. 2001); Molina v. Sea Land Services, Inc., 2 F. Supp. 2d 
185, 188 (D.P.R. 1998); Wendt v. New York Life Insurance Co., 1998 WL 
118168, at *6 (S.D.N.Y. 1998); Passer v. American Chemical Society, 749 
F. Supp. 277, 280 (D.D.C. 1990); Wright v. Zenner & Ritter, Inc., 1986 
WL 6152, at *2 (W.D.N.Y. 1986); Kuhlmann v. American College of 
Cardiology, 1974 WL 1344, at *1 (D.D.C. 1974); Marchant v. Sands Taylor 
& Woods Co., 75 F. Supp. 783, 786 (D. Mass. 1948); Anderson v. Federal 
Cartridge Corp., 62 F. Supp. 775, 781 (D. Minn. 1945).
    As illustrated by these cases, factors such as the frequency of 
making recommendations, frequency of an employer's relying on an 
employee's recommendations, as well as evidence that the employee's job 
duties explicitly include the responsibility to make such 
recommendations, are important considerations in determining whether 
``particular weight'' is given to the employee's recommendations. Thus, 
for example, an employee who provides few recommendations which are 
never followed would not meet the ``hire or fire'' requirement in final 
section 541.100(a)(4). Evidence that an employee's recommendation are 
given ``particular weight'' could include witness testimony that 
recommendations were made and considered; the exempt employee's job 
description listing responsibilities in this area; the exempt 
employee's performance reviews documenting the employee's activities in 
this area; and other documents regarding promotions, demotions or other 
change of status that reveal the employee's role in this area.
Section 541.106 Concurrent Duties (Proposed Sec. Sec.  541.106 and 
541.107)
    Proposed section 541.106 entitled ``Working supervisors'' stated: 
``Employees, sometimes called `working foremen' or `working 
supervisors,' who

[[Page 22136]]

have some supervisory functions, such as directing the work of other 
employees, but also perform work unrelated or only remotely related to 
the supervisory activities are not exempt executives if, instead of 
having management as their primary duty as required in Sec.  541.100, 
their primary duty consists of either the same kind of work as that 
performed by their subordinates; work that, although not performed by 
their own subordinates, consists of ordinary production or sales work; 
or routine, recurrent or repetitive tasks.'' Proposed section 541.107 
entitled ``Supervisors in retail establishments'' stated: ``Supervisors 
in retail establishments often perform work such as serving customers, 
cooking food, stocking shelves, cleaning the establishment or other 
nonexempt work. Performance of such nonexempt work by a supervisor in a 
retail establishment does not disqualify the employee from the 
exemption if the requirements of Sec.  541.100 are otherwise met. Thus, 
an assistant manager whose primary duty includes such activities as 
scheduling employees, assigning work, overseeing product quality, 
ordering merchandise, managing inventory, handling customer complaints, 
authorizing payment of bills or performing other management functions 
may be an exempt executive even though the assistant manager spends the 
majority of the time on nonexempt work.''
    As the Department explained in the preamble to the proposed rule, 
both proposed section 541.106 and proposed section 541.107 were meant 
to address the difficult issue of classifying employees who have both 
exempt supervisory duties and nonexempt duties. The Department invited 
comments on whether these sections have appropriately distinguished 
exempt and nonexempt employees. 61 FR 15565.
    Based on the comments received, the Department has decided to 
combine these two proposed sections into one section entitled 
``concurrent duties.'' The Department believes that a unified section 
on this topic will better illustrate when an employee satisfies the 
requirements of the executive exemption. The final section 541.106 
incorporates the general principles and examples from both proposed 
section 541.106 and proposed section 541.107. The final section 
541.106(a) thus provides: ``Concurrent performance of exempt and 
nonexempt work does not disqualify an employee from the executive 
exemption if the requirements of Sec.  541.100 are otherwise met.'' To 
further distinguish exempt executives from nonexempt workers, the final 
subsection 541.106(a) also states: ``Generally, exempt executives make 
the decision regarding when to perform nonexempt duties and remain 
responsible for the success or failure of business operations under 
their management while performing the nonexempt work. In contrast, the 
nonexempt employee generally is directed by a supervisor to perform the 
exempt work or performs the exempt work for defined time periods. An 
employee whose primary duty is ordinary production work or routine, 
recurrent or repetitive tasks cannot qualify for exemption as an 
executive.'' Final subsections 541.106(b) and (c) contain examples to 
further illustrate these general principles.
    The final section provides, as in the current regulations, that an 
employee with a primary duty of ordinary production work is not exempt 
even if the employee also has some supervisory responsibilities. As 
explained in the preamble to the proposed rule, this situation often 
occurs in a factory setting where an employee who works on a production 
line also has some responsibility to direct the work of other 
production line workers. Another example is an employee whose primary 
duty is to work as an electrician, but who also directs the work of 
other employees on the job site, orders parts and materials for the 
job, and handles requests from the prime contractor. Nonexempt 
employees do not become exempt executives simply because they direct 
the work of other employees upon occasion or provide input on 
performance issues from time to time because such employees typically 
do not meet the other requirements of section 541.100, such as having a 
primary duty of management.
    The Department decided to combine proposed sections 541.106 and 
541.107 into one section on ``concurrent duties'' in response to a 
number of comments indicating that the proposed separate sections were 
duplicative and not helpful in understanding the distinction between 
exempt and nonexempt employees. The National Council of Chain 
Restaurants argues that proposed section 541.106 should be eliminated 
because of confusion created by having two separate sections. The 
Fisher & Phillips law firm and the National Association of Convenience 
Stores argue that proposed section 541.106 should be eliminated as no 
longer necessary because that section has always related to the 
percentage limitations on nonexempt work from the existing long test. 
Similar comments were received from the U.S. Chamber of Commerce. The 
Workplace Practices Group argues for the elimination of proposed 
section 541.106 and suggests that proposed section 541.107 apply to all 
supervisors, as both working supervisors and retail supervisors have 
the same or very similar responsibilities such as scheduling employees, 
assigning work and overseeing product quality. The County of Culpeper, 
Virginia, argues that proposed section 541.106 ignored the realities of 
small governments where department heads have to perform both exempt 
management duties and nonexempt work.
    Some commenters, including the New Jersey Business & Industry 
Association, the National Retail Federation and the HR Policy 
Association, commend the Department for recognizing the special 
circumstances of retail supervisors. In contrast, the Society for Human 
Resource Management, Senator Orrin G. Hatch and others argue that a 
distinction between retail and non-retail supervisors does not exist. 
The American Hotel & Lodging Association, the International Franchise 
Association, the FLSA Reform Coalition, the National Association of 
Chain Drug Stores and the International Mass Retail Association argue 
that proposed section 541.107 should be modified to cover both retail 
and service establishments.
    Other commenters state that the description of ``working 
supervisors'' was too broad. Such commenters argue that fast-food 
managers who spend the majority of their time on nonexempt work should 
not be exempt. The National Employment Law Project states that the 
proposed language would make it possible to exempt all line employees, 
provided they met the requirements of proposed section 541.100. The 
McInroy & Rigby law firm argues that proposed section 541.107 should be 
eliminated since there was no policy justification for assistant 
managers in fast-food establishments to be exempt from FLSA 
requirements. The Communications Workers of America similarly opposes 
any diminution of the existing regulatory standards for exempt 
executives.
    The Department believes that the proposed and final regulations are 
consistent with current case law which makes clear that the performance 
of both exempt and nonexempt duties concurrently or simultaneously does 
not preclude an employee from qualifying for the executive exemption. 
Numerous courts have determined that an employee can have a primary 
duty of management while concurrently performing nonexempt duties. See, 
e.g., Jones v. Virginia Oil Co., 2003 WL 21699882, at *4 (4th Cir. 
2003) (assistant manager who spent 75 to 80 percent of

[[Page 22137]]

her time performing basic line-worker tasks held exempt because she 
``could simultaneously perform many of her management tasks''); Murray 
v. Stuckey's, Inc., 939 F.2d 614, 617-20 (8th Cir. 1991) (store 
managers who spend 65 to 90 percent of their time on ``routine non-
management jobs such as pumping gas, mowing the grass, waiting on 
customers and stocking shelves'' were exempt executives); Donovan v. 
Burger King Corp., 672 F.2d 221, 226 (1st Cir. 1982) (``an employee can 
manage while performing other work,'' and ``this other work does not 
negate the conclusion that his primary duty is management''); Horne v. 
Crown Central Petroleum, Inc., 775 F. Supp. 189, 190 (D.S.C. 1991) 
(convenience store manager held exempt even though she performed 
management duties ``simultaneously with assisting the store clerks in 
waiting on customers''). Moreover, courts have noted that exempt 
executives generally remain responsible for the success or failure of 
business operations under their management while performing the 
nonexempt work. See Jones v. Virginia Oil Co., 2003 WL 21699882, at *4 
(``Jones'' managerial functions were critical to the success' of the 
business); Donovan v. Burger King Corp., 675 F.2d 516, 521 (2nd Cir. 
1982) (the employees' managerial responsibilities were ``most important 
or critical to the success of the restaurant''); Horne v. Crown Central 
Petroleum, Inc., 775 F. Supp. at 191 (nonexempt tasks were ``not nearly 
as crucial to the store's success as were the management functions'').
    The Department continues to believe that this case law accurately 
reflects the appropriate test of exempt executive status and is a 
practical approach that can be realistically applied in the modern 
workforce, particularly in restaurant and retail settings. Since all of 
the prongs of the executive test need to be met to classify an employee 
as an exempt executive, the Department believes the final rule has 
sufficient safeguards to protect nonexempt workers.
    The Department also received more specific comments on the language 
contained in proposed sections 541.106 and 541.107. The National Retail 
Federation argues that the time spent ``multi-tasking'' should also be 
considered exempt work. A comment from the Food Marketing Institute 
argues that it is critically important that proposed section 541.107 
state unequivocally that managers shall not be subject to arbitrary 
percentage time limits on nonexempt work. The Department believes that 
sufficient language already is included in this section to make clear 
that, as stated in current case law, an otherwise exempt supervisory 
employee does not lose the exemption simply because the employee is 
simultaneously performing exempt and nonexempt work. The Department 
also believes that the final section 541.700, defining ``primary 
duty,'' states clearly that there is no strict percentage limitation on 
the performance of nonexempt work.
    One commenter suggests that the Department include in the final 
rule language from the current interpretive guidelines at 541.119(c) 
stating that the short test for highly compensated executives cannot be 
applied to the trades. The final rule, however, includes even stronger 
language in new section 541.3, which states that none of the section 
13(a)(1) exemptions apply to the skilled trades, no matter how highly 
compensated they are. Thus, the Department believes that no further 
clarification is needed.
    The State of Kansas Department of Administration, Division of 
Personnel Services, argues that proposed section 541.107 conflicts with 
language under the administrative exemption regarding project leaders. 
The Department does not believe that there is any conflict because the 
executive and administrative exemptions are independently defined and 
applied, and whether one or both of the exemptions apply will depend on 
the specific job duties the employee performs.
    The Information Technology Industry Council, the U.S. Chamber of 
Commerce and the Morgan Lewis & Bockius law firm argue that language 
regarding performance of production or sales work should be eliminated 
from proposed section 541.106, as it continues to emphasize the 
production versus staff dichotomy. This language has been removed from 
the final rule. The Department has combined and streamlined proposed 
sections 541.106 and 541.107, and we do not believe that this phrase 
was instructive in clarifying the concept of concurrent duties.

Subpart C, Administrative Employees

Section 541.200 General Rule for Administrative Employees
    As in the executive exemption, the proposed regulations streamlined 
the current regulations by adopting a single standard duties test in 
proposed section 541.200. The proposed standard duties test provided 
that an exempt administrative employee must have ``a primary duty of 
the performance of office or non-manual work related to the management 
or general business operations of the employer or the employer's 
customers,'' and hold ``a position of responsibility with the 
employer.''
    The final rule modifies both of the proposed requirements for the 
administrative exemption. First, the final rule provides that an exempt 
administrative employee is one ``whose primary duty is the performance 
of office or non-manual work directly related to the management or 
general business operations of the employer or the employer's 
customers.'' Second, the final rule deletes the proposed ``position of 
responsibility'' requirement and instead reinserts the current 
requirement that an exempt administrative employee's primary duty 
include ``the exercise of discretion and independent judgment with 
respect to matters of significance.''
    In addition to the ``discretion and independent judgment'' 
requirement discussed more fully below, the final rule makes two 
changes to the proposed primary duty test. First, as under the 
executive exemption, the AFL-CIO and other commenters state that 
changing from ``whose'' primary duty as written in the current 
regulations to the proposed language of ``a'' primary duty was a major 
weakening of the test because it allows for more than one primary duty. 
As the Department did not intend any substantive change, the final rule 
uses the existing language ``whose primary duty.'' Second, the final 
rule reinserts language from the current regulation that the work must 
be ``directly'' related to management or general business operations. 
Commenters such as the National Treasury Employees Union, the National 
Employment Lawyers Association, the American Federation of Television 
and Radio Artists, the Stoll, Stoll, Berne, Lokting & Shlachter law 
firm, and the Rudy, Exelrod & Zieff law firm oppose the deletion of the 
word ``directly,'' stating that an employee whose duties relate only 
indirectly or tangentially to administrative functions should not 
qualify for exemption. As the Department did not intend any substantive 
change by deletion of the word ``directly,'' we have reinserted this 
term to ensure that the administrative primary duty test is not 
interpreted as allowing the exemption to apply to employees whose 
primary duty is only remotely or tangentially related to exempt work. 
The same change has been made in other sections where the term is used.
    The final rule, however, retains the proposed primary duty language 
that the exempt employee's work must be related to ``management or 
general business operations,'' rather than the

[[Page 22138]]

``management policies'' language of the existing regulations. Although 
some commenters object to this change, other commenters, such as the 
FLSA Reform Coalition, the HR Policy Association, and the Fisher & 
Phillips law firm, approve of the proposed deletion of the word 
``policies'' as recognizing that while management policies are one 
component of management, there are many other administrative functions 
that support managing a business. The Department agrees and has 
retained the proposed language in the final regulation. As explained in 
the 1949 Weiss Report, the administrative operations of the business 
include the work of employees ``servicing'' the business, such as, for 
example, ``advising the management, planning, negotiating, representing 
the company, purchasing, promoting sales, and business research and 
control.'' 1949 Weiss Report at 63. Much of this work, but not all, 
will relate directly to management policies. As the current regulations 
state at section 541.205(c), exempt administrative work includes not 
only those who participate in the formulation of management policies or 
in the operation of the business as a whole, but it ``also includes a 
wide variety of persons who either carry out major assignments in 
conducting the operations of the business, or whose work affects 
business operations to a substantial degree, even though their 
assignments are tasks related to the operation of a particular segment 
of the business.'' Therefore, the Department considers the primary duty 
test for the administrative exemption to be as protective as the 
existing regulations.
    In addition to the primary duty test, the proposed general rule for 
the administrative exemption also required that an employee hold a 
``position of responsibility.'' The proposal at section 541.202 further 
defined ``position of responsibility'' as performing ``work of 
substantial importance'' or ``work requiring a high level of skill or 
training.'' The proposal also eliminated the current requirement that 
an exempt administrative employee perform work ``requiring the exercise 
of discretion and independent judgment.'' The Department specifically 
invited comments on these changes, including 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 in place of the ``position of 
responsibility requirement,'' but modified to provide better guidance 
on distinguishing exempt administrative employees.
    The Department received numerous, widely divergent comments on 
these proposed changes. Commenters such as the FLSA Reform Coalition, 
the U.S. Chamber of Commerce, the HR Policy Association, the National 
Retail Federation, the Morgan, Lewis & Bockius law firm, and the 
National Association of Federal Wage Hour Consultants generally approve 
of the ``position of responsibility'' requirement, preferring it to the 
mandatory ``discretion and independent judgment'' requirement of the 
existing regulations. They support, in particular, the proposal that 
employees with a ``high level of skill or training'' can qualify as 
exempt administrative employees, even if they use reference manuals to 
provide guidance in addressing difficult or novel circumstances. For 
example, the Morgan, Lewis & Bockius law firm states that, ``in today's 
regulatory climate, few employers can leave highly complex issues 
totally to the discretion of even high level employees.'' The HR Policy 
Association states that this ``new requirement that an employee have a 
`high level of skill or training' distinguishes employees who are 
merely looking up information from those who use the information in an 
analytical way.''
    However, even commenters who generally support the ``position of 
responsibility'' structure also express concerns about the vagueness 
and subjectivity of the new terms. For example, the National 
Association of Manufacturers (NAM) states that it ``is not sure what 
`position of responsibility' means and fears that the Department is 
substituting one vague term for another.'' NAM also notes that, ``using 
the term `skill' in the administrative employee definition can be 
problematic. The term is often associated with nonexempt trade 
occupations--i.e., people who perform work and are not exempt from the 
FLSA's wage and overtime rules.'' NAM states that ``care should be used 
when introducing into the white-collar exemption definitions a term 
that has been historically associated with nonexempt workers.'' 
Similarly, the American Bakers Association states that the position of 
responsibility standard ``is somewhat vague and subjective'' and that 
it ``appears to invite another generation of court litigation to 
clarify the meaning of its key terms.'' The FLSA Reform Coalition 
expresses concern that the standard would be applied to the 
disadvantage of large companies, stating that ``small fish in big 
ponds'' might not be found exempt even if they had the same degree of 
responsibility as employees working for small companies. Other 
commenters object to the implication that some employees do not have 
responsibility at work. For example, the Society for Human Resource 
Management states that, ``each and every position in an organization is 
one of responsibility * * *.'' Similarly, the Workplace Practices Group 
recommends eliminating the term ``position of responsibility'' because 
a ``basic tenet of modern management philosophy is empowering employees 
to see their position in an organization, whatever it might be, as one 
of responsibility. This is true whether the position held is 
receptionist or customer service agent.'' Finally, the American 
Corporate Counsel Association, while approving of the abandonment of 
the ``discretion and independent judgment'' requirement, suggests that 
the ``position of responsibility'' test has ``the potential to result 
in significant uncertainty and continued litigation. Employers often 
seek to foster an atmosphere and develop workplace programs emphasizing 
that the work of every employee involves a degree of responsibility and 
contributes something substantially important to the success of the 
enterprise. Thus, it appears to us that both `white collar' and `blue 
collar' positions may be positions of responsibility for which work of 
substantial importance is being performed.''
    Other commenters strongly oppose the new ``position of 
responsibility'' requirement as inappropriately weakening the 
requirements for exemption. For example, the AFL-CIO states that 
neither ``work of substantial importance'' nor ``work requiring a high 
level of skill or training'' was an adequate substitute for the 
``discretion and independent judgment'' test. Similarly, the Rudy, 
Exelrod & Zieff law firm states that the FLSA does not exempt highly 
skilled or trained employees, and such a regulatory change would allow 
employers to misclassify employees with duties related to the 
production of the company's goods and services. In addition, the firm 
argues that such a provision effectively and unreasonably broadens the 
professional exemption, by eliminating the advanced degree requirement. 
Professor David Walsh similarly comments that the proposed language is 
not more easily applied than the existing standard and ``seems to 
conflate the administrative and professional exemptions.'' Commenters 
such as the American Federation of

[[Page 22139]]

State, County and Municipal Employees, the Communications Workers of 
America, the National Treasury Employees Union, the American Federation 
of Television and Radio Artists, the National Employment Lawyers 
Association, and the Goldstein, Demchak, Baller, Borgen & Dardarian law 
firm express similar views, stating that the ``position of 
responsibility'' test is not an equivalent substitute for the 
``discretion and independent judgment requirement.'' These commenters 
also state that all workers possess skills and training in one form or 
another.
    Many commenters view the ``discretion and independent judgment'' 
standard of the existing regulations as vague, ambiguous and 
unworkable. Commenters such as the FLSA Reform Coalition, the Society 
for Human Resource Management, the HR Policy Association, the Fisher & 
Phillips law firm, the National Retail Federation, the National 
Association of Chain Drug Stores, and the National Council of Chain 
Restaurants state that the ``discretion and independent judgment'' 
requirement is the cause of confusion and unnecessary litigation. Such 
commenters commend the Department for eliminating ``discretion and 
independent judgment'' as a required element of the test for exemption. 
The Fisher & Phillips law firm, for example, states that this standard 
``has been an unending source of confusion, ambiguity, and dispute.''
    Nevertheless, many of these same commenters support inclusion of 
the ``discretion and independent judgment'' standard as a third 
alternative to satisfy the ``position of responsibility'' test. For 
example, the National Association of Manufacturers suggests that the 
Department retain ``discretion and independent judgment'' as an 
optional independent alternative to the ``position of responsibility'' 
requirement. These commenters state that decades of court decisions and 
opinion letters provide guidance on its interpretation. Retaining the 
standard as an alternative would thus provide a level of continuity 
between the existing regulations and the new regulations, and avoid re-
litigation of jobs already held to be exempt under the current 
``discretion and independent judgment'' test.
    Other commenters such as the AFL-CIO, the American Federation of 
State, County and Municipal Employees, the Communications Workers of 
American, the National Treasury Employees Union, the New York Public 
Employees Federation, the National Employment Lawyers Association, the 
Rudy, Exelrod & Zieff law firm and Women Employed oppose the deletion 
of the ``discretion and independent judgment'' standard as a required 
element for exemption. Such commenters view deletion of this test as a 
substantial expansion of the exemption. They cite the 1940 Stein Report 
and 1949 Weiss Report as stating that the ``discretion and independent 
judgment'' requirement was necessary to minimize the opportunity for 
employer abuse in categorizing the diverse group of employees who might 
be labeled as administrative. Moreover, such commenters generally view 
the requirement as considerably more precise than the proposed 
``position of responsibility'' replacement, and note that the 
``discretion and independent judgment'' concept is also used under the 
National Labor Relations Act. Such commenters often state that the need 
to address developing case law prohibiting the use of manuals by exempt 
employees does not necessitate the entire abandonment of the 
``discretion and independent judgment'' standard. Finally, these 
commenters also state that decades of jurisprudence would be lost if 
the ``discretion and independent judgment'' requirement is eliminated. 
Accordingly, the commenters recommend retention of the ``discretion and 
independent judgment'' standard as an independent requirement for 
exemption.
    The commenters' widely divergent views demonstrate the difficult 
task of clearly defining and delimiting the administrative exemption. 
The GAO Report documented the difficulty of applying the ``discretion 
and independent judgment'' standard consistently, causing uncertainty 
for good faith employers attempting to classify employees correctly. 
Even the 1949 Weiss Report noted that this standard ``is not as precise 
and objective as some other terms in the regulations.'' 1949 Weiss 
Report at 65. Numerous commenters concur with our observation in the 
proposal that this requirement has generated significant confusion and 
litigation. However, most commenters generally view both the ``position 
of responsibility'' and the ``high level of skill or training'' 
standards as similarly vague, ambiguous and subjective. Most of the 
commenters state that the ``discretion and independent judgment'' 
standard should be retained in some form, although there was sharp 
disagreement on whether the standard should be a mandatory requirement. 
Despite sharp criticism of both the current ``discretion and 
independent judgment'' requirement and the proposed ``position of 
responsibility'' standard, the comments contain very few suggestions 
for clear and objective alternative language.
    After careful consideration of the public comments submitted, the 
Department agrees that the ``position of responsibility'' standard does 
little to bring clarity and certainty to the administrative exemption. 
In the proposal, the Department attempted to articulate a clear, 
simple, common sense test for exemption, but most commenters believe 
that we were not fully successful. Further, many commenters believe 
that the term ``position of responsibility'' greatly expanded the scope 
of the exemption--a result which the Department did not intend. In 
addition, the Department agrees with the concerns of the National 
Association of Manufacturers and other commenters that the ``high level 
of skill or training'' standard is problematic because it is too 
closely associated with nonexempt ``blue collar'' skilled trade 
occupations.
    Accordingly, the final rule deletes the proposed ``position of 
responsibility'' requirement and its definition at proposed section 
541.202 as ``work of substantial importance'' or ``work requiring a 
high level of skill or training.'' Instead, as the second requirement 
for the administrative exemption, the final rule requires that exempt 
administrative employees exercise ``discretion and independent judgment 
with respect to matters of significance.'' Thus, consistent with the 
current short test, the final rule contains two independent, yet 
related, requirements for the administrative exemption. First, the 
employee must have a primary duty of performing office or non-manual 
work ``directly related to management or general business operations.'' 
This first requirement refers to the type of work performed by the 
employee, and is further defined at section 541.201. Second, the 
employee's primary duty must include ``the exercise of discretion and 
independent judgment with respect to matters of significance.'' As 
discussed below, the exercise of discretion and independent judgment 
``involves the comparison and the evaluation of possible courses of 
conduct and acting or making a decision after the various possibilities 
have been considered.'' The term ``matters of significance'' refers to 
the level of importance or consequence of the work performed. These 
terms are further defined at final section 541.202. See, e.g., Bothell 
v. Phase Metrics, Inc., 299 F.3d 1120, 1125-26 (9th Cir. 2002) (looking 
to both the ``types of activities'' and the importance of the work).

[[Page 22140]]

Section 541.201 Directly Related to Management or General Business 
Operations
    The proposed section 541.201 defined the phrase ``related to the 
management or general business operations'' as referring ``to the type 
of work performed by the employee'' and requiring that the exempt 
administrative employee ``perform work related to assisting with the 
running or servicing of the business, as distinguished, for example, 
from working on a manufacturing production line or selling a product.'' 
The proposal also provided examples of the types of work that generally 
relate to management or general business operations, including work in 
areas such as tax, finance, accounting, auditing, quality control, 
advertising, marketing, research, safety and health, personnel 
management, human resources, labor relations, and others. Finally, the 
proposal stated that an employee also may qualify for the 
administrative exemption if the ``employee performs work related to the 
management or general business operations of the employer's 
customers,'' such as employees acting as advisers and consultants to 
their employer's clients or customers.
    The Department made two changes in the final subsection 541.201(a). 
First, for the reasons discussed above, the final rule reinserts the 
word ``directly'' throughout this section. Some commenters argue that 
the deletion of the word ``directly'' from the existing regulations 
would allow the exemption for an employee whose duties relate only 
indirectly or tangentially to administrative functions. The Department 
did not intend any substantive change by deletion of the word 
``directly'' in the proposal, and thus has reinserted this term to 
ensure that the administrative duties test is not interpreted as 
allowing the exemption to apply to employees whose primary duty is only 
remotely or tangentially related to exempt work. Second, the words 
``retail or service establishment'' have been reinserted from the 
current rule in the phrase: ``as distinguished, for example, from 
working on a manufacturing production line or selling a product in a 
retail or service establishment.'' This addition returns the regulatory 
text more closely to the current section 541.205(a): ``as distinguished 
from `production' or, in a retail or service establishment, `sales' 
work.'' Commenters state that deletion of the words ``retail or service 
establishment'' could be interpreted as denying the administrative 
exemption to any employee engaged in any sales, advertising, marketing 
or promotional activities. Because no such categorical change was 
intended, or is supported by current case law, the Department has 
restored the language from the current regulations. See, e.g., Reich v. 
John Alden Life Insurance Co., 126 F.3d 1, 9-10 (1st Cir. 1997) 
(promoting sales in the insurance industry is exempt administrative 
work). The Department also notes that this phrase begins with the words 
``for example.'' This final phrase in section 541.201(a) provides non-
exclusive examples. Thus, the concern of commenters such as the Rudy, 
Exelrod & Zieff law firm that the reference to ``working on a 
manufacturing production line'' suggests that ``working on what might 
be termed a `white collar production line' is different from working on 
a manufacturing production line for purposes of the exemption'' is 
unfounded.
    The primary focus of most comments on subsection 541.201(a) dealt 
with the so-called `production versus staff' dichotomy. The preamble to 
the proposal stated that the Department intended ``to reduce the 
emphasis on the so-called ``production versus staff'' dichotomy in 
distinguishing between exempt and nonexempt 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.''
    Many commenters, including the Society for Human Resource 
Management (SHRM), the FLSA Reform Coalition, the National Association 
of Manufacturers (NAM), the U.S. Chamber of Commerce (Chamber), the HR 
Policy Association, the Morgan, Lewis & Bockius law firm and the Fisher 
& Phillips law firm, strongly support the proposal's intended 
diminution of the production versus staff dichotomy, which they believe 
has little value in today's service-oriented economy. For example, the 
Chamber states that the dichotomy ``does not fit in today's workplace'' 
because the ``decline in manufacturing and the rise in the service and 
information industries has rendered the production dichotomy an 
artifact of a different age.'' SHRM ``applauds the Department's 
elimination of much of the `production v. staff' language'' but also 
``recognizes that the production versus staff in some circumstances can 
be a helpful aid in determining whether an employee fits under the 
administrative exemptions and, therefore, supports the proposed 
language. * * * This language strikes a proper balance between 
retaining this concept and ensuring that it is not so strictly 
construed so as to deny the exemption to an employee who should be 
exempt.'' Similarly, NAM supports the proposed rule's attempt to 
``reduce the emphasis on the production versus staff dichotomy.''
    However, many of these commenters believe that the proposal did not 
go far enough, and that the final rule should strive to eliminate the 
dichotomy entirely. For example, the FLSA Reform Coalition states that 
the dichotomy should be eliminated by allowing an employee to qualify 
for the exemption either by performing work related to management or 
general business operations, or by doing any work that includes the 
exercise of discretion and independent judgment: ``Thus, even if the 
employee's work could arguably be characterized as ``production,'' he 
or she would nonetheless be an exempt administrative employee if his or 
her job is a responsible, non-manual one that includes the exercise of 
`discretion and independent judgment.' '' Similarly, the HR Policy 
Association recommends that the Department ``eliminate the production 
dichotomy from the administrative exemption'' because the confusion it 
causes is too great and it is difficult to apply with uniformity. The 
Fisher & Phillips law firm also states that the Department should 
``eliminate the `dichotomy' altogether.''
    The primary focus of these comments was the last sentence in 
proposed subsection (a), which states that the administrative exemption 
does not apply if an employee is ``working on manufacturing production 
line or selling a product.'' Numerous commenters ask for clarification 
about the scope and meaning of the statement. For example, the Morgan, 
Lewis & Bockius law firm requests clarification that not all sales work 
is excluded from exemption, such as advertising, marketing and 
promotional activities, and for confirmation that some individuals who 
work on a production line, such as a safety and health administrator or 
quality control specialist, may still be exempt. The U.S. Chamber of 
Commerce also states that the Department should ``revisit its approach, 
especially with regard to treatment of employees who may be involved in 
some aspect of sales,'' and should clarify that sales work is not 
inherently inconsistent with exempt work. The HR Policy Association 
recommends that the Department delete the ``working on a manufacturing 
production line or selling a product'' phrase, or else clarify its 
meaning either in the regulations or this preamble.

[[Page 22141]]

    A large number of commenters have the opposite view about the 
``production versus staff'' dichotomy, stating that minimizing or 
deleting the dichotomy would deprive the administrative exemption of 
its meaning. Such commenters, including the AFL-CIO, the National 
Treasury Employees Union, the American Federation of State, County and 
Municipal Employees, the Rudy, Exelrod & Zieff law firm, the National 
Employment Lawyers Association, the American Federation of Television 
and Radio Artists, the National Partnership for Women and Families and 
the Stoll, Stoll, Berne Lokting & Shlachter law firm, believe that the 
courts have found the dichotomy to be a useful and appropriate tool in 
analyzing workers in a broad variety of non-manufacturing contexts. 
They oppose any indication that the Department is minimizing the 
dichotomy.
    For example, the AFL-CIO notes that the 1949 Weiss report explained 
that the phrase ``directly related to management policies or general 
business operations'' describes those activities ``relating to the 
administrative as distinguished from the `production' operations of a 
business.'' Similarly, the 1940 Stein Report described administrative 
exempt employees as ``those who can be described as staff rather than 
line employees, or functional rather than departmental heads.'' The 
AFL-CIO quotes Reich v. New York, 3 F.3d 581, 588 (2nd Cir. 1993), 
cert. denied, 510 U.S. 1163 (1994), stating that the dichotomy ``has 
repeatedly proven useful to courts in a variety of non-manufacturing 
settings,'' and cites a number of court decisions applying the 
dichotomy in a variety of government and service sector contexts. The 
National Treasury Employees Union states that the ``distinction which 
the Department would so casually discard is a key tool to help identify 
the specific class of office workers that Congress intended to exempt: 
support staff contributing to business operations and management. It is 
imperative to keep this narrow focus rather than blur the distinction 
between support staff and line workers * * *.'' The Rudy, Exelrod & 
Zieff law firm notes that, prior to 1940, the Department did not 
separately define the administrative exemption from the executive 
exemption, because the Department recognized that the administrative 
exemption ``was intended to cover no more than a small subclass of 
`executive' employees.'' The firm states that the 1940 Stein Report 
concluded that the employees whom the administrative exemption was 
intended to cover had ``functional rather than departmental 
authority,'' meaning they did not ``give orders to individuals.'' The 
firm argues that nothing in the modern workplace, involving production 
of services instead of manufactured goods, makes it improper to 
continue to draw the line between employees who help to administer an 
employer's general business operations and those employees whose duties 
are related to the day-to-day production of the goods or services the 
employer sells.
    Commenters, thus, have very different perspectives about how the 
Department should approach the ``production versus staff'' dichotomy 
and apply it to the modern workplace. Except as stated above, we have 
not adopted any of the commenters' suggestions for substantial changes 
to the primary duty standard in section 541.201(a). The Department 
believes that our proposal struck the proper balance on the 
``production versus staff'' dichotomy. We do not believe that it is 
appropriate to eliminate the concept entirely from the administrative 
exemption, but neither do we believe that the dichotomy has ever been 
or should be a dispositive test for exemption. The Department believes 
that the dichotomy is still a relevant and useful tool in appropriate 
cases to identify employees who should be excluded from the exemption. 
As the Department recognized in the 1949 Weiss Report at 63, this 
exemption is intended to be limited to those employees whose duties 
relate ``to the administrative as distinguished from the `production' 
operations of a business.'' Thus, it relates to employees whose work 
involves servicing the business itself--employees who ``can be 
described as staff rather than line employees, or as functional rather 
than departmental heads.'' 1940 Stein Report at 27. The 1940 Stein 
Report further described the exemption as being limited to employees 
who have ``miscellaneous policy-making or policy-executing 
responsibilities'' but who do not give orders to other employees. 1940 
Stein Report at 4. Based on these principles, the Department provided 
in proposed section 541.201(a) that the administrative exemption covers 
only employees performing a particular type of work--work related to 
assisting with the running or servicing of the business. The examples 
the Department provided in proposed section 541.201(b) were intended to 
identify departments or subdivisions that generally fit this rule.
    The Department's view that the ``production versus staff'' 
dichotomy has always been illustrative--but not dispositive--of exempt 
status is supported by federal case law. In Bothell v. Phase Metrics, 
Inc., 299 F.3d 1120 (9th Cir. 2002), for example, the Ninth Circuit 
found the dichotomy ``useful only to the extent that it helps clarify 
the phrase `work directly related to the management policies or general 
business operations.' '' Id. at 1126 (citation omitted). The court 
further stated:

    The other pertinent cases from our sister circuits similarly 
regard the administration/production dichotomy as but one piece of 
the larger inquiry, recognizing that a court must `construe the 
statutes and applicable regulations as a whole.' Indeed, some cases 
analyze the primary duty test without referencing the Sec.  
541.205(a) dichotomy at all. This approach is sometimes appropriate 
because, as we have said, the dichotomy is but one analytical tool, 
to be used only to the extent that it clarifies the analysis. Only 
when work falls `squarely on the production side of the line,' has 
the administration/production dichotomy been determinative.
* * * * *
    Moreover, the distinction should only be employed as a tool 
toward answering the ultimate question, whether work is `directly 
related to management policies or general business operations,' not 
as an end in itself.

Id. at 1127 (citations omitted). See, e.g., Piscione v. Ernst & Young, 
L.L.P., 171 F.3d 527, 538-39 (7th Cir. 1999) (even though the employee 
``produced'' some reports and filings, and such work might be viewed as 
production work, the work was directly related to the management or 
general business operations); Spinden v. GS Roofing Products Co., 94 
F.3d 421, 428 (8th Cir. 1996) (employee held administratively exempt 
despite the fact that he ``produced'' certain specific outputs), cert. 
denied, 520 U.S. 1120 (1997).
    The final regulation is consistent with the Ninth Circuit's 
approach in Phase Metrics: the ``production versus staff'' dichotomy is 
``one analytical tool'' that should be used ``toward answering the 
ultimate question,'' and is only determinative if the work ``falls 
squarely on the production side of the line.''
    As noted above, proposed section 541.201(b) provided an 
illustrative list of the types of functional areas or departments, 
including accounting, auditing, marketing, human resources and public 
relations, typically administrative in nature. The commenters generally 
found this illustrative list to be accurate and helpful. For example, 
the FLSA Reform Coalition states that it supported the Department's 
efforts to clarify the administrative exemption by ``focusing on the 
function performed by the employee and providing examples of exempt, 
administrative functions.'' The AFL-CIO comments that the list includes 
areas ``which are clearly

[[Page 22142]]

encompassed within the servicing functions of a business, and which 
substantially overlap with the servicing examples set forth in current 
section 541.205(b).'' The U.S. Chamber of Commerce also notes that the 
list is similar to the examples in the existing regulations and agrees 
that all of the areas listed in the proposed regulation ``are proper 
illustrations of exempt administrative work.'' Some commenters suggest 
a variety of additional areas of work that should be added to the 
illustrative list. However, the National Treasury Employees Union 
cautions against exempting workers based upon their job area or title. 
Other commenters similarly suggest that the Department should include 
fewer categories in the list, because employees doing routine work may 
be misperceived as exempt simply because they work in an area like 
marketing, human resources, or research.
    In light of these comments, we have added the language, ``but is 
not limited to,'' to emphasize that the list is intended only to be 
illustrative. It is not intended as a complete listing of exempt areas. 
Nor is it intended as a listing of specific jobs; rather, it is a list 
of functional areas or departments that generally relate to management 
and general business operations of an employer or an employer's 
customers, although each case must be examined individually. Within 
such areas or departments, it is still necessary to analyze the level 
or nature of the work (i.e., does the employee exercise discretion and 
independent judgment as to matters of significance) in order to assess 
whether the administrative exemption applies. Commenters recommend the 
inclusion of several areas that we think are appropriate as additional 
examples of areas that generally relate to management and general 
business operations. Therefore, we are adding computer network, 
internet and database administration; legal and regulatory compliance; 
and budgeting to the illustrative list.
    Finally, proposed section 541.201(c) provided that employees who 
perform work related to the management or general business operations 
of the employer's customers, such as advisers and consultants, also may 
qualify for the administrative exemption. The proposed rule included 
language from existing sections 541.2(a)(2) and 541.205(d), and no 
substantive changes were intended. The commenters express few 
substantive concerns with this provision. A small number of commenters 
suggest that the regulation should provide that the employer's customer 
could be an individual, while commenter Karen Dulaney Smith urges the 
Department to insert the word `business' to clarify that the exemption 
does not apply to ``individuals, whose ``business'' is purely 
personal.'' The Department has not made either change. Nothing in the 
existing or final regulations precludes the exemption because the 
customer is an individual, rather than a business, as long as the work 
relates to management or general business operations. As stated by 
commenter Smith, the exemption does not apply when the individual's 
`business' is purely personal, but providing expert advice to a small 
business owner or a sole proprietor regarding management and general 
business operations, for example, is an administrative function. The 
1949 Weiss Report stated that the administrative exemption should not 
be read to exclude ``employees whose duties relate directly to the 
management policies or to the general business operations of their 
employers' customers. For example, many bona fide administrative 
employees perform important functions as advisors and consultants but 
are employed by a concern engaged in furnishing such services for a fee 
* * *. Such employees, if they meet the other requirements of the 
regulations, should qualify for exemption regardless of whether the 
management policies or general business operations to which their work 
is directly related are those of the employers' clients or customers, 
or those of their employer.'' 1949 Weiss Report at 65. Weiss also noted 
that a consultant employed by a firm of consultants is exempt if the 
employee's ``work consists primarily of analyzing, and recommending 
changes in, the business operations of his employer's client.'' 1949 
Weiss Report at 56. This provision is meant to place work done for a 
client or customer on the same footing as work done for the employer 
directly, regardless of whether the client is a sole proprietor or a 
Fortune 500 company, as long as the work relates to ``management or 
general business operations.''
Section 541.202 Discretion and Independent Judgment (Proposed 
``Position of Responsibility'')
    As discussed above, the Department has decided to eliminate the 
proposed ``position of responsibility'' requirement. Thus, the final 
rule deletes proposed section 541.202 defining ``position of 
responsibility,'' proposed section 541.203 defining ``substantial 
importance,'' and proposed section 541.204 defining ``high level of 
skill or training.'' Instead, the final rule reinserts the ``discretion 
and independent judgment'' requirement, and defines that term at final 
section 541.202. Some of the language in proposed sections 541.203 and 
541.204 was retained from the existing regulations and also appears in 
the final regulations as described below. The language from proposed 
section 541.204 regarding the use of manuals has been moved to a new 
section in Subpart H, Definitions and Miscellaneous Provisions, and is 
discussed under that subpart.
    The Department continues to believe, as most commenters confirm, 
that the current discretion and independent judgment standard has 
caused confusion and unnecessary litigation. Even in the 1949 Weiss 
Report, the Department recognized that the ``discretion and independent 
judgment'' standard was somewhat subjective, and the difficulty of 
applying the standard consistently has increased with the passing 
decades. As evidenced by the increasing court litigation, it has become 
progressively more difficult to apply the standard with the creation of 
many new jobs that did not exist 50 years ago. Nonetheless, the vast 
majority of commenters express concern that abandoning the ``discretion 
and independent judgment'' standard entirely would create even more 
uncertainty and litigation. We also recognize the benefit of retaining 
the standard in some form so as not to jettison completely decades of 
federal court decisions and agency opinion letters.
    Accordingly, while retaining this standard from the existing 
regulations, final section 541.202 clarifies the definition of 
discretion and independent judgment to reflect existing federal case 
law and to eliminate outdated and confusing language in the existing 
interpretive guidelines. The Department intends the final rule to 
clarify the existing standard and to make the standard easier to 
understand and apply to the 21st Century workplace.
    Final section 541.202(a) thus restates the requirement that the 
exempt administrative employee's primary duty must ``include'' the 
exercise of discretion and independent judgment and includes the 
general definition of this term, taken word-for-word from the existing 
interpretive guideline at subsection 541.207(a): ``In general, the 
exercise of discretion and independent judgment involves the comparison 
and the evaluation of possible courses of conduct and acting or making 
a decision after the various possibilities have been considered.'' The 
requirement that the primary duty must ``include'' the

[[Page 22143]]

exercise of discretion and independent judgment--rather than 
``customarily and regularly'' exercise discretion and independent 
judgment--is not a change from current law. Although the Department is 
aware that there has been some confusion regarding the appropriate 
standard under the existing ``short'' duties test, federal court 
decisions have recognized that the current ``short'' duties test does 
not require that the exempt employee ``customarily and regularly'' 
exercise discretion and independent judgment, as does the effectively 
dormant ``long'' test. See, e.g., O'Dell v. Alyeska Pipeline Service 
Co., 856 F.2d 1452, 1454 (9th Cir. 1988) (district court erred in not 
applying more lenient ``includes'' standard under short test which made 
a difference in determining whether employee was exempt); Dymond v. 
United States Postal Service, 670 F.2d 93, 95 (8th Cir. 1982) (while 
the ``long'' duties test for the administrative exemption requires that 
the employee ``customarily and regularly'' exercise discretion and 
independent judgment, when an employee makes more than $250 a week, 
``that requirement is reduced to requiring that the employee's primary 
duty simply `includes work requiring the exercise of discretion and 
independent judgment''').
    Also retained from existing subsection 541.207(a), the final 
subsection 541.202(a) provides that discretion and independent judgment 
must be exercised ``with respect to matters of significance.'' Final 
subsection 541.202(a) states that the term ``matters of significance'' 
refers to ``the level of importance or consequence of the work 
performed.'' This concept of the importance or high level of work 
performed does not appear as a regulatory requirement in existing 
section 541.2, but is included twice in the existing interpretive 
guidance. Existing section 541.205(a), defining the primary duty 
requirement, states that the administrative exemption is limited ``to 
persons who perform work of substantial importance to the management or 
operation of the business.'' This language was the basis of the ``work 
of substantial importance'' option in the proposed definition of 
``position of responsibility.'' Existing section 541.207(a), defining 
the term ``discretion and independent judgment'' provides that an 
exempt administrative employee ``has the authority or power to make an 
independent choice, free from immediate direction or supervision and 
with respect to matters of significance.''
    The existing regulations use these two different phrases found in 
two different sections to describe the same general concept--that the 
work performed by an exempt administrative employee must be 
significant, substantial, important, or of consequence. See, e.g., 
Piscione v. Ernst & Young, L.L.P., 171 F.3d 527, 535-43 (7th Cir. 
1999). The words ``substantial'' and ``significant'' are synonyms. 
Existing section 541.207(d) describes the ``matters of significance'' 
concept as requiring that ``the discretion and independent judgment 
exercised must be real and substantial, that is, they must be exercised 
with respect to matters of consequence.'' Further, existing section 
541.205 and existing section 541.207 use some of the same examples 
(i.e., personnel clerks, inspectors, buyers) to illustrate the meaning 
of ``substantial importance'' and the meaning of ``matters of 
significance.''
    Describing the same concept using two different phrases in two 
different sections of the existing interpretive guidelines is 
duplicative and confusing. Accordingly, the final rule chooses one 
phrase--``matters of significance''--and makes that phrase part of the 
regulatory test for the administrative exemption, rather than merely 
interpretive guidance. As described below, final subsections 541.202(b) 
through (f) combine language from existing section 541.205, existing 
section 541.207, and current case law to more clearly define and 
delimit this concept.
    Final subsection 541.202(b) begins with language from existing 
section 541.207(b) stating that the phrase `discretion and independent 
judgment' must be applied in the light of all the facts involved in the 
particular employment situation in which the question arises.'' Final 
subsection 541.202(b) then contains the following non-exclusive list of 
factors to consider when determining whether an employee exercises 
discretion and independent judgment with respect to matters of 
significance:

    [W]hether the employee has authority to formulate, affect, 
interpret, or implement management policies or operating practices; 
whether the employee carries out major assignments in conducting the 
operations of the business; whether the employee performs work that 
affects business operations to a substantial degree, even if the 
employee's assignments are related to operation of a particular 
segment of the business; whether the employee has authority to 
commit the employer in matters that have significant financial 
impact; whether the employee has authority to waive or deviate from 
established policies and procedures without prior approval; whether 
the employee has authority to negotiate and bind the company on 
significant matters; whether the employee provides consultation or 
expert advice to management; whether the employee is involved in 
planning long- or short-term business objectives; whether the 
employee investigates and resolves matters of significance on behalf 
of management; and whether the employee represents the company in 
handling complaints, arbitrating disputes or resolving grievances.

These factors were taken from the existing regulations, see 541.205(b), 
541.205(c) and 541.207(d), or developed from facts which federal courts 
have found relevant when determining whether an employee exercises 
discretion and independent judgment. Federal courts generally find that 
employees who meet at least two or three of these factors are 
exercising discretion and independent judgment, although a case-by-case 
analysis is required. See, e.g., Bondy v. City of Dallas, 2003 WL 
22316855, at *1 (5th Cir. 2003) (making recommendations to management 
on policies and procedures); McAllister v. Transamerica Occidental Life 
Insurance Co., 325 F.3d 997, 1000-02 (8th Cir. 2003) (independent 
investigation and resolution of issues without prior approval; 
authority to waive or deviate from established policies and procedures 
without prior approval); Cowart v. Ingalls Shipbuilding, Inc., 213 F.3d 
261, 267 (5th Cir. 2000) (developing guidebooks, manuals, and other 
policies and procedures for employer or the employer's customers); 
Piscione, 171 F.3d at 535-43 (making recommendations to management on 
policies and procedures); Haywood v. North American Van Lines, Inc., 
121 F.3d 1066, 1071-73 (7th Cir. 1997) (negotiating on behalf of the 
employer with some degree of settlement authority; independent 
investigation and resolution of issues without prior approval; 
authority to waive or deviate from established policies and procedures 
without prior approval); O'Neill-Marino v. Omni Hotels Management 
Corp., 2001 WL 210360, at *8-9 (S.D.N.Y. 2001) (negotiating on behalf 
of the employer with some degree of settlement authority; developing 
guidebooks, manuals, and other policies and procedures for employer or 
the employer's customers); Stricker v. Eastern Off-Road Equipment, 
Inc., 935 F. Supp. 650, 656-59 (D. Md. 1996) (authority to commit 
employer in matters that have financial impact); Reich v. Haemonetics 
Corp., 907 F. Supp. 512, 517-18 (D. Mass. 1995) (negotiating on behalf 
of the employer with some degree of settlement authority; authority to 
commit employer in matters that have financial impact); Hippen v. First 
National Bank, 1992 WL 73554, at *6 (D. Kan. 1992) (authority to commit 
employer in matters that have

[[Page 22144]]

financial impact). Other factors which federal courts have found 
relevant in assessing whether an employee exercises discretion and 
independent judgment include the employee's freedom from direct 
supervision, personnel responsibilities, troubleshooting or problem-
solving activities on behalf of management, use of personalized 
communication techniques, authority to handle atypical or unusual 
situations, authority to set budgets, responsibility for assessing 
customer needs, primary contact to public or customers on behalf of the 
employer, the duty to anticipate competitive products or services and 
distinguish them from competitor's products or services, advertising or 
promotion work, and coordination of departments, requirements, or other 
activities for or on behalf of employer or employer's clients or 
customers. See, e.g., Hogan v. Allstate Insurance Co., 2004 WL 362378 
(11th Cir. 2004); Demos v. City of Indianapolis, 302 F.3d 698 (7th Cir. 
2002); Lutz v. Ameritech Corp., 2000 WL 245485 (6th Cir. 2000); Lott v. 
Howard Wilson Chrysler-Plymouth, Inc., 203 F.3d 326 (5th Cir. 2001); 
Heidtman v. County of El Paso, 171 F.3d 1038 (5th Cir. 1999); Piscione 
v. Ernst & Young, L.L.P., 171 F.3d 527 (7th Cir. 1999); Shockley v. 
City of Newport News, 997 F.2d 18 (4th Cir. 1993); West v. Anne Arundel 
County, Maryland, 137 F.3d 752 (4th Cir.), cert. denied, 525 U.S. 1048 
(1998); Reich v. John Alden Life Insurance Co., 126 F.3d 1 (1st Cir. 
1997); Wilshin v. Allstate Insurance Co., 212 F. Supp. 2d 1360 (M.D. 
Ga. 2002); Roberts v. National Autotech, Inc., 192 F. Supp. 2d 672 
(N.D. Tex. 2002); Orphanos v. Charles Industries, Ltd., 1996 WL 437380 
(N.D. Ill. 1996).
    Most of the remaining subsections in final 541.202 contain language 
from the existing regulations. Final subsection 541.202(c) contains 
language from existing section 541.207(a) and existing section 
541.207(e) providing that ``discretion and independent judgment implies 
that the employee has authority to make an independent choice, free 
from immediate direction or supervision.'' However, ``employees can 
exercise discretion and independent judgment even if their decisions or 
recommendations are reviewed at a higher level.'' Final subsection (c) 
also retains the credit manager and management consultant examples from 
existing section 541.207(e)(2). Final subsection 541.202(d) contains 
language from existing section 541.205(c)(6) providing that the ``fact 
that many employees perform identical work or work of the same relative 
importance does not mean that the work of each such employee does not 
involve the exercise of discretion and independent judgment with 
respect to matters of significance.'' Final subsection 541.202(e) 
contains language from existing sections 541.207(c)(1) and 
541.207(c)(2) stating that the exercise of discretion and independent 
judgment ``must be more than the use of skill in applying well-
established techniques, procedures or specific standards described in 
manuals or other sources.'' As in existing section 541.205(c), final 
subsection 541.202(e) provides that the exercise of discretion and 
independent judgment ``does not include clerical or secretarial work, 
recording or tabulating data, or performing other mechanical, 
repetitive, recurrent or routine work.'' Final subsection 541.202(f) 
includes language from existing section 541.205(c)(2) that an employee 
``does not exercise discretion and independent judgment with respect to 
matters of significance merely because the employer will experience 
financial losses if the employee fails to perform the job properly.''
    In sum, as in the existing regulations, the final administrative 
exemption regulations establish a two-part inquiry for determining 
whether an employee performs exempt administrative duties. First, what 
type of work is performed by the employee? Is the employee's primary 
duty the performance of work directly related to management or general 
business operations? Second, what is the level or nature of the work 
performed? Does the employee's primary duty include the exercise of 
discretion and independent judgment with respect to matters of 
significance? See, e.g., Bothell v. Phase Metrics, Inc., 299 F.3d 1120, 
1125-26 (9th Cir. 2002) (looking to both the type of work and the 
importance of the work). By retaining the ``discretion and independent 
judgment'' standard from the existing regulations, as clarified to 
reflect current case law, and combining the existing concepts of 
``substantial importance'' and ``matters of significance,'' the final 
rule provides clarity while at the same time maintaining continuity 
with the existing regulations.
Section 541.203 Administrative Exemption Examples
    The final regulations include a new section 541.203 which includes 
illustrations of the application of the administrative duties test to 
particular occupations. Many of the examples are from sections 541.201, 
541.205 and 541.207 of the existing regulations. Other examples reflect 
existing case law.
    Final subsection 541.203(a) provides that insurance claims 
adjusters ``generally meet the duties requirements for the 
administrative exemption, whether they work for an insurance company or 
other type of company, if their duties include activities such as 
interviewing insureds, witnesses and physicians; inspecting property 
damage; reviewing factual information to prepare damage estimates; 
evaluating and making recommendations regarding coverage of claims; 
determining liability and total value of a claim; negotiating 
settlements; and making recommendations regarding litigation.'' This 
section was moved from proposed section 541.203(b)(2). Commenters, such 
as National Employment Lawyers Association (NELA), the Rudy, Exelrod & 
Zieff law firm and the Stoll, Stoll, Berne, Lokting & Shlachter law 
firm, state that the Department should not single out insurance claims 
adjusters in the regulations. NELA states that this example ``flies in 
the face of the basic rule that titles are not dispositive in 
determining whether employees are exempt. Many insurance claims 
adjusters perform routine production work.'' Such commenters state that 
the work of many adjusters involves the day-to-day work of the company, 
such as whether to repair or replace a dented fender, rather than work 
related to the management or general business operations of the firm 
such as the overall methods used to process claims generally. However, 
this provision of the proposed rule is consistent with existing section 
541.205(c)(5) and an Administrator's opinion letter issued on November 
19, 2002, to which the court in Jastremski v. Safeco Insurance Cos., 
243 F. Supp. 2d 743, 753 (N.D. Ohio 2003), deferred because it was a 
``thorough, well reasoned, and accurate interpretation of the 
regulations.'' See also Palacio v. Progressive Insurance Co., 244 F. 
Supp. 2d 1040 (C.D. Cal. 2002). The final subsection 541.203(a)--like 
the opinion letter and the case law--does not rely on the ``claims 
adjuster'' job title alone. Rather, there must be a case-by-case 
assessment to determine whether the employee's duties meet the 
requirement for exemption. Thus, the final subsection (a) identifies 
the typical duties of an exempt claims adjuster as, among others, 
preparing damage estimates, evaluating and making recommendations 
regarding coverage of the claim, determining liability and total value 
of the claim, negotiating settlements, and making

[[Page 22145]]

recommendations regarding litigation. The courts have evaluated such 
factors to assess whether the employee is engaged in servicing the 
business itself. Moreover, as the court in Palacio emphasized, claims 
adjusters are not production employees because the insurance company is 
``in the business of writing and selling automobile insurance,'' rather 
than in the business of producing claims. Id. at 1046. Because the vast 
majority of customers never make a claim against the policy they 
purchase, the court concluded that claims adjusters do ``not produce 
the very goods and services'' that the employer offered to the public. 
Id. at 1047. Similarly, federal courts have evaluated such factors to 
assess whether the employee's exercises discretion and independent 
judgment. See, e.g., Palacio, 244 F. Supp. 2d at 1048 (claims agent who 
spent half her time negotiating with claimants and attorneys, who had 
independent authority to settle claims between $5,000 and $7,500, and 
whose recommendations regarding offers for larger claims often were 
accepted exercised discretion and independent judgment); Jastremski, 
243 F. Supp. 2d at 757 (claims adjuster who planned and carried out 
investigations, determined whether the loss was covered by the policy, 
negotiated settlements, had independent settlement authority up to 
$15,000 and could recommend settlements, which were usually accepted, 
above his authority level exercised discretion and independent 
judgment).
    Consistent with existing case law, final subsection 541.203(b) 
provides that employees in the financial services industry ``generally 
meet the duties requirements for the administrative exemption if their 
duties include work such as collecting and analyzing information 
regarding the customer's income, assets, investments or debts; 
determining which financial products best meet the customer's needs and 
financial circumstances; advising the customer regarding the advantages 
and disadvantages of different financial products; and marketing, 
servicing or promoting the employer's financial products. However, an 
employee whose primary duty is selling financial products does not 
qualify for the administrative exemption.'' Several commenters request 
a section regarding various occupations in the financial services 
industry because of growing litigation in this area.
    In cases such as Reich v. John Alden Life Insurance Co., 126 F.3d 1 
(1st Cir. 1997), Hogan v. Allstate Insurance Co., 2004 WL 362378 (11th 
Cir. 2004), and Wilshin v. Allstate Insurance Co., 212 F. Supp. 2d 1360 
(M.D. Ga. 2002), federal courts have found employees who represent the 
employer with the public, negotiate on behalf of the company, and 
engage in sales promotion to be exempt administrative employees, even 
though the employees also engaged in some inside sales activities. In 
contrast, the court in Casas v. Conseco Finance Corp., 2002 WL 507059, 
at *9 (D. Minn. 2002), held that the administrative exemption was not 
available for employees who had a ``primary duty to sell [the 
company's] lending products on a day-to-day basis'' directly to 
consumers and failed to exercise discretion and independent judgment.
    The John Alden case involved the exempt status of marketing 
representatives working for a company that designed, created and sold 
insurance products, primarily for businesses that were purchasing group 
coverage for their employees. The marketing representatives did not 
sell through direct contacts with the ultimate customers, but instead 
relied upon licensed independent insurance agents to make sales of the 
employer's financial products. The marketing representatives were 
responsible for maintaining contact with hundreds of such independent 
sales agents to keep them apprised of the employer's financial 
products, to inform them of changes in prices, and to discuss how the 
products might fit their customers' needs. The marketing 
representatives also would inform the employer of anything they learned 
from the independent sales agents, such as information about a 
competitor's products or pricing. The First Circuit ruled that these 
activities were directly related to management policies or general 
business operations and that the marketing representatives were exempt. 
Their activities involved ``servicing'' of the business because their 
work was ``in the nature of `representing the company' and `promoting 
sales' of John Alden products, two examples of exempt administrative 
work provided by Sec.  541.205(b) of the interpretations.'' 126 F.3d at 
10. Thus, the court concluded that the marketing representatives' 
contact with the independent sales agents involved `something more than 
routine selling efforts focused simply on particular sales 
transactions.' Rather, their agent contacts are `aimed at promoting 
(i.e., increasing, developing, facilitating, and/or maintaining) 
customer sales generally,' activity which is deemed administrative 
sales promotion work under section 541.205(b).'' Id. (citations 
omitted, emphasis in original), quoting Martin v. Cooper Electric 
Supply Co., 940 F.2d 896, 905 (3rd Cir. 1991), cert. denied, 503 U.S. 
936 (1992).
    In Hogan v. Allstate Insurance Co., 2004 WL 362378, at *4 (11th 
Cir. 2004), the Eleventh Circuit held that insurance agents who ``spent 
the majority of their time servicing existing customers'' and performed 
duties including ``promoting sales, advising customers, adapting 
policies to customer's needs, deciding on advertising budget and 
techniques, hiring and training staff, determining staff's pay, and 
delegating routine matters and sales to said staff '' were exempt 
administrative employees. The court held the insurance agents exempt 
even though they also sold insurance products directly to existing and 
new customers.
    The court in Wilshin v. Allstate Insurance Co., 212 F. Supp. 2d 
1360, 1377-79 (M.D. Ga. 2002), held that a neighborhood insurance agent 
met the requirements for the administrative exemption when his 
responsibilities included such activities as recommending products and 
providing claims help to different customers, as well as using his own 
personal sales techniques to promote and close transactions. He also 
was required to represent his employer in the market, and be 
knowledgeable about the market and the needs of actual and potential 
customers. The Wilshin court found that selling financial products to 
an individual, ultimate consumer--as opposed to an agent, broker or 
company--was not enough of a distinction to negate his exempt status.
    In contrast, the district court in Casas v. Conseco Finance Corp., 
2002 WL 507059 (D. Minn. 2002), held that loan originators were not 
exempt because they had a ``primary duty to sell [the company's] 
lending products on a day-to-day basis'' directly to consumers. 2002 WL 
507059, at *9. The employees called potential customers from a list 
provided to them by the employer and, using the employer's guidelines 
and standard operating procedures, obtained information such as income 
level, home ownership history, credit history and property value; ran 
credit reports; forwarded the application to an underwriter; and 
attempted to match the customer's needs with one of Conseco's loan 
products. If the underwriter approved the loan, the originator gathered 
documents for the closing, verified the information, and ordered the 
title work and appraisals. The court concluded that this was the 
ordinary production work of Conseco, which has the business purpose of 
designing, creating, and selling home lending

[[Page 22146]]

products, making them nonexempt production employees. The court also 
found that the plaintiffs lacked discretion and independent judgment 
necessary to qualify for the exemption since they followed strict 
guidelines and operating procedures, and had no authority to approve 
loans.
    The Department agrees that employees whose primary duty is inside 
sales cannot qualify as exempt administrative employees. However, as 
found by the John Alden, Hogan and Wilshin courts, many financial 
services employees qualify as exempt administrative employees, even if 
they are involved in some selling to consumers. Servicing existing 
customers, promoting the employer's financial products, and advising 
customers on the appropriate financial product to fit their financial 
needs are duties directly related to the management or general business 
operations of their employer or their employer's customers, and which 
require the exercise of discretion and independent judgment.
    Accordingly, consistent with this case law, the final rule 
distinguishes between exempt and nonexempt financial services employees 
based on the primary duty they perform. Final section 541.203(b) thus 
provides:

    Employees in the financial services industry generally meet the 
duties requirements for the administrative exemption if their duties 
include work such as collecting and analyzing information regarding 
the customer's income, assets, investments or debts; determining 
which financial products best meet the customer's needs and 
financial circumstances; advising the customer regarding the 
advantages and disadvantages of different financial products; and 
marketing, servicing or promoting the employer's financial products. 
However, an employee whose primary duty is selling financial 
products does not qualify for the administrative exemption.

    The Department believes this approach also is consistent with the 
case law and the final rule regarding insurance claims adjusters, which 
emphasizes that employees performing duties related to servicing the 
company, such as representing the company in evaluating the merits of 
claims against it and in negotiating settlements, generally qualify for 
exemption. We also believe that this approach is consistent with the 
existing and final regulations providing that advisory specialists and 
consultants to management, such as tax experts, insurance experts, or 
financial consultants, who are employed by a firm that furnishes such 
services for a fee, should be treated the same as an in-house adviser 
regardless of whether the management policies or general business 
operations to which their work is directly related are those of their 
employer's clients or customers or those of their employer. See final 
rule section 541.201(c); existing sections 541.201(a)(2), 541.205(c)(5) 
and 541.205(d); and Piscione v. Ernst & Young, L.L.P., 171 F.3d 527 
(7th Cir. 1999). Finally, our approach is consistent with existing 
section 541.207(d)(2), which provides that ``a customer's man in a 
brokerage house'' exercises discretion and independent judgment ``in 
deciding what recommendations to make to customers for the purchase of 
securities,'' but reflects the modernization of this existing 
subsection for the 21st Century workforce.
    Consistent with Hogan, the final rule rejects the view that selling 
financial products directly to a consumer automatically precludes a 
finding of exempt administrative status. Application of the exemption 
should not change based only on whether the employees' activities are 
aimed at an end user or an intermediary. The final rule distinguishes 
the exempt and nonexempt financial services employees based on the 
duties they perform, not the identity of the customer they serve. For 
example, a financial services employee whose primary duty is gathering 
and analyzing facts and providing consulting advice to assist customers 
in choosing among many complex financial products may be an exempt 
administrative employee. An employee whose primary duty is inside sales 
is not exempt.
    Final subsection 541.203(c) provides that an employee ``who leads a 
team of other employees assigned to complete major projects for the 
employer (such as purchasing, selling or closing all or part of the 
business, negotiating a real estate transaction or a collective 
bargaining agreement, or designing and implementing productivity 
improvements) generally meets the duties requirements for the 
administrative exemption, even if the employee does not have direct 
supervisory responsibility over the other employees on the team.'' This 
modification of proposed section 541.203(b)(3) responds to commenters 
who express concern that the executive exemption fails to reflect the 
modern practice of a company forming cross-functional or multi-
department teams to complete major projects. Several commenters suggest 
that the manager or leader of such teams should be treated as exempt 
even if the leader did not have traditional supervisory authority over 
the other members of the team. Although, as stated above, the 
Department does not believe that the executive exemption applies, an 
employee who leads teams to complete major projects may qualify for 
exemption under the existing administrative regulations. See current 29 
CFR 541.205(c) (exemption applies to employees who ``carry out major 
assignments in conducting the operations of the business''). The final 
subsection (c) merely updates this concept with a more modern example.
    Final subsection 541.203(d) includes the example regarding 
executive assistants and administrative assistants derived from 
existing sections 541.201(a)(1), 541.207(d)(2) and 541.207(e), and 
proposed at section 541.203(b)(4). Final subsection 541.203(e) 
distinguishes exempt human resources managers from nonexempt personnel 
clerks. The language in this subsection appears in existing sections 
541.205(c)(3) and 541.207(c)(5), and was proposed at sections 
541.203(b)(4) and 541.203(c). Final subsection 541.203(f) includes the 
purchasing agent example from proposed section 541.203(b)(4), which was 
derived from existing sections 541.205(c)(4), 541.207(d)(2) and 
541.207(e)(2). Final subsection 541.203(g) contains the inspection work 
example from existing section 541.207(c)(2) and proposed section 
541.204(c). Final section 541.203(h) contains the examples regarding 
examiners and graders from existing sections 541.207(c)(3) and (4) and 
proposed section 541.204(c). Final subsection 541.203(i) includes the 
comparison shopping example from existing section 541.207(c)(6). No 
substantive changes from current law are intended in these examples.
    The Department received no substantive comments with respect to the 
examples of nonexempt work. With respect to administrative or executive 
assistants, a number of commenters assert that these employees should 
be exempt if they assist a senior executive in a corporation below the 
level of proprietor or chief executive of a business. Other commenters 
express a countervailing concern that these terms could be applied too 
broadly to employees with nonexempt duties, such as secretarial 
employees. The final rule makes no changes to current law, and thus 
this example should not expand the exemption to include secretaries or 
other clerical employees. We do not believe expansion of this example 
beyond current law is warranted on the record evidence.
    Final subsection 541.203(j) contains a new example providing that 
``[p]ublic sector inspectors or investigators of

[[Page 22147]]

various types, such as fire prevention or safety, building or 
construction, health or sanitation, environmental or soils specialists 
and similar employees, generally do not meet the duties requirements 
for the administrative exemption because their work typically does not 
involve work directly related to the management or general business 
operations of the employer. Such employees also do not qualify for the 
administrative exemption because their work involves the use of skills 
and technical abilities in gathering factual information, applying 
known standards or prescribed procedures, determining which procedure 
to follow, or determining whether prescribed standards or criteria are 
met.'' This new example responds to comments from public sector 
employees and employer groups. The Public Sector FLSA Coalition, for 
example, comments that because the existing rules were written with 
only the private sector in mind, the proposed revisions offer an 
opportunity for the Department to include language addressing issues 
unique to public sector concerns. The Public Sector FLSA Coalition 
states that, although the discretion and independent judgment 
requirement is vague and unworkable, this standard retains the benefit 
of being the subject of several court decisions and opinion letters. 
These interpretations have provided some guidance for Public Sector 
FLSA Coalition members in assessing the exempt status of certain 
positions in the public sector. Similarly, the Wisconsin Department of 
Employment Relations suggests that the final regulations include 
specific examples from the public sector relating to the discretion and 
independent judgment standard. Various public sector unions and 
employees express concern that employees such as investigators, 
inspectors and parole officers would newly qualify for the 
administrative exemption under the proposed regulations. Thus, the 
final rule has been modified to add examples of various types of 
inspection work found in the public sector that typically fail the 
requirement for exercising discretion and independent judgment. The 
examples are straightforward and drawn from previous Wage and Hour 
opinion letters in which, based on the facts presented, the work 
involved was considered to be based on the employee's use of skills and 
technical abilities, rather than exercising the requisite discretion 
and independent judgment specified in the regulations. See, e.g., Wage 
and Hour Opinion Letter of 4/17/98, 1998 WL 852783 (investigators); 
Wage and Hour Opinion Letter of 3/11/98, 1998 WL 852755 (inspectors); 
and Wage and Hour Opinion Letter of 12/21/94, 1994 WL 1004897 
(probation officers).
Section 541.204 Educational Establishments (Proposed Sec.  541.205)
    The proposed rule established a separate exemption test for 
employees whose primary duty is ``performing administrative functions 
directly related to academic instruction or training in an educational 
establishment or department or subdivision thereof.'' Such employees 
are separately identified in section 13(a)(1) of the FLSA and are 
separately addressed in the existing regulation. The proposed rule 
defined the terms used and gave examples of employees who are engaged 
in academic administrative functions and employees who are not so 
engaged. Under the proposed rule, the term ``educational institution'' 
was defined as an ``elementary or secondary school system, an 
institution of higher education or other educational institution.''
    As discussed below, the Department has added a list of relevant 
factors for determining whether post-secondary career programs qualify 
as ``other educational institutions'' to final subsection 541.204(b), 
and added ``academic counselors'' to the list of examples of exempt 
academic administrative employees in final subsection 541.204(c). 
Except for adjustment of the salary levels, the Department has made no 
other substantive changes to this section.
    As the preamble to the proposed rule stated, this provision simply 
consolidated into a single section of the regulations a few provisions 
in the existing regulation pertaining to the administration of 
educational institutions, with no substantive changes intended. The 
Department received very few comments on this section.
    A few commenters, including the Morgan, Lewis & Bockius law firm, 
the Air Force Labor Advisors and the Career College Association, 
suggest that the regulations contain some additional guidance regarding 
``other educational institutions'' such as schools that provide adult 
continuing education or post-secondary technical and vocational 
training programs such as aircraft flight schools. Opinion letters 
currently provide guidance about such institutions. For example, the 
Department has stated that a flight instruction installation approved 
by the Federal Aviation Administration under that agency's regulations 
would constitute an educational establishment. Wage and Hour Opinion 
Letter of April 2, 1970 (1970 WL 26390). See also 2000 WL 33126562. 
Factors that are relevant in assessing whether such post-secondary 
career programs are educational institutions include whether the school 
is licensed by a state agency responsible for the state's educational 
system or accredited by a nationally recognized accrediting 
organization for career schools. Gonzales v. New England Tractor 
Trailer Training School, 932 F. Supp. 697 (D. Md. 1996). Because such 
questions must be answered on a case-by-case basis, it would not be 
prudent for the Department to list just a few types of schools that 
could qualify as educational institutions. However, we have included 
the above factors in final subsection 541.204(b).
    The American Council of Education suggests that we include 
admissions counselors and academic counselors on the list of examples 
of exempt academic administrative employees. The Department has 
provided guidance on these positions in opinion letters dated February 
19, 1998 (1998 WL 852683), and April 20, 1999 (1999 WL 1002391). In 
those letters, the Department addressed the exempt status of academic 
counselors and enrollment or admissions counselors. Those letters 
elaborate on the regulatory requirement that the academic 
administrative exemption is limited to employees engaged in work 
relating to the academic operations and functions of a school rather 
than work relating to the general business operations of the school. 
Thus, academic counselors performing the job duties listed in the 1998 
opinion letter were found to qualify for the academic administrative 
exemption because their primary duty involved work such as 
administering the school's testing programs, assisting students with 
academic problems, advising students concerning degree requirements, 
and performing other functions directly related to the school's 
educational functions. In contrast, enrollment counselors who engage in 
general outreach and recruitment efforts to encourage students to apply 
to the school did not qualify for the academic administrative exemption 
because their work was not sufficiently related to the school's 
academic operations. However, the 1999 letter noted that, depending 
upon the employees' duties, they might qualify for the general 
administrative exemption because their work related to the school's 
general business operations and involved work in the nature of general 
sales promotion work.

[[Page 22148]]

Consistent with these opinion letters, we have added academic 
counselors as an example of exempt academic administrative employees in 
final subsection 541.204(c), but not admissions counselors.

Subpart D, Professional Employees

Section 541.300 General Rule for Professional Employees
    The proposed general rule for the professional exemption also 
streamlined the current regulations by adopting a single standard 
duties test. The proposed standard duties test provided that an exempt 
professional employee must have ``a primary duty of performing office 
or non-manual work: (i) Requiring knowledge of an advanced type in a 
field of science or learning customarily acquired by a prolonged course 
of specialized intellectual instruction, but which also may be acquired 
by alternative means such as an equivalent combination of intellectual 
instruction and work experience; or (ii) Requiring invention, 
imagination, originality or talent in a recognized field of artistic or 
creative endeavor.''
    The final rule modifies the proposed professional duties test in 
three ways, ensuring that the final professional test is as protective 
as the existing short duties test under which most employees are tested 
for exemption today. First, as under the other exemptions, the final 
rule changes the phrase ``a primary duty'' back to the current language 
of ``whose primary duty'' in response to commenter concerns that this 
change weakened the test for exemption. Second, consistent with the 
existing regulations, the final rule deletes the phrase ``office or 
non-manual'' work. This revision was made in response to commenter 
concerns about the confusion that would result from applying the 
``office and non-manual'' requirement to the professional exemption for 
the first time. Employer commenters express concerns that occupations 
clearly satisfying the requirements of the existing tests for learned 
or creative professionals would not be exempt under the proposal 
because some aspect of the employee's duties requires ``manual'' work, 
such as a surgeon using a scalpel or a portrait artist using a brush. 
The Department did not intend this result, and thus has removed the 
``office and non-manual'' language from the professional exemption. 
Third, the final rule deletes from subsection 541.300(a)(2)(i) the 
phrase, ``but which also may be acquired by alternative means such as 
an equivalent combination of intellectual instruction and work 
experience.'' As discussed more fully under section 541.301 below, some 
commenters view the addition of this language as a significant 
expansion of the learned professional exemption. No such result was 
intended. Rather, this proposed language was merely an attempt to 
streamline and summarize the discussion of the word ``customarily'' in 
subsection 541.301(d) of the current regulations.
Section 541.301 Learned Professionals
    Proposed section 541.301(a) restated the duties tests for the 
learned professional exemption and defined ``advanced knowledge'' as 
``knowledge that is customarily acquired through a prolonged course of 
specialized intellectual instruction, but which also may be acquired by 
alternative means such as an equivalent combination of intellectual 
instruction and work experience.'' The proposed subsection (a) also 
included a list of traditional fields of science or learning such as 
law, medicine, theology and teaching ``that have a recognized 
professional status based on the acquirement of advanced knowledge and 
performance of work that is predominantly intellectual in character as 
opposed to routine, mental, manual, mechanical or physical work.'' The 
remaining subsections in proposed section 541.301 defined the key terms 
in the duties test and provided examples of occupations which generally 
meet or do not meet the duties requirements for the learned 
professional exemption.
    The final section 541.301(a) has been modified to track the 
existing learned professional duties test, and then list separately the 
three elements of this duties test: ``(1) The employee must perform 
work requiring advanced knowledge; (2) The advanced knowledge must be 
in a field of science or learning; and (3) The advanced knowledge must 
be customarily acquired by a prolonged course of specialized 
intellectual instruction.'' Other text from proposed subsection (a) has 
been moved as appropriate to final subsection (b) defining the phrase 
``advanced knowledge,'' final subsection (c) defining the phrase 
``field of science or learning,'' and final subsection (d) defining the 
phrase ``customarily acquired by a prolonged course of specialized 
intellectual instruction.'' The final subsection (e) contains examples, 
consistent with existing case law as detailed below, illustrating how 
the learned professional duties test applies to specific occupations. 
The language in proposed subsection (f) has been deleted as redundant 
with the new section 541.3, and proposed subsection (g) has been 
renumbered.
    Commenters on the learned professional exemption focus most of 
their discussion on the educational requirements for the exemption. 
Proposed section 541.301(a) provided that the advanced knowledge 
required for exemption is ``customarily acquired through a prolonged 
course of specialized intellectual instruction,'' but may also ``be 
acquired by alternative means such as an equivalent combination of 
intellectual instruction and work experience.'' Similarly, proposed 
section 541.301(d) provided: ``However, the word ``customarily'' means 
that the exemption is also available to employees in such professions 
who have substantially the same knowledge level as the degreed 
employees, but who attained such knowledge through a combination of 
work experience, training in the armed forces, attending a technical 
school, attending a community college or other intellectual 
instruction.'' This new ``equivalent combination'' language generated 
sharp disagreement among the commenters.
    Many commenters, including the FLSA Reform Coalition, the National 
Restaurant Association, the Food Marketing Institute, the State of 
Oklahoma Office of Personnel Management, the Johnson County Government 
Human Resources Department and Henrico County, Virginia, generally 
support the proposal as more appropriately focusing on an employee's 
knowledge level and application of such knowledge. Such commenters 
state that the proposal reflects the realities of the modern workplace 
where employees may take an alternative educational path, but perform 
the same duties as the degreed professionals. Comments filed by the HR 
Policy Association, for example, recognize that the current regulations 
allow some non-degreed employees to be classified as exempt learned 
professionals by providing that the requisite knowledge is 
``customarily'' acquired by a prolonged course of intellectual 
instruction. However, the HR Policy Association writes that the 
Department has not provided sufficient guidance, under the current or 
proposed regulations, on the application of this ``customarily'' 
language. The HR Policy Association endorses the Department's proposal 
as providing a workable and reasonable standard which recognizes that 
more workers today perform work requiring professional knowledge 
without possessing a formal professional degree. The Society for Human 
Resource Management (SHRM)

[[Page 22149]]

expresses concern that the existing test requires an employer to 
classify and pay employees differently even if they who perform the 
same work and if they acquired their knowledge in different ways. SHRM 
supports the proposal because it would allow employers to classify and 
pay employees the same when they have the same knowledge level and 
perform the same work. The Workplace Practices Group similarly notes 
that the existing rule arguably creates difficulties for an employer 
who must treat differently two employees who perform the same work but 
acquired their knowledge in different manners. The National Association 
of Manufacturers (NAM) states that the proposal reflects the realities 
of the 21st century workplace while remaining consistent with the 
purposes of the FLSA. NAM agrees with the Department's proposal, 
stating that the regulations should focus on the employee's knowledge 
and application of that knowledge, not on how the employee acquired 
such knowledge. Comments filed by the U.S. Chamber of Commerce 
(Chamber) supporting the proposal discuss how the professions and 
professional education have evolved since the current regulations were 
promulgated in 1940. The current focus of the regulations, the Chamber 
notes, is inconsistent with this evolution in how knowledge is 
acquired.
    Other commenters, however, argue that the proposed ``equivalent 
combination'' language would greatly and unjustifiably expand the scope 
of the professional exemption. The AFL-CIO acknowledges that ``on its 
face,'' the proposal ``does not permit occupations that currently do 
not meet the test for learned professionals to qualify for the 
exemption under the new alternative educational requirement.'' The AFL-
CIO notes that the 1940 Stein Report recognized a need for flexibility 
in the professional duties test to allow the exemption for the 
occasional employee who did not acquire the requisite knowledge for 
exemption through a formal degree program. The AFL-CIO also 
acknowledges that the court in Leslie v. Ingalls Shipbuilding, Inc., 
899 F. Supp. 1578 (S.D. Miss. 1995), focused on the knowledge level to 
find that an engineer without a formal degree was an exempt 
professional. Nonetheless, the AFL-CIO argues that the proposal would 
have the practical effect of allowing employers to classify as exempt 
any employee who has some post-high school education and job 
experience. According to the AFL-CIO, entire occupations such as 
medical technicians, licensed practical nurses, engineering technicians 
and other technical workers could be classified as exempt employees 
under the proposal. The American Federation of State, County and 
Municipal Employees claims that the Department's proposed rule would 
replace an existing ``bright line'' test with a confusing standard. The 
National Treasury Employees Union argues that the proposal creates a 
new category of exempt technical professionals, which the Department 
lacks the statutory authority to do. The American Federation of 
Government Employees (AFGE) describes the proposal as substituting ``a 
vague and unworkable ``knowledge'' test'' for an existing ``workable 
educational requirement.'' The AFGE also claims that the proposed 
professional exemption ``utterly destroys'' the requirement that an 
exempt professional be in a recognized profession and eliminates any 
requirement for an advanced education degree. The International 
Association of Machinists and Aerospace Workers claims the proposal is 
an ``unwarranted relaxation of FLSA standards.'' The International 
Federation of Professional and Technical Engineers argues that the 
proposal opens the door to classifying beauticians, barbers, 
radiological technicians and technicians that test or repair mechanical 
or electric equipment as exempt learned professionals.
    The Department believes the proposal was consistent with current 
case law, and that the proposal would not have caused substantial 
expansion of the professional exemption. Nonetheless, after careful 
consideration of all the comments, the Department has modified sections 
541.301(a) and (d) to ensure our intent cannot be so misconstrued. The 
Department did not and does not intend to change the long-standing 
educational requirements for the learned professional exemption. 
Rather, the revisions to these subsections were intended to provide 
additional guidance on the existing language, ``customarily acquired'' 
by a prolonged course of specialized intellectual instruction.
    The Department has modified proposed section 541.301(a) in response 
to the comments evidencing confusion regarding the different elements 
of the primary duty test for the learned professional exemption. As 
noted above, some commenters express concern that allowing the 
exemption for employees with ``an equivalent combination of 
intellectual instruction and work experience'' would result in 
significant expansion of the exemption to new occupations never before 
considered to be professions, such as licensed practical nursing, the 
skilled trades, and various engineering and repair technicians. These 
concerns are unfounded because they incorrectly conflate the three 
separate elements of the learned professional duties test as described 
in the 1940 Stein Report:

    The first element in the requirement is that the knowledge be of 
an advanced type. Thus, generally speaking, it must be knowledge 
which cannot be attained at the high-school level. Second, it must 
be knowledge in a field of science or learning. This in itself is 
not entirely definitive but will serve to distinguish the 
professions from the mechanical arts where in some instances the 
knowledge is of a fairly advanced type, but not in a field of 
science or learning. * * * The requisite knowledge, in the third 
place, must be customarily acquired by a prolonged course of 
specialized intellectual instruction and study.

1940 Stein Report at 38-39. All three of these essential elements must 
be satisfied before an employee qualifies as an exempt learned 
professional under the existing, proposed and final rule. Thus, for 
example, a journeyman electrician may acquire advanced knowledge and 
skills through a combination of training, formal apprenticeship, and 
work experience, but can never qualify as an exempt learned 
professional because the electrician occupation is not a ``field of 
science or learning'' as required for exemption. A licensed practical 
nurse may work in a ``field of science or learning,'' but cannot meet 
the requirements for the professional exemption because the occupation 
does not require knowledge ``customarily acquired by a prolonged course 
of specialized intellectual instruction.''
    The proper focus of inquiry is upon whether all three required 
elements have been satisfied, not upon any job title or ``status'' the 
employee might have. Rather, only occupations that customarily require 
an advanced specialized degree are considered professional fields under 
the final rule. For example, no amount of military training can turn a 
technical field into a profession. Similarly, a veteran who received 
substantial training in the armed forces but is working on a 
manufacturing production line or as an engineering technician cannot be 
considered a learned professional because the employee is not 
performing professional duties.
    The Department intended, and still intends, that these three 
essential elements, as set forth in the 1940 Stein Report, remain 
applicable and relevant today. Accordingly, final section 541.301(a) 
now separately lists the three elements, thus ensuring that nothing in

[[Page 22150]]

this section can be interpreted as allowing the professional exemption 
to be claimed for licensed practical nurses, skilled tradespersons, 
engineering technicians and other occupations that cannot meet all 
three of the elements.
    Although the Department has removed the ``equivalent combination'' 
language from the final section 541.301(a), the references to the 
educational requirements for the professional exemption and the term 
``customarily'' are discussed in subsection (d). As the AFL-CIO notes, 
the 1940 Stein Report recognized a need for flexibility in the 
professional duties test to allow the exemption for the occasional 
employee who does not possess the specialized academic degree usually 
required for entry into the profession. This flexibility is discussed 
in the existing regulations at section 541.301(d) which states, in 
part:

    Here it should be noted that the word ``customarily'' has been 
used to meet a specific problem occurring in many industries. As is 
well known, even in the classical profession of law, there are still 
a few practitioners who have gained their knowledge by home study 
and experience. Characteristically, the members of the profession 
are graduates of law schools, but some few of their fellow 
professionals whose status is equal to theirs, whose attainments are 
the same, and whose word is the same did not enjoy that opportunity. 
Such persons are not barred from the exemption.

Thus, the existing section 541.301(d) states, the learned professional 
exemption is ``available to the occasional lawyer who has not gone to 
law school, or the occasional chemist who is not the possessor of a 
degree in chemistry.''
    The final section 541.301(d), defining the phrase ``customarily 
acquired by a prolonged course of specialized intellectual 
instruction,'' retains these general concepts while providing 
additional guidance to clarify when an employee working in a ``field of 
science or learning,'' but without a formal degree, can qualify as an 
exempt learned professional. The final subsection (d) requires two 
separate inquiries. First, as in the existing regulations, the 
occupation must be in a field of science or learning where specialized 
academic training is a standard prerequisite for entrance into the 
profession. Thus, the learned professional exemption is available for 
lawyers, doctors and engineers, but not for skilled tradespersons, 
technicians, beauticians or licensed practical nurses, as none of these 
occupations require specialized academic training at the level intended 
by the regulations as a standard prerequisite for entrance into the 
profession. Second, employees within such a learned profession can then 
only qualify for the learned professional exemption if they either 
possess the requisite advanced degree or ``have substantially the same 
knowledge level and perform substantially the same work as the degreed 
employees, but who attained the advanced knowledge through a 
combination of work experience and intellectual instruction.''
    The final subsection (d) thus recognizes, as evidenced by many 
comments and recognized in the existing regulations, that some 
employees, occasional though they may be, have the same knowledge level 
and perform the same work as degreed employees but obtain that advanced 
knowledge by a non-traditional path.'' \9\ An employee with the same 
knowledge level and performing the same work in a professional field of 
science or learning as the degreed professionals should be classified 
and paid in the same manner as those degreed professionals. This 
principle does not expand the learned professional exemption to new 
quasi-professional fields. Rather, it merely ensures, as in the current 
regulations, that employees performing the same work, and who met the 
other requirements for exemption, are treated the same--a common theme 
in employment law today.
---------------------------------------------------------------------------

    \9\ The preamble to the proposal, 68 FR at 15568, invited 
comments on whether the regulations should specify equivalencies of 
work experience and other intellectual instruction that could 
substitute for a specialized advanced degree. A few commenters 
supported various specific equivalencies, but most commenters 
opposed them because equivalencies might vary by industry or be an 
``arbitrary exercise subject to abuse.'' The Department has decided 
not to impose inflexible equivalencies in the final regulations. 
However, we have added the phrase ``and performs substantially the 
same work'' to the final section 541.301(d), which should be a 
better guide for the regulated community in determining when a non-
degreed employee working in a recognized professional field of 
science or learning can qualify as an exempt learned professional by 
focusing the inquiry on the actual work performed by the employee. 
See, e.g., Leslie v. Ingalls Shipbuilding, Inc., 899 F. Supp. 1578 
(S.D. Miss. 1995).
---------------------------------------------------------------------------

    To ensure that the final rule is not interpreted to exempt entire 
occupations previously considered nonexempt by the Department, the 
final rule deletes the phrase in proposed section 541.301(d) that 
equivalent knowledge may be obtained ``through a combination of work 
experience, training in the armed forces, attending a technical school, 
attending a community college or other intellectual instruction.'' 
Instead, final section 541.301(d) provides that the word 
``customarily'' means ``that the exemption is also available to 
employees in such professions who have substantially the same knowledge 
level and perform substantially the same work as the degreed employees, 
but who attained the advanced knowledge through a combination of work 
experience and intellectual instruction.''
    Thus, a veteran who is not performing work in a recognized 
professional field will not be exempt, regardless of any training 
received in the armed forces. The International Federation of 
Professional & Technical Engineers, for example, describes its members 
as technicians who test and repair electronic or mechanical equipment 
using knowledge gained through on-the-job training, military training 
and technical or community colleges. This commenter states that such 
technicians ``generally do not have specialized college degrees in 
engineering or scientific fields, and do not have the detailed and 
sophisticated knowledge that scientists or engineers possess.'' Such 
technical workers are entitled to overtime under the existing and final 
regulations because their work does not require advanced knowledge in a 
field of science or learning customarily acquired by a prolonged course 
of specialized intellectual instruction.
    To further avoid any misunderstanding of our intent, the final rule 
adds the following additional language to subsection (d):

    Thus, for example, the learned professional exemption is 
available to the occasional lawyer who has not gone to law school, 
or the occasional chemist who is not the possessor of a degree in 
chemistry. However, the learned professional exemption is not 
available for occupations that customarily may be performed with the 
general knowledge acquired by an academic degree in any field, with 
knowledge acquired through an apprenticeship, or with training in 
the performance of routine mental, manual, mechanical or physical 
processes. The learned professional exemption also does not apply to 
occupations in which most employees have acquired their skill by 
experience rather than by advanced specialized intellectual 
instruction.

Some jobs require only a four-year college degree in any field or a 
two-year degree as a standard prerequisite for entrance into the field. 
Other jobs require only completion of an apprenticeship program or 
other short course of specialized training. The final section 
541.301(d), drawn from existing subsection 541.301(d) and proposed 
section 541.301(f), makes clear that such occupations do not qualify 
for the learned professional exemption.
    The decision in Palardy v. Horner, 711 F. Supp. 667 (D. Mass. 1989) 
(applying Office of Personnel Management and FLSA regulations), cited 
by the AFL-CIO, would not

[[Page 22151]]

change if analyzed under the proposed or final regulations. The 
employees in that case were technicians employed by the Navy at the GS-
11 grade level who performed ``technical tasks relating to the proper 
design, repair, testing and overhaul of naval ship systems and 
equipment, as well as the vessels themselves.'' Id. at 668. The court 
described the employees as ``primarily responsible for preparing 
drawings and schematics used in installing and reconfiguring equipment 
on navy vessels,'' but these tasks were ``accomplished by consulting 
standard texts, guides and established formulas.'' Id. The work was 
``practical rather than theoretical,'' with the more complex tasks 
performed by professional engineers. Id. at 668-69. The only 
educational requirement for the positions was a high school diploma, 
and the skills needed to perform the work were ``obtained through on 
the job training.'' Id. The work did ``not require an advanced course 
of academic study.'' Id. Such technicians would be entitled to overtime 
pay under the final regulations, because the standard prerequisite for 
entry into such jobs is only a high school education, not advanced 
specialized academic training. In addition, the technicians would be 
entitled to overtime pay under the final regulations because they did 
not perform the same work as the professional engineers. In contrast, 
the employee in Leslie v. Ingalls Shipbuilding, Inc., 899 F. Supp. 1578 
(S.D. Miss. 1995), who had completed three years of engineering study 
at a university and had many years of experience in the field of 
engineering, would continue to be properly classified as an exempt 
learned professional.
    The Department also received substantial comments on the proposal 
to eliminate the existing ``short'' test requirement that an exempt 
professional employee ``consistently exercise * * * discretion and 
judgment.'' Many commenters such as the U.S. Chamber of Commerce 
(Chamber), the HR Policy Association, the Public Sector FLSA Coalition, 
the National Restaurant Association, and the National Association of 
Chain Drug Stores support this change. The Chamber, for example, notes 
that the ``discretion and judgment'' requirement is inconsistent with 
modern workforce practices, citing the case of Hashop v. Rockwell Space 
Operations Co., 867 F. Supp. 1287, 1297 (S.D. Tex. 1994) (employees 
with degrees in electronic engineering and mathematics who trained 
Space Shuttle ground control personnel held not exempt). Difficulties 
in articulating and defining this requirement, the HR Policy 
Association states, have resulted in confusion in its application and 
have spawned numerous lawsuits. The HR Policy Association notes that 
professional employees are increasingly guided by operational 
parameters or standards because of the increased acceptance of 
international standards, especially in fields like engineering and 
science. According to the commenter, this evolution in work performed 
by professional employees has accelerated confusion with, and 
litigation over, the current professional exemption. The HR Policy 
Association also cites the Rockwell Space Operations case to illustrate 
that the current test can lead to illogical results.
    Other commenters, such as the AFL-CIO, the American Federation of 
State, County and Municipal Employees, the National Treasury Employees 
Union, the American Federation of Government Employees and the 
International Federation of Professional and Technical Engineers, urge 
the Department to restore ``discretion and judgment'' as a requirement 
for the professional exemption. Such commenters argue that the exercise 
of discretion and judgment demonstrates the independence and authority 
that is an inherent part of professional work. Similarly, the National 
Employment Law Project contends that the ``discretion and judgment'' 
requirement ``is a key limiting factor of the exemption and is intended 
to weed out those workers who are not bona fide exempt employees.'' 
Some of these commenters also believe that the proposal eliminated the 
``long'' duties test requirement that exempt professionals perform work 
``predominantly intellectual and varied in character.'' Such commenters 
object to the perceived deletion of the ``predominantly intellectual'' 
requirement as further weakening the requirements for exemption.
    The Department continues to believe that having a primary duty of 
``performing work requiring advanced knowledge in a field of science or 
learning customarily acquired by a prolonged course of specialized 
intellectual instruction'' includes, by its very nature, exercising 
discretion and independent judgment. Indeed, existing section 541.305 
defines ``discretion and judgment'' under the professional exemption by 
stating only that: ``A prime characteristic of professional work is the 
fact that the employee does apply his special knowledge or talents with 
discretion and judgment. Purely mechanical or routine work is not 
professional.'' See also 1940 Stein Report at 37 (``A prime 
characteristic of professional work is the fact that the employee does 
apply his special knowledge or talents with discretion and 
judgment.''). The Department has been unable to identify any occupation 
that would meet the primary duty test for the professional exemption, 
but not require the consistent exercise of discretion and judgment.
    The Department observes that only a few courts have discussed the 
definition of the phrase ``includes work requiring the consistent 
exercise of discretion and judgment'' in the existing ``short'' 
professional duties test, and how this standard differs from the phrase 
``includes work requiring the exercise of discretion and independent 
judgment'' in the existing ``short'' administrative duties test. See, 
e.g., Piscione v. Ernst & Young, L.L.P., 171 F.3d 527, 536 (7th Cir. 
1999); Hashop, 867 F. Supp. at 1298 n.6. The Department also notes that 
the ``consistent exercise of discretion and judgment'' standard under 
the learned professional exemption is less stringent than the 
``includes work requiring the exercise of discretion and independent 
judgment'' standard of the administrative exemption. See De Jesus 
Rentas v. Baxter Pharmacy Services Corp., 286 F. Supp. 2d 235, 241 
(D.P.R. 2003) (noting that the discretion required for the professional 
exemption is ``a lesser standard'' than the discretion required under 
the administrative exemption).
    The Department continues to agree that a ``prime characteristic of 
professional work is the fact that the employee does apply his special 
knowledge or talents with discretion and judgment,'' 29 CFR 541.305(b), 
and did not intend to delete this concept entirely from the 
professional duties test. Thus, consistent with existing section 
541.305(b), the Department has included the ``consistent exercise of 
discretion and judgment'' in final subsection 541.301(b) as part of the 
definition of ``work requiring advanced knowledge,'' one of three 
essential elements of the learned professional primary duty tests:

    The phrase ``work requiring advanced knowledge'' means work 
which is predominantly intellectual in character, and which includes 
work requiring the consistent exercise of discretion and judgment, 
as distinguished from performance of routine mental, manual, 
mechanical or physical work. An employee who performs work requiring 
advanced knowledge generally uses the advanced knowledge to analyze, 
interpret or make deductions from varying facts or circumstances. 
Advanced knowledge cannot be attained at the high school level.


[[Page 22152]]


    This language, consistent with existing section 541.305, 
acknowledges that the exercise of ``discretion and judgment'' is a 
prime characteristic of professional work, while also providing a more 
substantive definition of ``advanced knowledge'' than the definition in 
existing section 541.301(b), which merely defines advanced knowledge as 
``knowledge which cannot be attained at a high school level.'' These 
clarifications in the final rule are based on current law, should make 
the professional duties test easier to apply, and will not cause 
currently nonexempt employees to be classified as exempt learned 
professionals. At the same time, the final rule recognizes that some 
learned professionals in the modern workplace are required to comply 
with national or international standards or guidelines. Certified 
Public Accountants have not under current law, and will not under the 
final rule, lose the learned professional exemption because they follow 
the Generally Accepted Accounting Principles (GAAP). Similarly, a 
lawyer who follows Security and Exchange Commission rules to prepare 
corporate filings should still qualify for exemption even though such 
rules today allow for little variation. In such cases, the exempt 
professional employee applies advanced knowledge to identify and 
interpret varying facts and circumstances. As noted by several 
commenters, the decision in Hashop v. Rockwell Space Operations Co., 
867 F. Supp. 1287 (S.D. Tex. 1994), demonstrates the absurd result from 
too literally applying the current ``discretion and judgment'' 
requirement to a 21st century job. While this case has not been 
followed by any court in the decade since it was decided, the Rockwell 
Space Operations decision has caused confusion for employers attempting 
to determine the exempt status of employees. The plaintiffs in the 
Rockwell Space Operations case were instructors who trained ``Space 
Shuttle ground control personnel during simulated missions.'' Id. at 
1291. The plaintiffs provided ``instruction on all communications, 
data, tracking, and telemetry information that ordinarily flows between 
the Space Shuttle and the Johnson Space Center Mission Control 
Center.'' Id. The plaintiffs were responsible for assisting in 
development of the script for the simulated missions, running the 
simulation, and debriefing Mission Control on whether the trainees 
handled simulated anomalies correctly. Id. at 1291-92. The plaintiffs 
also wrote workbooks and technical guides. Id. The plaintiffs had 
college degrees in electrical engineering, mathematics or physics. Id. 
at 1296. Nonetheless, the court found the plaintiffs did not 
``consistently exercise discretion and judgment,'' and thus were 
entitled to overtime pay, because the appropriate responses to 
simulated Space Shuttle malfunctions were contained in a manual. Id. at 
1297-98. In the Department's view, the reliance by an engineer or 
physicist on a manual outlining appropriate responses to a Space 
Shuttle emergency (or a problem in a nuclear reactor, as another 
example) should not transform an otherwise learned professional 
scientist into a nonexempt technician. The clarifications to the 
professional duties test are designed to prevent such an absurd result.
    The definition of ``advanced knowledge'' also retains the 
``predominantly intellectual'' concept from the existing ``long'' 
duties test. The Department notes that the proposal did not eliminate 
the requirement that exempt professional work must be predominantly 
intellectual. We agree with the commenters stating that professional 
work, by its very nature, must be intellectual. Thus, proposed section 
541.301(a) defined learned professions to include those ``occupations 
that have a recognized professional status based on the acquirement of 
advanced knowledge and performance of work that is predominantly 
intellectual in character as opposed to routine mental, manual, 
mechanical or physical work.'' Nonetheless, the comments demonstrate 
that the proposal did not sufficiently stress this concept, and may 
have been unclear as to how the ``predominantly intellectual'' 
requirement fits into the primary duty test. Moving the ``predominantly 
intellectual'' language to final section 541.301(b) should address the 
commenter concerns discussed above.
    A number of commenters ask the Department to declare various 
occupations as qualifying for the learned professional exemption, but 
these commenters did not provide sufficient information regarding the 
educational requirements of the occupations necessary for us to make 
that determination. For example, the Newspaper Association of America 
(NAA) suggests that the Department consider including a specific 
discussion on the applicability of the learned professional exemption 
to journalists, particularly given the guidance in the existing 
regulations that the learned professional exemption does not apply to 
``quasi-professions'' such as journalism. The NAA cites a 1996 survey 
of daily newspaper editors conducted at the Ohio State Newspaper 
finding that 86 percent of daily newspaper entry-level hires just out 
of college had journalism and mass communication degrees. The 
Department, however, has no further supporting information about the 
requirements for the profession and, as such, declines to include 
journalists in the learned professional exemption at this time. Further 
discussion regarding journalists is retained as in the existing 
regulations under the creative professional exemption.
    The record evidence is sufficient for the Department to provide 
additional guidance regarding the following occupations, some of which 
are covered by the current regulations but repeated here:
    Nurses. The proposal retained the Department's existing 
interpretation regarding the exempt status of registered nurses (RNs). 
Simply stated, nurses who are registered by an appropriate state 
licensing board satisfy the duties requirements for exemption as 
learned professional employees. This well-established regulatory 
exemption for registered nurses has appeared in the existing 
interpretative guidelines for more than 32 years:

    Registered nurses have traditionally been recognized as 
professional employees by the Division in its enforcement of the 
act. Although, in some cases, the course of study has become 
shortened (but more concentrated), nurses who are registered by the 
appropriate examining board will continue to be recognized as having 
met the requirement of Sec.  541.3(a)(1) of the regulations.

29 CFR 541.301(e)(1) (36 FR 22978, December 2, 1971). Final rule 
section 541.301(e)(2) continues to provide that RNs satisfy the duties 
test for the professional exemption, and clarifies that other nurses, 
such as licensed practical nurses (LPNs), would not be exempt from 
eligibility for overtime.
    The AFL-CIO, the American Federation of Teachers (AFT), the 
American Nurses Association, the Maine State Nurses Association, the 
Minnesota Nurses Association, the Service Employees International Union 
(SEIU) and United Food and Commercial Workers International Union 
(UFCW), as well as many individual nurses, express reservations about 
the knowledge equivalency language of the proposal. They state that the 
proposed formulation of the professional standard duty test would 
exempt additional classes of healthcare workers, such as LPNs. For 
example, AFT and SEIU note that LPNs have some level of formal 
education but do

[[Page 22153]]

not possess the same level to be considered degreed exempt employees, 
as are RNs. SEIU also argues that the proposal ignored the differences 
in the permitted scope of practice between RNs and LPNs. The UFCW 
argues that the difference between RNs and LPNs is that the former 
typically enter the nursing profession by attending a specialized 
school and obtaining a specialized nursing degree while the latter do 
not. The UFCW criticizes the proposal as eliminating this distinction 
between RNs and LPNs, and for eliminating overtime for LPNs and other 
technical workers who have experience or training but do not have an 
advanced degree in a recognized field of science or learning. In 
describing the work and qualifications of LPNs, or a licensed 
vocational nurse (LVNs) in the state of California, UFCW comments that 
they perform patient care tasks pursuant to the direct and close 
supervision of RNs or physicians. LPNs and LVNs are not required to 
have an advanced degree or undergo a prolonged course of study in a 
recognized field of science or learning. ``Typically, all that is 
required is a high school education and a year's training in a 
vocational school.'' As for their job duties, UFCW states that LPNs and 
LVNs have limited discretion and little supervisory or administrative 
duties; rather, they perform tasks such as ``routine bedside care, 
including bathing, dressing, personal hygiene, feeding, and tending to 
patients' comfort and emotional needs.'' Since such nurses are 
nonexempt under the current regulatory framework, UFCW calls on the 
Department to expressly affirm that such nurses remain nonexempt under 
the final regulations. The Minnesota Nurses Association states that the 
proposal would detrimentally affect the nursing profession. Other 
organizations, such as the National Organization for Women and Women 
Employed Institute, also express similar concerns that nurses could be 
classified as exempt and no longer entitled to overtime.
    Some of these same commenters view the proposal as classifying RNs 
as bona fide professionals and thereby exempting them from overtime for 
the first time. For example, the American Nurses Association states 
that the proposal would add RNs as exempt from overtime. Also, the 
Maine State Nurses Association argues that RNs should be treated as 
eligible for overtime.
    As noted above, the existing regulations have treated RNs as 
performing exempt learned professional duties since 1971. The 
Department's long-standing position is that RNs satisfy the duties test 
for exempt learned professionals, but LPNs do not. See Wage and Hour 
Opinion Letters dated April 1, 1999, June 23, 1983, May 16, 1983 and 
November 16, 1976. As re-emphasized by the Administrator in an October 
19, 1999 Opinion Letter, ``in virtually every case, licensed practical 
nurses cannot be considered exempt, bona fide, professionals.'' 
Similarly, the scant case law in this area is consistent. For example, 
in Fazekas v. Cleveland Clinic Foundation Health Care Ventures, Inc., 
204 F.3d 673 (6th Cir. 2000), the parties did not dispute that the 
plaintiff RNs who made home health care visits possessed the requisite 
knowledge of an advanced type in a field of science to satisfy the 
duties test for the professional exemption. There, as in most reported 
cases involving claims by nurses for overtime pay, the issue was 
whether the nurses were paid on a fee basis that would meet the salary 
or fee basis test. See also Elwell v. University Hospitals Home Care 
Services, 276 F.3d 832, 835-36 (6th Cir. 2002) (dispute regarding 
whether home health care nurse providing ``skilled nursing services'' 
was paid on a salary or fee basis, but no dispute that nurse met the 
duties test); Klem v. County of Santa Clara, California, 208 F.3d 1085, 
1088-90 (9th Cir. 2000) (dispute on whether RN was paid on a salary 
basis, but no dispute that registered nurse met the duties test for the 
learned professional exemption).
    The Department did not and does not have any intention of changing 
the current law regarding RNs, LPNs or other similar health care 
employees, and no language in the proposed regulations suggested 
otherwise. Consequently, the final rule reiterates the long-standing 
position that RNs satisfy the duties test for bona fide learned 
professional employees. The Department further clarifies that LPNs and 
other similar health care employees generally do not qualify as exempt 
learned professionals, regardless of work experience and training, 
because possession of a specialized advanced academic degree is not a 
standard prerequisite for entry into such occupations.
    Physician Assistants. Proposed section 541.301(e)(4) included an 
enforcement policy articulated in section 22d23 of the Wage and Hour 
Division Field Operations Handbook (FOH) that physician assistants who 
complete three years of pre-professional study (or 2,000 hours of 
patient care experience) and not less than one year of professional 
course work in a medical school or hospital generally meet the duties 
requirements for the learned professional exemption. Although a few 
commenters object to this section, the final rule retains this long-
standing recognition of physician assistants as exempt learned 
professionals. However, the Department has modified the educational and 
certification requirements in final section 541.301(e)(4) in response 
to a comment filed by the American Academy of Physician Assistants 
(AAPA).
    According to the AAPA, the standard prerequisite for practice as a 
physician assistant is graduation from a physician assistant program 
accredited by the Accreditation Review Commission on Education for the 
Physician Assistant and certification by the National Commission on 
Certification of Physician Assistants (NCCPA). The AAPA states that the 
proposal, and thus section 22d23 of the FOH, describes the educational 
background or experience typical of an individual who is admitted into 
an accredited physician assistant program and includes an abbreviated 
version of the physician assistant educational curriculum--not the 
standard an individual must satisfy to practice as a physician 
assistant. For entry into an accredited physician assistant educational 
program, an individual should have a Bachelor's degree and 45 months of 
health care experience, according to the AAPA. Physician assistant 
programs are located at schools of medicine or health sciences, 
universities and teaching hospitals and typically consist of 111 weeks 
of instruction: 400 classroom and laboratory hours in the basic 
sciences with at least 70 hours in pharmacology, more than 149 hours in 
behavioral sciences and more than 535 hours in clinical medicine. In 
the second year of the program, 2,000 hours are spent in clinical 
rotations divided between primary care medicine and various 
specialties. To practice as a physician assistant, an individual must 
pass a national certifying examination jointly developed by the 
National Board of Medical Examiners and NCCPA. Physician assistants 
also must take continuing medical education credits and a 
recertification to maintain certification.
    The Department recognizes that the FOH section has not been updated 
in many years and thus may be out of date. The information provided by 
the AAPA reveals a more lengthy and involved required course of study 
than is currently set forth in the FOH. The national testing and 
certification requirement also is consistent with exempt learned 
professional status. Thus, the Department concludes that physician 
assistants who have graduated from a program accredited by

[[Page 22154]]

the Accreditation Review Commission on Education for the Physician 
Assistant and who are certified by the National Commission on 
Certification of Physician Assistants generally meet the duties 
requirements for the learned professional exemption. Final section 
541.301(e)(4) has been modified accordingly.
    Chefs. Section 541.301(e)(6) of the proposal provided that chefs, 
such as executive chefs and sous chefs, ``who have attained a college 
degree in a culinary arts program, meet the primary duty requirement 
for the learned professional exemption.'' The Department received few 
comments addressing this section. The National Restaurant Association 
confirms that a four-year college degree in culinary arts is the 
standard prerequisite in the industry for executive chefs. The National 
Restaurant Association argues, however, that the Department should more 
explicitly allow work experience to substitute for a college degree. In 
contrast, the AFL-CIO expresses concern that the proposed language 
unjustly would expand the ``learned professional'' exemption to cover 
employees properly considered nonexempt cooks.
    The Department agrees that the proposed language should be 
clarified to better distinguish between exempt professional chefs with 
four-year culinary arts degrees and nonexempt ordinary cooks who 
perform predominantly routine mental, manual, mechanical or physical 
work. The Department has no intention of departing from current law 
that ordinary cooks are not exempt professionals. See, e.g., Wage and 
Hour Opinion Letter of February 18, 1983 (``Cooks and bakers are not 
considered to be executive, administrative, or professional employees 
within the meaning of the regulations regardless of how highly skilled 
or paid such employees may be''). See also Cobb v. Finest Foods, Inc., 
755 F.2d 1148, 1150 (5th Cir. 1985) (employee who directed the work of 
two or more employees and whose primary duty was management of hot food 
section of cafeteria was exempt executive); Noble v. 93 University 
Place Corp., 2003 WL 22722958, at *10 (S.D.N.Y. 2003) (summary judgment 
denied because of factual dispute over whether employee was head chef 
and kitchen manager with numerous managerial and supervisory 
responsibilities or ``simply a chef who spent 75 to 100 percent of his 
time cooking'').
    Accordingly, to avoid any misinterpretations, the final rule 
replaces the proposed language ``a college degree'' with ``a four-year 
specialized academic degree'' and states that cooks are not exempt 
professionals. The final subsection 541.301(e)(6) thus provides: 
``Chefs, such as executive chefs and sous chefs, who have attained a 
four-year specialized academic degree in a culinary arts program, 
generally meet the duties requirements for the learned professional 
exemption. The learned professional exemption is not available to cooks 
who perform predominantly routine mental, manual, mechanical or 
physical work.'' This language is consistent with industry standard 
educational prerequisites as represented by the National Restaurant 
Association and distinguishes the exempt learned professional chef from 
the nonexempt cook. The Department rejects the National Restaurant 
Association's suggestion that the regulations should broadly allow work 
experience to substitute for a four-year college degree in the culinary 
arts because it would inappropriately expand the scope of the learned 
professional exemption.
    The National Restaurant Association also argues that certain chefs 
qualify as creative professionals. The Department agrees that certain 
forms of culinary arts have risen to a recognized field of artistic or 
creative endeavor requiring ``invention, imagination, originality or 
talent.'' The National Restaurant Association points to the 
Department's Occupational Outlook Handbook, 2002-2003, stating at page 
306 that ``[d]ue to their skillful preparation of traditional dishes 
and refreshing twists in creating new ones, many chefs have earned 
fame* * *.'' The National Restaurant Association also references 
various publications emphasizing the creative nature of certain 
culinary innovation, including the specialization of creating 
distinctive, unique dishes. Another commenter, a wage and hour 
consultant, also suggests that the Department consider the creative 
professional exemption for such chefs, noting the ``national acclaim'' 
and ``reputation and power in the industry'' enjoyed by certain chefs.
    Accordingly, after careful consideration of this issue, the 
Department concludes that to the extent a chef has a primary duty of 
work requiring invention, imagination, originality or talent, such as 
that involved in regularly creating or designing unique dishes and menu 
items, such chef may be considered an exempt creative professional. 
Recognizing that some chefs may qualify as exempt creative 
professionals is consistent with the Department's long-standing 
enforcement policy regarding floral designers and other federal case 
law. See Wage and Hour Opinion Letter of September 4, 1970, 1970 WL 
26442 (``The requirement that work must be original and creative in 
character would be, generally speaking, met by a flower designer who is 
given a subject matter, theme or occasion for which a floral design or 
arrangement is needed and creates the floral design or floral means of 
communicating an idea for the occasion. Work of this type is original 
and creative and depends primarily on the invention, imagination and 
talent of the employee''). See also Freeman v. National Broadcasting 
Co., 80 F.3d 78, 82 (2nd Cir. 1996) (employees ``talented'' because 
they have a ``native and superior ability in their fields''); Reich v. 
Gateway Press, Inc., 13 F.3d 685, 700 (3rd Cir. 1994) (``developing an 
entirely fresh angle on a complicated topic''); Shaw v. Prentice Hall, 
Inc., 977 F. Supp. 909, 914 (S.D. Ind. 1997) (``employees who have been 
found to meet the artistic professional exemption performed work that 
was much more inventive and `artistic'''). However, there is a wide 
variation in duties of chefs, and the creative professional exemption 
must be applied on a case-by-case basis with particular focus on the 
creative duties and abilities of the particular chef at issue. The 
Department intends that the creative professional exemption extend only 
to truly ``original'' chefs, such as those who work at five-star or 
gourmet establishments, whose primary duty requires ``invention, 
imagination, originality, or talent.''
    Paralegals. The Department received a number of comments from 
paralegals and legal assistants expressing concern that they would be 
classified as exempt under the proposed regulations. Other commenters 
urge the Department to declare that paralegals are exempt learned 
professionals. However, none of these commenters provided any 
information to demonstrate that the educational requirement for 
paralegals is greater than a two-year associate degree from a community 
college or equivalent institution. Although many paralegals possess a 
Bachelor's degree, there is no evidence in the record that a four-year 
specialized paralegal degree is a standard prerequisite for entry into 
the occupation. Because comments revealed some confusion regarding 
paralegals, the final rule contains new language in section 
541.301(e)(7) providing that paralegals generally do not qualify as 
exempt learned professionals. The final rule, however, also states that 
the learned professional exemption is available for paralegals

[[Page 22155]]

who possess advanced specialized degrees in other professional fields 
and apply advanced knowledge in that field in the performance of their 
duties. For example, if a law firm hires an engineer as a paralegal to 
provide expert advice on product liability cases or to assist on patent 
matters, that engineer would qualify for exemption.
    Athletic Trainers. The Department requested and received a number 
of comments on athletic trainers. Commenters describe an athletic 
trainer's duties as evaluation of injuries and illnesses of athletes; 
designing and administering care, treatment and rehabilitation; keeping 
and maintaining records of injuries and progress; directly supervising 
student athletic trainers and student team managers; and maintaining 
current catalogues and files on research and information related to 
sports medicine. Athletic trainers are on call 24 hours a day to assist 
coaches and teams with athletic injuries, according to the commenters, 
and often travel to away competitions with teams.
    In the past, the Department has taken the position that athletic 
trainers are not exempt learned professionals. However, the court in 
Owsley v. San Antonio Independent School District, 187 F.3d 521 (5th 
Cir. 1999), cert. denied, 529 U.S. 1020 (2000), rejected this position 
and held that athletic trainers certified by the State of Texas 
qualified for the learned professional exemption based upon their 
possession of a specialized advanced degree.
    Further, the information submitted by commenters indicates that 
athletic trainers are nationally certified and that a specialized 
academic degree is a standard prerequisite for entry into the field. 
Athletic trainers are nationally certified by the Board of 
Certification of the National Athletic Trainers Association (NATA) Inc. 
In order to qualify for such certification, a candidate must meet 
NATA's basic requirements that include a Bachelor's degree in a 
curriculum accredited by the Commission on Accreditation of Allied 
Health Education Programs (CAAHEP). The CAAHEP-accredited curriculums 
are in specialized fields such as athletic training, health, physical 
education or exercise training, and require study in six particular 
courses--Human Anatomy, Human Physiology, Biometrics, Exercise 
Physiology, Athletic Training and Health/Nutrition. Candidates are 
strongly encouraged to take additional courses in the areas of Physics, 
Pharmacology, Recognition of Medical Conditions, Pathology of Illness 
and Injury, and Chemistry. Finally, a candidate must participate in 
extensive clinicals under the supervision of NATA licensed trainers. At 
least 25 percent of these clinical hours must be obtained on location, 
at the practice or game, in one of many eligible sports such as 
football, soccer, wrestling, basketball or gymnastics.
    In light of the Owsley decision and the comments evidencing the 
specialized academic training required for certification, the 
Department concludes that athletic trainers certified by NATA, or under 
an equivalent state certification procedure, would qualify as exempt 
learned professionals. We have modified the regulation accordingly by 
adding a section on athletic trainers at final section 541.301(e)(8).
    Funeral Directors. Comments from the National Funeral Directors 
Association (NFDA) include detailed information on the educational and 
licensure requirements in each state for licensed funeral directors and 
embalmers. The NFDA comments indicate that the licensing requirements 
for funeral directors or embalmers in 16 states require at least two 
years of college plus graduation from an accredited college of mortuary 
science, which requires two years of study. According to NFDA, the 
American Board of Funeral Service Education (ABFSE) is the sole 
national academic accreditation agency for college and university 
programs in funeral service and mortuary science education, and the 
ABFSE is recognized by the U.S. Department of Education and Council on 
Higher Education Accreditation. The ABFSE-recommended curriculum is 
used in all accredited mortuary colleges in the United States. The 
ABFSE stipulates that the minimum educational standard for the funeral 
service profession consists of 60 semester hours (equivalent to two 
years of college-level credits) in public health and technical studies, 
such as chemistry, anatomy and pathology; business management, such as 
funeral home management and merchandising and funeral directing; social 
sciences, such as grief dynamics and counseling; legal, ethical and 
regulatory subjects, such as mortuary law; and electives in general 
education or non-technical courses. Thus, licensed funeral directors or 
embalmers in 16 states must complete at least the equivalent of four 
years of post-secondary education which is sufficient, NFDA argues, to 
meet the educational requirements for the learned professional 
exemption. The NFDA comments also reveal that one state, Colorado, has 
no educational or licensing requirements for funeral directors or 
embalmers, and five states require funeral directors or embalmers to 
have only a high school education. The other states fall somewhere in 
between: some requiring high school and mortuary college, and some 
requiring one year of post-secondary education plus completion of the 
mortuary college program. Twelve states also require passage of a state 
or national exam for licensure.
    Other commenters oppose recognizing licensed funeral directors or 
embalmers as learned professionals. For example, the International 
Brotherhood of Teamsters (Teamsters) contend that the proposed rule 
would improperly exempt most licensed funeral directors and embalmers. 
The Teamsters argue that the specialized intellectual instruction and 
apprenticeship that a licensed funeral director or embalmer attains 
does not constitute the requisite knowledge of an exempt professional. 
The Teamsters state that a four-year course of study is not a 
prerequisite to licensure, and cites a November 23, 1999, Wage and Hour 
Opinion letter in support of its position. In this opinion letter, the 
Wage and Hour Division wrote that ``[a] prolonged course of specialized 
instruction and study generally has been interpreted to require at 
least a baccalaureate degree or its equivalent which includes an 
intellectual discipline in a particular course of study as opposed to a 
general academic course otherwise required for a baccalaureate 
degree.'' 1999 WL 33210905. The Teamsters also express concern that, 
under the proposal, more licensed funeral directors and embalmers could 
be classified as exempt professional employees because they could 
obtain the requisite knowledge through a combination of educational 
requirements, apprenticeships and on-the-job training.
    The issue of the exempt status of funeral directors and embalmers 
presents precisely the situation long contemplated by the existing 
regulations at section 541.301(e)(2) that the ``areas in which 
professional exemptions may be available are expanding. As knowledge is 
developed, academic training is broadened, degrees are offered in new 
and diverse fields, specialties are created and the true specialist, so 
trained, who is given new and greater responsibilities, comes closer to 
meeting the tests.'' See also discussion of final section 541.301(f), 
infra. In the past, the Department has taken the position that licensed 
funeral directors and embalmers are not exempt learned professionals. 
The Department took this position as amicus curiae in support of a 
funeral director's argument that he was not an exempt learned 
professional in the case of Rutlin v. Prime Succession, Inc., 220 F.3d 
737 (6th Cir.

[[Page 22156]]

2000). However, the court in Rutlin did not agree with the Department's 
position and held that funeral directors certified by the State of 
Michigan qualified for the learned professional exemption. In Rutlin, 
the district court found that the plaintiff funeral director's work 
``required knowledge of an advance type in a field of science or 
learning customarily acquired by a prolonged course of specialized 
intellectual instruction and study * * *.'' 220 F.3d at 742. Quoting 
from the lower court's decision, the appellate court agreed:

    As a funeral director and embalmer, plaintiff had to be licensed 
by the state. In order to become licensed, plaintiff had to complete 
a year of mortuary science school and two years of college, 
including classes such as chemistry and psychology, take national 
board tests covering embalming, pathology, anatomy, and cosmetology, 
practice as an apprentice for one year, and pass an examination 
given by the state.

    Id. The appellate court characterized plaintiff's educational 
requirement as ``a specialized course of instruction directly relating 
to his primary duty of embalming human remains,'' notwithstanding the 
fact that plaintiff ``was not required to obtain a bachelor's degree.'' 
Id. The court noted that ``[t]he FLSA regulations do not require that 
an exempt professional hold a bachelor's degree; rather, the 
regulations require that the duties of a professional entail advanced, 
specialized knowledge'' and concluded ``that a licensed funeral 
director and embalmer must have advanced, specialized knowledge in 
order to perform his duties.'' Id. See also Szarnych v. Theis-Gorski 
Funeral Home Inc., 1998 WL 382891 (7th Cir. 1998) (licensed funeral 
director/embalmer in Illinois was exempt learned professional).
    After carefully weighing the comments and case law, the Department 
concludes that some licensed funeral directors and embalmers may meet 
the duties requirements for the learned professional exemption. The 
Teamsters state that a four-year course of study is not a prerequisite 
for licensure as a funeral director or embalmer. However, the detailed, 
state-by-state analysis submitted by NFDA evidences that four years of 
post-secondary education, including two years of specialized 
intellectual instruction in an accredited mortuary college, is a 
prerequisite for licensure in many states. In such states, a prolonged 
course of specialized intellectual instruction has become a standard 
prerequisite for entrance into the profession. See, e.g., Reich v. 
State of Wyoming, 993 F.2d 739, 742 (10th Cir. 1993) (the Department's 
argument that game wardens were not exempt professionals because 
``there is a lack of uniformity among states as to the requirement and 
duties of game wardens'' was rejected by the court, which stated that 
``Wyoming may rightfully require more duties of its game wardens than 
other states''). Further, the only federal appellate courts to address 
this issue--the Sixth Circuit in Rutlin and the Seventh Circuit in 
Szarnych--have held the licensed funeral directors and embalmers are 
exempt learned professionals. Indeed, the educational and licensing 
requirements for funeral directors or embalmers in the 16 states that 
require two years of post-secondary education and completion of a two-
year program at an accredited mortuary college are comparable to the 
educational requirements for certified medical technologists, who have 
long been recognized in the existing regulations as exempt 
professionals. Accordingly, consistent with the case law and the 
existing rule on medical technologists, a new subsection 541.301(e)(9) 
in the final rule provides:

    Licensed funeral directors and embalmers who are licensed by and 
working in a state that requires successful completion of four 
academic years of pre-professional and professional study, including 
graduation from a college of mortuary science accredited by the 
American Board of Funeral Service Education, generally meet the 
duties requirements for the learned professional exemption.

    The Department recognizes, however, that some employees with the 
job title of ``funeral director'' or ``embalmer'' have not completed 
the four years of post-secondary education required in final subsection 
541.301(d)(9). In fact, the NFDA comments reveal that the state of 
Colorado has no educational requirements for funeral directors and 
embalmers, and five other states require only a high school education. 
Such employees, of course, cannot qualify as exempt learned 
professionals.
    Pilots. Most pilots are exempt from the FLSA overtime requirements 
under section 13(b)(3) of the Act, which exempts ``any employee of a 
carrier by air subject to the provisions of title II of the Railway 
Labor Act.'' Thus, pilots who are employed by commercial airlines are 
exempt from overtime under section 13(b)(3). However, the exempt status 
of other pilots, such as pilots of corporate jets, is determined under 
section 13(a)(1), and has been the subject of recent litigation.
    The Department has taken the position that pilots are not exempt 
professionals. We have maintained that aviation is not a ``field of 
science or learning,'' and that the knowledge required to be a pilot is 
not ``customarily acquired by a prolonged course of specialized 
intellectual instruction.'' See Wage and Hour Opinion Letter dated 
January 20, 1975; In re U.S. Postal Service ANET and WNET Contracts, 
2000 WL 1100166, at *7 (DOL Admin. Rev. Bd.).
    A contrary result was reached in Paul v. Petroleum Equipment Tools 
Co., 708 F.2d 168 (5th Cir. 1983). In Paul, the Fifth Circuit allowed 
the learned professional exemption for a company airline pilot who held 
an airline transport pilot (ATP) certificate, a flight instructor 
certificate, a commercial pilot certificate, an instrument flight rules 
(IFR) rating, and was authorized to fly both single and multiengine 
airplanes. The court examined the Federal Aviation Authority 
regulations setting forth the requirements for the licenses and 
ratings, finding the combination of instruction and flight tests 
sufficient to satisfy the requirement of a prolonged course of 
specialized instruction, ``despite its distance from campus.'' Id. at 
173.
    Despite Paul, the Department continued to assert that pilots are 
not exempt in Kitty Hawk Air Cargo, Inc. v. Chao, 2004 WL 305603 (N.D. 
Tex. 2004) (Service Contract Act case), supported by the decision in 
Ragnone v. Belo Corp., 131 F. Supp. 2d 1189, 1193-94 (D. Ore. 2001), 
holding that a helicopter pilot was not exempt under section 13(a)(1).
    However, the district court in Kitty Hawk, relying on Paul, ruled 
on January 26, 2004, that the pilots at issue did in fact meet the 
requirements of the professional exemption. In addition, a number of 
commenters argue that the Department should reconsider its position on 
pilots. Such commenters note that aviation degrees are now available 
from a few institutions of higher education. Further, pilots must 
complete classroom training, hours of flying with an instructor, pass 
tests and meet other requirements to obtain FAA licenses. Because of 
the conflict in the courts, and the insufficient record evidence on the 
standard educational requirements for the various pilot licenses, the 
Department has decided not to modify its position on pilots at this 
time.
    Other Professions. The final rule adopts without change subsection 
541.301(e)(1) on medical technologists, subsection 541.301(e)(3) on 
dental hygienists and subsection 541.301(e)(5) on accountants. These 
subsections are consistent with the existing regulations and long-
standing policies of the Wage and Hour Division. None of the

[[Page 22157]]

comments received provided information justifying departure from the 
current law.
    Finally, consistent with the existing regulations and the proposal, 
final section 541.301(f) recognizes that the areas in which the 
professional exemption may be available are expanding. Final section 
541.301(f) also now provides:

    Accrediting and certifying organizations similar to those listed 
in subsections (e)(1), (3), (4), (8) and (9) of this section also 
may be created in the future. Such organizations may develop similar 
specialized curriculums and certification programs which, if a 
standard requirement for a particular occupation, may indicate that 
the occupation has acquired the characteristics of a learned 
profession.

    This new language is adopted to ensure that final subsections 
541.301(e)(1), (3), (4), (8) and (9) do not become outdated if the 
accrediting and certifying organizations change or if new organizations 
are created. Accredited curriculums and certification programs are 
relevant to determining exempt learned professional status to the 
extent they provide evidence that a prolonged course of specialized 
intellectual instruction has become a standard prerequisite for 
entrance into the occupation as required under section 541.301. Neither 
the identity of the certifying organization nor the mere fact that 
certification is required is determinative, if certification does not 
involve a prolonged course of specialized intellectual instruction. For 
example, certified physician assistants meet the duties requirements 
for the learned professional exemption because certification requires 
four years of specialized post-secondary school instruction; employees 
with cosmetology licenses are not exempt because the licenses do not 
require a prolonged course of specialized intellectual instruction.
Section 541.302 Creative Professionals
    Proposed section 541.302 provided further guidance on the primary 
duties test for creative professionals. In the proposal, subsection (a) 
set forth the general rule that creative professionals must have ``a 
primary duty of performing office or non-manual work requiring 
invention, imagination, originality or talent in a recognized field of 
artistic or creative endeavor as opposed to routine mental, manual, 
mechanical or physical work. The exemption does not apply to work which 
can be produced by a person with general manual ability and training.'' 
Proposed subsection (b) set forth some general examples of fields of 
``artistic or creative endeavor.'' Proposed subsection (c) set forth 
more specific examples of creative professionals, and proposed 
subsection (d) provided guidance on journalists.
    The final rule deletes the ``office or non-manual work'' language 
in subsection 541.302(a) for the reasons discussed above under section 
541.300. In addition, the words ``or intellectual'' have been 
reinserted from the existing regulations into subsection (a) because 
its deletion in the proposal was unintentional. To add further clarity 
to the requirement of ``invention, imagination, originality or 
talent,'' final subsection (c) adds: ``The duties of employees vary 
widely, and exemption as a creative professional depends on the extent 
of the invention, imagination, originality or talent exercised by the 
employee. Determination of exempt creative professional status, 
therefore, must be made on a case-by-case basis.'' As described in more 
detail below, the final rule also makes substantial changes to 
subsection (d) regarding journalists.
    Because the proposal adopted the primary duty test of the existing 
regulations with few changes, the Department received few substantive 
comments on this section except for comments regarding journalists. The 
American Federation of Television and Radio Artists expresses concern 
that the proposed regulations would lead to an across-the-board 
exemption of all journalists, including employees of smaller news 
organizations, whom the organization believes should not be exempt. In 
an opposing view, the Newspaper Association of America and the National 
Newspaper Association, an organization of smaller newspapers,\10\ 
support the proposed regulations relating to journalists and would seek 
to have all reporters of community newspapers classified as exempt.
---------------------------------------------------------------------------

    \10\ Employees of small newspapers and small radio and 
television stations are statutorily exempt from the overtime pay 
requirement under sections 13(a)(8) and 13(b)(9) of the Act, 
respectively. 29 U.S.C. 213(a)(8); 29 U.S.C. 213(b)(9).
---------------------------------------------------------------------------

    Proposed subsection (d) was intended to reflect current federal 
case law regarding the status of journalists as creative professionals. 
Reich v. Gateway Press, Inc., 13 F.3d 685, 689 (3rd Cir. 1994), for 
example, involved the exempt status of reporters who worked for weekly 
newspapers either rewriting press releases under various topics such as 
``what's happening,'' ``church news,'' ``school lunch menus,'' and 
``military news,'' or writing standard recounts of public information 
by gathering facts on routine community events. In affirming the lower 
court's decision that the plaintiffs were not exempt, the appellate 
court evaluated the duties of reporters in light of the Department's 
interpretive guidelines, current section 541.302(d), which states: 
``The majority of reporters do work which depends primarily on 
intelligence, diligence, and accuracy. It is the minority whose work 
depends primarily on `invention, imaging [sic], or talent.''' The court 
concluded that the duties of the weekly newspaper reporters did not 
require invention, imagination, or talent:

    This work does not require any special imagination or skill at 
making a complicated thing seem simple, or at developing an entirely 
fresh angle on a complicated topic. Nor does it require invention or 
even some unique talent in finding informants or sources that may 
give access to difficult-to-obtain information.

13 F.3d at 700. However, the appellate court did recognize that not all 
fact-gathering duties are necessarily nonexempt work. While some fact-
gathering would entail the skill or expertise of an investigative 
reporter or bureau chief, the court found that the fact gathering 
performed by the reporters in the Gateway case did not rise to such 
level.
    The First Circuit reached a similar conclusion in Reich v. 
Newspapers of New England, Inc., 44 F.3d 1060 (1st Cir. 1995). In 
Newspapers of New England, the reporters had duties similar to those in 
the Gateway case. In finding such reporters nonexempt, the court 
observed that ``the day-to-day duties of these three reporters 
consisted primarily of `general assignment' work,'' and the reporters 
``[r]arely'' were ``asked to editorialize about or interpret the events 
they covered.'' Rather, the focus of their writing was ``to tell 
someone who wanted to know what happened * * * in a quick and 
informative and understandable way.'' Id. at 1075. Like the Third 
Circuit in Gateway, the First Circuit concluded that the reporters 
``were not performing duties which would place them in that minority of 
reporters `whose work depends primarily on invention, imaging [sic], or 
talent.''' Id. (citation omitted). See also Bohn v. Park City Group 
Inc., 94 F.3d 1457 (10th Cir. 1996) (employee employed as a technical 
writer or documenter in software and training departments did not 
perform work requiring artistic invention, imagination, or talent to 
qualify as an exempt artistic professional); Shaw v. Prentice Hall, 
Inc., 977 F. Supp. 909, 914 (S.D. Ind. 1997), aff'd, 151 F.3d 640 (7th 
Cir. 1998) (district court found that production editor in book 
publishing industry did not qualify as exempt

[[Page 22158]]

creative professional because the ``duty * * * to manage a book project 
through the editing and publishing process'' did not entail 
``invention, imagination, or talent in an artistic field of 
endeavor.'').
    In addition to examining the nature of the journalists' duties to 
determine exempt creative professional status, courts have looked to 
whether an employee's work is subject to substantial control from 
management. For example, in Dalheim v. KDFW-TV, 918 F. 2d 1220, 1229 
(5th Cir. 1990), the court found that while general-assignment 
reporters could be exempt creative professionals, the reporters in this 
case were nonexempt because ``their day-to-day work is in large part 
dictated by management.'' In addition, the court held that news 
producers were not exempt creative professionals because they performed 
work pursuant to ``a well-defined framework of management policies and 
editorial convention.''
    In contrast, other courts have recognized that some journalists 
perform work requiring invention, imagination and talent, and thus 
qualify as exempt creative professionals. For example, in Freeman v. 
National Broadcasting Co., 80 F.3d 78 (2nd Cir. 1996), the appellate 
court found that the duties of a domestic news writer, domestic 
producer, and field producer for television news shows involved a 
sufficient amount of creativity to qualify them as exempt ``employees 
whose primary duty consists of the performance of work requiring 
invention, imagination, or talent in a recognized field of artistic 
endeavor.'' Id. at 82. The court noted that technological changes and 
the more sophisticated demands of the current news consumer have caused 
changes in the news industry, and stated that the lower court erred in 
finding the plaintiffs were nonexempt because it relied on a 
nonbinding, outdated, and inapplicable interpretation by the U.S. 
Department of Labor of the artistic professional exemption, section 
541.302(a). One of the reasons the appellate court gave scant weight to 
the Department's interpretation was the Department's failure to reflect 
the vast changes in the industry. The court described the transition 
that modern news organizations had experienced as follows:

    Dizzying technological advances and the sophisticated demands of 
the news consumer have resulted in changes in the news industry over 
the past half-century. This is particularly true of television news 
where the same news may be communicated by a variety of combined 
audio and visual presentations in which creativity is at a premium. 
Yet, over this period, the DOL has failed to update the journalism 
interpretations.

Id. at 85. Citing Sherwood v. Washington Post, 871 F. Supp. 1471, 1482 
(D.D.C. 1994), the NBC court acknowledged that there is a fundamental 
difference between a journalist working for a major news organization 
and a journalist working as a small press reporter. It would be 
``anachronistic, even irrational,'' the court wrote, ``to continue to 
impose these guidelines on many journalists in major news 
organizations.'' 80 F.3d at 85. The court in Truex v. Hearst 
Communications, Inc., 96 F. Supp. 2d 652, 661 (S.D. Tex. 2000), denying 
the employer's summary judgment motion regarding a sportswriter, also 
acknowledged the continuum that, on one end, consists of nonexempt 
reporters who gather and ``regurgitate'' facts and, on the other end, 
consists of exempt creative professionals who generate and develop 
ideas for stories in print or broadcast, with little editorial input.
    In proposed subsection (d), the Department intended to modify the 
existing regulations to reflect this federal case law. The Department 
did not intend to create an across the board exemption for journalists. 
As stated in the case law, the duties of employees referred to as 
journalists vary along a spectrum from the exempt to the nonexempt, 
regardless of the size of the news organization by which they are 
employed. The less creativity and originality involved in their 
efforts, and the more control exercised by the employer, the less 
likely are employees classified as journalists to qualify as exempt. 
The determination of whether a journalist is exempt must be made on a 
case-by-case basis. The majority of journalists, who simply collect and 
organize information that is already public, or do not contribute a 
unique or creative interpretation or analysis to a news product, are 
not likely to be exempt.
    In order to reflect this case law more accurately, the Department 
has modified section 541.302(d) to state as follows:

    Journalists may satisfy the duties requirements for the creative 
professional exemption if their primary duty is work requiring 
invention, imagination, originality or talent, as opposed to work 
which depends primarily on intelligence, diligence and accuracy. 
Employees of newspapers, magazines, television and other media are 
not exempt creative professionals if they only collect, organize and 
record information that is routine or already public, or if they do 
not contribute a unique interpretation or analysis to a news 
product. Thus, for example, newspaper reporters who merely rewrite 
press releases or who write standard recounts of public information 
by gathering facts on routine community events are not exempt 
creative professionals. Reporters also do not qualify as exempt 
creative professionals if their work product is subject to 
substantial control by the employer. However, journalists may 
qualify as exempt creative professionals if their primary duty is 
performing on the air in radio, television or other electronic 
media; conducting investigative interviews; analyzing or 
interpreting public events; writing editorials, opinion columns or 
other commentary; or acting as a narrator or commentator.
Section 541.303 Teachers
    The Department received few comments on this provision and does not 
believe any substantive changes to this section are necessary in light 
of those comments.
Section 541.304 Practice of Law or Medicine
    The Department received few comments on this provision and does not 
believe any substantive changes to this section are necessary in light 
of those comments.

Subpart E, Computer Employees

Sections 541.400-402
    The proposed regulations consolidated 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 
sections 541.3(a)(4), 541.205(c)(7), and 541.303. Proposed Subpart E 
collected into one place the substance of the original 1990 statutory 
enactment, the 1992 final regulations, and the 1996 statutory enactment 
(section 13(a)(17) of the FLSA). Because the key regulatory language 
that resulted from the 1990 enactment is now substantially codified in 
section 13(a)(17) of the FLSA, no substantive changes were proposed to 
that language comprising the primary duty test for the computer 
exemption. However, the proposal removed the additional regulatory 
requirement, not contained in section 13(a)(17) of the FLSA, that an 
exempt computer employee must consistently exercise discretion and 
judgment. Because of the tremendously rapid pace of significant changes 
occurring in the information technology industry, the proposal did not 
cite specific job titles as examples of exempt computer employees, as 
job titles tend to quickly become outdated.
    Based on the comments received and for reasons discussed below, 
several changes have been made in the final rule to further align the 
regulatory text with the specific standards adopted by the Congress for 
the computer employee

[[Page 22159]]

exemption in section 13(a)(17) of the FLSA. Section 541.401 of the 
proposed rule, which discussed the high level of skill and expertise in 
``theoretical and practical application'' of specialized computer 
systems knowledge as a prerequisite for exemption (a carry-over from 
the rules in effect prior to the 1996 statutory amendment), has been 
deleted from the final rule, as it goes beyond the scope of the 
specific standards adopted by Congress in section 13(a)(17).
    As described in the preamble to the proposed rule, the exemption 
for employees in computer occupations has a unique legislative and 
regulatory history. In November 1990, Congress enacted legislation 
directing the Department of Labor to issue regulations permitting 
computer systems analysts, computer programmers, software engineers, 
and other similarly-skilled professional workers to qualify as exempt 
executive, administrative, or professional employees 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. See 29 CFR 541.3(a)(4), 541.303; 57 FR 46744 (Oct. 9, 
1992); 57 FR 47163 (Oct. 14, 1992). However, when Congress increased 
the minimum wage in 1996, Congress enacted, almost verbatim, most--but 
not all--of the Department's regulatory language comprising the 
computer employee ``primary duty test'' as a separate statutory 
exemption, under a new FLSA section 13(a)(17). Section 13(a)(17) 
exempts ``any employee who is a computer systems analyst, computer 
programmer, software engineer, or other similarly skilled worker, whose 
primary duty is (A) the application of systems analysis techniques and 
procedures, including consulting with users, to determine hardware, 
software or system functional specifications; (B) the design, 
development, documentation, analysis, creation, testing or modification 
of computer systems or programs, including prototypes, based on and 
related to user or system design specifications; (C) the design, 
documentation, testing, creation or modification of computer programs 
related to machine operating systems; or (D) a combination of [the 
aforementioned duties], the performance of which requires the same 
level of skills * * *.'' 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 1996 enactment included no delegation of 
rulemaking authority to the Department of Labor to further interpret or 
define the scope of the exemption; however, the original 1990 statute 
was not repealed by the 1996 amendment.
    A number of employers and business groups commenting on the 
proposal believe that the Department should update the computer 
exemption regulations to reflect the status of the many new job 
classifications that have arisen since the computer exemption 
regulations were first promulgated in the early 1990s. They suggest 
that the Department expand the computer employee exemption beyond the 
specific terms used in section 13(a)(17), to include additional job 
titles like network managers, LAN/WAN administrators, database 
administrators, web site design and maintenance specialists, and 
systems support specialists performing similar duties with hardware, 
software and communications networks.
    The Wisconsin Department of Employment Relations notes that most 
computer professionals now work within a personal computer, network-
based environment and recommends adding language to the duties test 
that addresses hardware, software, and network-based duties, to make 
the test more relevant and applicable to current computer environments. 
The HR Policy Association comments that the computer professionals 
exemption was written 11 years ago, and considerable confusion exists 
over which jobs are covered. The commenter suggests that the Department 
provide additional guidance in the preamble through illustrative 
examples analyzing exempt computer jobs. The HR Policy Association also 
recommends clarifying the duties for computer employees who do not 
program yet have highly sophisticated roles in maintaining computer 
software and systems, such as network managers, systems integration 
professionals, programmers, certain help desk professionals, and those 
who provide end-user support. The U.S. Chamber of Commerce asks the 
Department to recognize that the computer exemption applies not only to 
analysts, programmers, and engineers, but also to those with similar 
skills, and suggested amendments to the regulations to include network, 
LAN, and database analysts and developers, Internet administrators, 
individuals responsible for troubleshooting, those who train new 
employees, and those who install hardware and software. The Financial 
Services Roundtable comments that the specialized education necessary 
to acquire the complex knowledge associated with software languages, 
relational database applications, and/or communication or operating 
system software should correlate with the exemption for computer 
employees. The Information Technology Industry Council and Organization 
Resources Counselors suggest the Department clarify that computer 
networks and the Internet are included in the phrase ``computer 
systems,'' and that high-level work on a computer's database or on the 
Internet is covered by the reference to programming or analysis.
    The Workplace Practices Group notes that past distinctions between 
software and hardware positions have long converged. Today, according 
to this commenter, enterprise applications run on sophisticated 
networks administered by highly skilled and highly compensated LAN/WAN 
professionals who typically understand both networking and 
telecommunications theory and practice, some of whom are required to 
have a college degree in computer science, management information 
systems, or the equivalent, often with an additional preference that 
the individual have server or system-level engineer certification.
    The National Association of Computer Consultant Businesses (NACCB) 
notes that the computer employee exemption is unique in that it has a 
dual statutory basis--section 13(a)(1) (from the 1990 law) and section 
13(a)(17) (from 1996). NACCB urges that the Department explore how the 
exemption applies under the 1990 law to workers beyond those covered by 
section 13(a)(17) in 1996, and address what other duties, apart from 
those listed in the proposed regulations, should be included in the 
computer employee exemption in accordance with the 1990 enactment. This 
commenter suggests an illustrative list of ``similarly skilled 
workers'' covered by the exemption, to include database administrators, 
network or system administrators, computer support specialists 
including help desk technicians, and technical writers. This commenter 
also suggests definitions for ``system functional specifications,'' 
``computer systems,'' and ``machine operating systems.''
    Other commenters, in contrast, question the Department's authority 
to expand the computer employee exemption beyond the express terms used 
by the Congress in 1996 under section 13(a)(17). The McInroy & Rigby 
law firm states that the Department should not expand the computer 
exemption, and that there is no justification for any such expansion. 
The Fisher & Phillips law firm states

[[Page 22160]]

that, unlike in section 13(a)(1), in section 13(a)(17) Congress granted 
no authority to the Secretary of Labor to define or delimit the 
computer employee exemption. This commenter suggests that the final 
regulations clarify that references to section 13(a)(17) are 
illustrative only and are not to be taken as affecting the scope or 
application of that exemption in any respect.
    The Workplace Practices Group also traces the evolution of the 
statutory exemption for computer employees noting that, while the 
Department has authority to define and delimit the section 13(a)(1) 
exemptions by regulation, the Department has no such authority under 
the computer exemption in section 13(a)(17). If additional positions 
are to be found exempt under the computer exemption, that status must 
be found clearly within the provisions specified by Congress under 
section 13(a)(17), according to this commenter.
    While the Department recognizes that the computer employee 
exemption has been particularly confusing given its history, and that 
comments were invited on whether any further clarifications were 
possible under the terms of the statute, the Department believes that 
creating two different definitions for computer employees exempt under 
sections 13(a)(1) and 13(a)(17) of the FLSA would be inappropriate 
given that Congress recently spoke directly on this issue in 1996 under 
section 13(a)(17). Moreover, adopting such inconsistent definitions 
would be confusing and unwieldy for the regulated community.
    Section 13(a)(17) exempts computer positions that are ``similarly 
skilled'' to a systems analyst, programmer, or software engineer, but 
only if the primary duty of the position in question includes the 
specified ``systems analysis techniques * * * to determine hardware, 
software, or system functional specifications'' or a combination of 
duties prescribed in section 13(a)(17), ``the performance of which 
requires the same level of skills.'' Depending on the particular facts, 
some of the computer occupations mentioned in the comments could in 
fact meet this statutory primary duty test for the computer exemption 
without having to specifically cite job titles in the regulations to 
qualify for exemption. Where the prescribed duties tests are met, the 
exemption may be applied regardless of the job title given to the 
particular position. Since an employee's job duties, not job title, 
determine whether the exemption applies, we do not believe it is 
appropriate, given the history of the computer employee exemption, to 
cite additional job titles as exempt beyond those cited in the primary 
duty test of the statute itself. In each instance, regardless of the 
job title involved, the exempt status of any employee under the 
computer exemption must be determined from an examination of the actual 
job duties performed under the criteria in section 13(a)(17) of the 
Act. In addition, the Department notes that certain jobs cited in the 
comments could in fact meet the duties test for the administrative 
employee exemption and be exempt on that basis where all those tests 
are met, as the proposed regulations pointed out (see proposed section 
541.403) and some commenters observe.
    Several commenters question whether it was an oversight for the 
Department not to include the computer employee exemption within the 
proposed special exemption for highly compensated employees. As 
originally proposed in section 541.601, an employee performing office 
or non-manual work who is guaranteed total annual compensation of at 
least $65,000 and who performs any one or more of the exempt duties or 
responsibilities of an executive, administrative, or professional 
employee could be found exempt. Because Congress included a detailed 
primary duty test in the computer exemption, the Department did not 
apply the highly compensated exemption to computer employees. We 
continue to believe that decision was sound, and follows the statutory 
primary duty standards adopted by the Congress in section 13(a)(17) of 
the Act. It should also be noted that, for the same reason, the 
Department in its proposal removed the limitation contained in section 
541.303 of the current rule (adopted prior to 1996) that limited the 
exemption to employees who work in software functions, as no such 
limitation exists in the statutory exemption enacted in 1996. 
Similarly, the Department rejects, as inconsistent with the 1996 
enactment, comments suggesting that we reinsert the requirement that an 
exempt computer employee must ``consistently exercise discretion and 
judgment.'' Minor editorial revisions have been made to further conform 
the regulatory language to the statute, but no other suggested 
revisions have been adopted.

Subpart F, Outside Sales Employees

Section 541.500 General Rule for Outside Sales Employees
    Section 13(a)(1) of the FLSA contains a separate exemption for any 
employee employed ``in the capacity of outside salesman.'' Proposed 
section 541.500 set forth the general rule for exemption of such 
``outside sales'' employees.\11\ Under proposed subsection 541.500(a), 
the outside sales exemption applied to any employee ``with a primary 
duty of (i) making sales within the meaning of section 3(k) of the Act, 
or (ii) obtaining orders or contracts for services or for the use of 
facilities for which a consideration will be paid by the client or 
customer.'' In addition, to qualify for exemption the outside sales 
employee must be ``customarily and regularly engaged away from the 
employer's place or places of business in performing such primary 
duty.'' Finally, proposed subsection 541.500(b) stated that in 
determining the primary duty of an outside sales employee, ``work 
performed incidental to and in conjunction with the employee's own 
outside sales or solicitations, including incidental deliveries and 
collections, shall be regarded as exempt outside sales work.'' Under 
this subsection, other work that furthers the employee's sales effort, 
including ``writing sales reports, updating or revising the employee's 
sales or display catalogue, planning itineraries and attending sales 
conferences,'' is also considered exempt work.
---------------------------------------------------------------------------

    \11\ Although the statute refers to ``salesman,'' the final 
rule, without objection from commenters, replaces this gender-
specific term with ``outside sales employees.''
---------------------------------------------------------------------------

    The Department has retained this general rule as proposed.
    The only modification intended in the proposed regulations was 
removing the restriction that exempt outside sales employees could not 
perform work unrelated to outside sales for more than 20-percent of the 
hours worked in a workweek by nonexempt employees of the employer. This 
revision was proposed for consistency with the ``primary duty'' 
approach adopted for the other section 13(a)(1) exemptions. In 
addition, the current outside sales 20-percent restriction is 
particularly complicated and confusing since it relies on the work 
hours of nonexempt employees and requires tracking the time of 
employees who, by definition, spend much of their time away from the 
employer's place of business.
    A large majority of the comments that address the outside sales 
exemption express support for the adoption of the ``primary duty'' test 
in lieu of the 20-percent rule. For example, the Society for Human 
Resource Management (SHRM) and Grocery Manufacturers of America (GMA) 
state that this revision would provide a more practical method for 
employers to determine whether an employee qualifies as an exempt 
outside sales employee. According to SHRM, in

[[Page 22161]]

order to keep an account of the percentage of time that outside sales 
employees spend on exempt versus nonexempt tasks, as required under the 
20-percent rule, employers essentially have to track the hours of their 
outside sales employees. SHRM notes that it is very difficult for 
employers to meet this responsibility given that outside sales 
employees spend large amounts of time away from their employers' 
regular places of business. GMA shares these concerns, stating that 
keeping track of an outside sales employee's individual activities to 
determine whether they are exempt, nonexempt or incidental to exempt 
sales activity is administratively difficult, if not impossible. The 
National Small Business Association comments that moving away from a 
percentage basis to the new definition of ``primary duty'' will 
alleviate much of the administrative burden on small business owners.
    Two law firms commenting on the outside sales exemption (Goldstein 
Demchak Baller Borgen & Dardarian and McInroy & Rigby) ask the 
Department to retain the current 20-percent limit on nonexempt work. 
Both firms express concern that the outside sales exemption would be 
subject to abuse by employers without a ``bright-line'' 20-percent 
test. In other words, employers might misclassify sales personnel as 
exempt under the outside sales exemption by merely requiring that they 
perform only minor amounts of outside sales work. A few commenters, 
such as the AFL-CIO, generally oppose removing the 20-percent 
limitation on nonexempt work for the same reasons discussed above in 
connection with the executive, administrative and professional 
exemptions.
    After review of the relevant comments, the Department continues to 
believe that the application of the primary duty test to the outside 
sales exemption is preferable to the 20-percent tolerance test. As 
noted in several comments, the primary duty test is relatively simple, 
understandable and eliminates much of the confusion and uncertainty 
that are present under the existing rule. Cf. Ackerman v. Coca-Cola 
Enterprises, Inc., 179 F.3d 1260, 1267 (10th Cir. 1999) (citing 
existing Sec.  541.505(a) to the effect that `` `[a] determination of 
an employee's chief duty or primary function must be made in terms of 
the basic character of the job as a whole' and that ``the time devoted 
to the various duties is an important, but not necessarily controlling, 
element' ''), cert. denied, 528 U.S. 1145 (2000). It also avoids the 
necessity that employers track the hours of its outside sales 
employees, which is consistent with the underlying rationale for 
exempting outside salespersons. Utilization of the primary duty concept 
also provides a consistent approach between the outside sales exemption 
and the exemptions for executive, administrative and professional 
employees. Finally, the Department is of the view that concerns 
relating to potential abuse under the new rule are addressed by the 
objective criteria and factors for determining an employee's primary 
duty that are contained in section 541.700.
Section 541.501 Making Sales or Obtaining Orders
    Proposed section 541.501 defined the term ``sales'' consistent with 
section 3(k) of the FLSA, to include ``any sale, exchange, contract to 
sell, consignment for sale, shipment for sale, or other disposition.'' 
Proposed subsection (b) also stated that ``sales'' includes the 
transfer of title to tangible property and transfer of tangible and 
valuable evidences of intangible property. Proposed subsections (c) and 
(d) defined the phrase ``obtaining orders or contracts for services or 
for the use of facilities'' to include such activities as selling of 
time on radio or television; soliciting of advertising for newspapers 
and other periodicals; soliciting of freight for railroads and other 
transportation agencies; and taking orders for a service which may be 
performed for the customer by someone other than the person taking the 
order.
    The Department's proposal removed outdated examples and unnecessary 
language from current section 541.501, but did not intend any 
substantive changes. The Department has retained the proposed changes 
to section 541.501 in the final rule.
    The Department received few comments on this section. However, one 
commenter expresses concern regarding the Department's decision to 
remove current section 541.501(e), which states that the outside sales 
exemption does not apply to ``servicemen even though they may sell the 
service which they themselves perform.'' The commenter claims that, 
because of the removal of subsection (e), service technicians would be 
classified as exempt outside sales employees. The Department believes 
that subsection (e) is an unnecessary example, and its removal is not a 
substantive change. The Department agrees with the commenter that an 
employee whose primary duty is to repair or service products (e.g., 
refrigerator repair) does not qualify as an exempt outside sales 
employee. However, we continue to believe that this conclusion is 
obvious from the regulations and this example is unnecessary.
Section 541.502 Away From Employer's Place of Business
    An outside sales employee must be customarily and regularly engaged 
``away from the employer's place or places of business.'' This phrase 
was defined in proposed section 541.502, which began in subsection (a) 
by stating: ``The Administrator does not have authority to define this 
exemption for `outside' sales under section 13(a)(1) of the Act as 
including inside sales work. Section 13(a)(1) does not exempt inside 
sales and other inside work (except work performed incidental to and in 
conjunction with outside sales and solicitations). However, section 
7(i) of the Act exempts commissioned inside sales employees of 
qualifying retail or service establishments if those employees meet the 
compensation requirements of section 7(i).'' The actual definition of 
``away from the employer's place of business'' was contained in 
proposed subsection (b) which requires that an exempt outside sales 
employee make sales ``at the customer's place of business or, if 
selling door-to-door, at the customer's home.'' Proposed subsection (b) 
also stated that: ``Outside sales does not include sales made by mail, 
telephone or the Internet unless such contact is used merely as an 
adjunct to personal calls. Thus, any fixed site, whether home or 
office, used by a salesperson as a headquarters or for telephonic 
solicitation of sales is considered one of the employer's places of 
business, even though the employer is not in any formal sense the owner 
or tenant of the property.''
    Numerous commenters request that the Department delete the language 
in proposed section 541.502(a) regarding the Administrator's lack of 
authority to expand the outside sales exemption to include inside sales 
work. For example, the U.S. Chamber of Commerce urges the Department 
not to use expansive language that could be read to render all inside 
sales employees nonexempt, even if they meet the requirements of the 
executive, administrative or professional exemptions.
    The Department has decided to make the changes requested by these 
commenters, not due to any inaccuracy in the sentence, but because we 
agree that this language might imply that sales employees, inside or 
outside, can only have exempt status by meeting the requirements for 
the section 13(a)(1) ``outside sales'' exemption. Thus, the final rule 
eliminates most of the regulatory text in proposed section 541.502(a), 
including the language

[[Page 22162]]

regarding the Administrator's lack of authority to define the 
``outside'' sales exemption to include ``inside'' sales work and the 
language regarding the section 7(i) exemption. The Department is 
deleting this language to avoid any misunderstanding that the outside 
sales exemption is the only exemption available for sales employees. 
Other exemptions in the statute, including the section 7(i) exemption 
for commissioned employees of retail and service establishments, and 
the executive, administrative and professional exemptions, are also 
available for sales employees who can meet all the requirements for any 
of those exemptions.
    The Department emphasizes, however, that notwithstanding these 
deletions to the proposed language of section 541.502(a), the 
Administrator does not have statutory authority to exempt inside sales 
employees from the FLSA minimum wage and overtime requirements under 
the outside sales exemption. Those comments that ask the Department to 
revise the regulatory definition of an outside sales employee to 
include inside sales employees, on the basis that they perform much the 
same functions as outside sales employees, must be rejected as beyond 
the statutory authority of the Administrator. For example, the National 
Association of Manufacturers (NAM) states that, because of 
technological advances, inside sales employees perform the same 
functions as outside sales employees, with the only distinction being 
an on-site visit by the outside sales employee. According to NAM, fax 
machines, voice-mail, teleconferencing, cellular phones, computers, and 
videoconferencing all enable office-based sales personnel to emulate 
the customer contact formerly within the exclusive province of outside 
salespersons.
    Finally, the National Automobile Dealers Association asks that the 
definition of ``away from the employer's place of business'' be 
expanded to encompass trade shows. The Department believes that, if 
sales occur, trade shows are similar to the ``hotel sample room'' 
example in the current and proposed regulations. In trade shows, as in 
the hotel sample room, a sales employee displays the employer's product 
over a short time period and for the purpose of promoting or making 
sales in a room not owned by the employer. Accordingly, we have added 
language to clarify that an outside sales employee does not lose the 
exemption by displaying the employer's products at a trade show. If 
selling actually occurs, rather than just sales promotion, trade shows 
of short duration (i.e., one or two weeks) should not be considered as 
the employer's places of business.
Section 541.503 Promotion Work
    Under proposed section 541.503, ``promotional work'' is exempt 
outside sales work if it ``is actually performed incidental to and in 
conjunction with an employee's own outside sales or solicitations.'' 
However, ``promotional work that is incidental to sales made, or to be 
made, by someone else is not exempt outside sales work.'' Proposed 
subsections 541.503(b) and 541.503(c) include examples to illustrate 
when promotional activities are exempt versus nonexempt work. To 
address commenter concerns discussed below, the Department has made 
minor changes to section 541.503(c).
    Several commenters, including the Grocery Manufacturers Association 
(GMA), ask the Department to eliminate the emphasis upon an employee's 
``own'' sales in the proposed regulations. According to GMA, because of 
team selling, customer control of order processing, and increasing 
computerization of sales and purchasing activities, many of its members 
do not analyze performance of their salespersons by looking at their 
``own'' sales. In other words, they do not evaluate their sales 
personnel based on their ``sales numbers,'' but rather their ``sales 
efforts.'' GMA urges the Department to modify the outside sales 
regulations to exempt promotion work when it is performed incidental to 
and in connection with an employee's ``sales efforts'' and to delete 
the requirement that such work be incidental to the employee's ``own'' 
sales. GMA states this change is necessary to maintain the exemption 
where customers enter orders into a computer system, rather than by 
submitting a paper order to the outside sales employee whose 
promotional efforts helped facilitate the sale.
    The U.S. Chamber of Commerce (Chamber) expresses similar concerns, 
stating that due to advances in computerized tracking of inventory and 
product shipment, the sales of manufactured goods are increasingly 
driven by computerized recognition of decreases in customer's 
inventory, rather than specific face-to-face solicitations by outside 
sales employees. The Chamber states that, under these circumstances, 
the role of the outside sales employee has, in many instances, changed 
to one of facilitation of sales. The Chamber maintains that promotional 
activities, even when they do not culminate in an individual sale, are 
nonetheless an integral part of the sales process.
    The National Association of Manufacturers (NAM) also expresses 
concern that the proposal does not take into account the extent to 
which modern technology affects the outside sales exemption. NAM 
states, for example, that outside sales employees might lose their 
exempt status where products stored in centralized warehouses are 
ordered through the customer's internal computerized purchasing system. 
In other words, such employees might not be viewed as having 
``consummated the sale'' or ``directed efforts toward the consummation 
of the sale.'' NAM comments that employees who have long functioned as 
outside sales employees may no longer be exempt under the proposed 
regulations because they no longer execute contracts or write orders 
due to technological advances in the retail business.
    After reviewing the comments and current case law, the Department 
has made minor changes to section 541.503(c) to address commenter 
concerns that technological changes in how orders are taken and 
processed should not preclude the exemption for employees whose primary 
duty is making sales. As indicated in the proposal, the Department does 
not intend to change any of the essential elements required for the 
outside sales exemption, including the requirement that the outside 
sales employee's primary duty must be to make sales or to obtain orders 
or contracts for services. An employer cannot meet this requirement 
unless it demonstrates objectively that the employee, in some sense, 
has made sales. See 1940 Stein Report at 46 (outside sales exemption 
does not apply to an employee ``who does not in some sense make a 
sale'') (emphasis added). Extending the outside sales exemption to 
include all promotion work, whether or not connected to an employee's 
own sales, would contradict this primary duty test. See 1940 Stein 
Report at 46 (outside sales exemption does not extend to employees 
``engaged in paving the way for salesmen, assisting retailers, and 
establishing sales displays, and so forth'').
    Nonetheless, the Department agrees that technological changes in 
how orders are taken and processed should not preclude the exemption 
for employees who in some sense make the sales. Employees have a 
primary duty of making sales if they ``obtain a commitment to buy'' 
from the customer and are credited with the sale. See 1949 Weiss Report 
at 83 (``In borderline cases

[[Page 22163]]

the test is whether the person is actually engaged in activities 
directed toward the consummation of his own sales, at least to the 
extent of obtaining a commitment to buy from the person to whom he is 
selling. If his efforts are directed toward stimulating the sales of 
his company generally rather than the consummation of his own specific 
sales his activities are not exempt''). See also Ackerman v. Coca-Cola 
Enterprises, Inc., 179 F.3d 1260, 1266-67 (10th Cir. 1999) (substantial 
merchandising responsibilities, including restocking of store shelves 
and setting up product displays, did not defeat outside sales exemption 
for soft drink advance sales reps and account managers where such 
responsibilities were ``incidental to and in conjunction with'' sales 
they consummated at stores they visited), cert. denied, 528 U.S. 1145 
(2000); Wirtz v. Keystone Readers Service, Inc., 418 F.2d 249, 261 (5th 
Cir. 1969) (``student salesmen'' not exempt where engaged in 
promotional activities incidental to sales thereafter made by others).
    Exempt status should not depend on whether it is the sales employee 
or the customer who types the order into a computer system and hits the 
return button. The changes to proposed section 541.503(c) are intended 
to avoid such a result. Finally, the Department notes that outside 
sales employees may also qualify as exempt executive, administrative or 
professional employees if they meet the requirements for those 
exemptions. For example, an employee whose primary duty is promotion 
work such as advertising or marketing--not selling--may not meet the 
requirements for the ``outside sales'' exemption, but could be an 
exempt administrative employee.
Section 541.504 Drivers Who Sell
    Under proposed section 541.504(a), drivers ``who deliver products 
and also sell such products may qualify as exempt outside sales 
employees only if the employee has a primary duty of making sales.'' 
Proposed subsection (b) provided factors that should be considered when 
determining whether the driver's primary duty is making sales: ``A 
comparison of the driver's duties with those of other employees engaged 
as truck drivers and as salespersons; possession of a selling or 
solicitor's license when such license is required by law or ordinances; 
presence or absence of customary or contractual arrangements concerning 
amounts of products to be delivered; description of the employee's 
occupation in collective bargaining agreements; the employer's 
specifications as to qualifications for hiring; sales training; 
attendance at sales conferences; method of payment; and proportion of 
earnings directly attributable to sales.''
    The Department has made no substantive changes to proposed section 
541.504, although editorial changes have been made to final subsections 
541.504(a) and 541.504(c)(4) as described below.
    The Grocery Manufacturers Association (GMA) has several concerns 
regarding proposed section 541.504. In its comments, for example, GMA 
sees a possible inconsistency between the language of proposed section 
541.500(b) and proposed section 541.504(a). Proposed section 541.500(b) 
states that ``[i]n determining the primary duty of an outside sales 
employee, work performed incidental to and in conjunction with an 
employee's own outside sales or solicitations, including incidental 
deliveries and collections, shall be regarded as exempt outside sales 
work.'' Proposed section 541.504(a) states with respect to drivers who 
sell that ``[i]f the employee has a primary duty of making sales, all 
work performed incidental to and in conjunction with the employee's own 
sales efforts * * * is exempt work.'' GMA believes that it is 
inconsistent with section 541.500(b) to make the inclusion of driver/
salesperson's incidental work within the outside sales exemption 
conditional upon the employee having a primary duty of making sales. 
GMA therefore urges the Department to delete the conditional phrase 
``[i]f the employee has a primary duty,'' from the second sentence of 
proposed section 541.504(a).
    The Department had no intention of creating a different standard 
regarding incidental work for drivers who sell as opposed to other 
outside sales employees. The two subsections at issue used different 
language to describe the same concept, which could lead to confusion. 
Accordingly, we have modified final section 541.504(a) to track the 
language from section 541.500(b).
    GMA also requests that the Department clarify section 
541.504(c)(1), to the extent it describes a driver who may qualify for 
the outside sales exemption as one ``who receives compensation 
commensurate with the volume of products sold.'' GMA does not believe 
that commissions alone should be used to determine exempt status. GMA 
therefore suggests that this regulation be broadened to recognize 
compensation systems which, while not commission-based, provide 
``compensation at least partially based on the volume of products 
sold,'' such as bonuses or other forms of recognition based on 
individual, group or corporate goals and volumes.
    The Department believes that the phrase in question, ``[a] driver * 
* * who receives compensation commensurate with the volume of products 
sold,'' helps provide an accurate example of an employee who has a 
primary duty of making sales. This phrase generally describes an 
employee paid on a commission basis, which is a commonly and frequently 
utilized method for compensating sales personnel. Since section 
541.504(c)(1) is intended to provide guidance by presenting an example 
of a driver who may qualify as an exempt outside sales employee and, as 
such, does not foreclose the exemption for employees who receive other 
types of compensation, we have not made the requested change.
    GMA also suggests that the Department delete the phrase ``and 
carrying an assortment of the employer's products'' from proposed 
section 541.504(c)(4), because it should not matter whether the driver/
salesperson is carrying one product or an assortment of them. The 
Department agrees with the comment that it is not necessary for a 
driver to carry ``an assortment'' of products in order to qualify as 
exempt under the outside sales exemption. The availability of this 
exemption does not depend on either the volume or variety of products 
carried by the driver/salesperson in question. Accordingly, we have 
made the suggested change.
    Another commenter asks that the Department clarify that 
``Professional Drivers'' are nonexempt. This exemption covers drivers 
who have a primary duty of making sales. The primary duty test offers 
an alternative to job titles that may not accurately reflect job duties 
and actual performance. Therefore, the Department believes that a 
blanket statement that ``Professional Drivers'' are not exempt 
employees would not serve the interest of a more accurate rule.
    Finally, a commenter asks for more examples of outside sales 
employees, including drivers who sell. Proposed subsection 541.504(c) 
and 541.504(d) already contain a number of examples of drivers who 
would or would not qualify as exempt employees. The Department does not 
believe that there will be any value added to the regulation through 
additional examples.

Subpart G, Salary Requirements

Section 541.600 Amount of Salary Required
    Salary level tests have been included as part of the exemption 
criteria since

[[Page 22164]]

the original regulations of 1938. With a few exceptions, executive, 
administrative and professional employees must earn a minimum salary 
level to qualify for the exemption.\12\ Employees paid below the 
minimum salary level are not exempt, irrespective of their job duties 
and responsibilities. Employees paid a salary at or above the minimum 
level in the regulations are only exempt if they also meet the salary 
basis and job duties tests. To qualify for exemption under the existing 
regulations, an employee must earn a minimum salary of $155 per week 
($8,060/year) for the executive and administrative exemptions, and $170 
per week ($8,840/year) for the professional exemption. Employees paid 
above these minimum salary levels must meet a ``long'' duties test to 
qualify for the exemption. The existing regulations also provide, under 
special provisions for ``high salaried'' employees (see 29 CFR 541.119, 
541.214 and 541.315), that employees paid above a higher salary rate of 
$250 per week ($13,000/year) are exempt if they meet a ``short'' duties 
test. As the name implies, the short tests contain fewer duties 
requirements. 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. A full-time 
minimum wage worker, in comparison, earns $206 per week ($5.15/hour x 
40 hours)--an amount above the existing ``long'' test levels and 
closely approaching the existing ``short'' test level. As a result, 
under the existing regulations, most employees are now tested for 
exemption under the ``short'' duties tests.
---------------------------------------------------------------------------

    \12\ For many years, the regulations have contained no salary 
level test for outside sales employees and some professional 
employees (teachers, doctors, lawyers). Such employees are exempt 
regardless of their salary. The final rule makes no changes in this 
area. Also, in 1990, Congress amended the FLSA to exempt certain 
hourly-paid computer professionals paid at least 6\1/2\ times the 
minimum wage (which then totaled $27.63 per hour; $57,470 per year, 
assuming 40 hours per week). Congress froze this compensation test 
at $27.63 per hour in 1996.
---------------------------------------------------------------------------

    The Department proposed that the minimum salary level required for 
exemption as an executive, administrative, or professional employee be 
increased from $155 per week ($8,060/year) to $425 per week ($22,100/
year). Thus, under proposed section 541.600(a), all employees earning 
less than $425 per week, either on an hourly or salary basis, would be 
guaranteed overtime protection, irrespective of their job duties and 
responsibilities. Employees earning $425 or more on a salary basis 
would only qualify for exemption if they met a new ``standard'' test of 
duties.
    The final rule adopts the new structure of the proposal to include 
a ``standard'' test of duties tied to a minimum salary level. However, 
the proposed rule used the Bureau of Labor Statistics' (BLS) year 2000 
Current Population Survey Outgoing Rotation Group data set, the most 
recent data available from BLS when the Preliminary Regulatory Impact 
Analysis was completed. When the Regulatory Impact Analysis for this 
final rule was completed, the most recent data available was the 2002 
CPS data set. Based on the more recent data, and taking into account 
numerous comments about the salary levels in the proposal, the 
Department has raised the minimum weekly salary level required for 
exemption in the final rule from $425 per week to $455 per week, an 
increase of $30 from the proposed regulations and an increase of $300 
per week from the existing minimum salary level. As a result of this 
increase, 6.7 million salaried workers who earn between $155 and $455 
per week will be guaranteed overtime protection, regardless of their 
duties.
    The remaining subsections of 541.600 retained, without substantive 
change from the existing regulations, certain special provisions 
regarding the salary requirements: Subsection (b) set forth the minimum 
salary levels required if the employee is paid on a biweekly, 
semimonthly or monthly basis; subsection (c) discussed the salary 
required for academic administrative employees; subsection (d) set 
forth the salary required for computer employees; and subsection (e) 
provided that the salary requirements do not apply to teachers, lawyers 
and doctors. The Department did not receive significant comments on 
these subsections, and thus no other changes have been made to section 
541.600.
    Most commenters agree that the minimum salary level needed to be 
increased, but disagreed sharply regarding the size of the increase. 
Some commenters state that the proposed $425 minimum salary level is 
too high, other commenters say it is too low, and some say it is just 
right.
    Some employer commenters, such as the U.S. Small Business 
Administration's Office of Advocacy, the American Health Care 
Association, and the Securities Industry Association's Human Resources 
Management Committee, strongly oppose the $425 per week minimum salary 
as too high. The Associated Builders and Contractors state that $425 
per week ``may be particularly high for rural areas of the country.'' 
Similarly, the National Grocers Association (NGA) comments that the 
$425 level ``could prove problematic for some retail grocers operating 
in differing geographic regions, such as rural areas and the South 
where economic conditions vary and pay scales are less.'' Based on 
their 2003 compensation survey, NGA suggests that the Department lower 
the minimum salary level to $400 per week. Some owners of small retail 
and restaurant businesses also filed comments asserting that $425 per 
week is too high. An owner of four Dairy Queen stores in Austin, Texas, 
for example, asks the Department to lower the minimum salary level to 
$400 per week because supervisor salaries in the area start at $21,000 
per year. A comment from Wesfam Restaurants requests that the 
Department lower the minimum salary level to $350 per week because the 
Department's proposed $425 level will cost the company at least 
$100,000 each year.
    Other organizations representing employer interests generally 
support the $425 salary level, but object to any further increase in 
this proposed minimum. For example, the U.S. Chamber of Commerce 
(Chamber) does not oppose the minimum salary level, but states that a 
significant minority of its members oppose the proposed compensation 
level as too high. Nevertheless, the Chamber opposes an increase to 
$425 per week if ``unaccompanied by significant changes in the duties 
and salary basis tests,'' and would oppose any compensation level 
higher than $425. The FLSA Reform Coalition, the Public Sector FLSA 
Coalition, the American Corporate Counsel Association and the HR Policy 
Association believe that the $425 per week minimum is reasonable. The 
National Restaurant Association recognizes that the salary levels have 
not been changed for many years, but states: ``Under no circumstance 
should the threshold be increased to a higher salary level [than $425 
per week]. In fact, the Association urges DOL to review the methodology 
used to establish the proposed minimum salary threshold of $425/wk. and 
reevaluate the impact of this threshold on specific industry sectors, 
including restaurants and retail establishments. Strong consideration 
should be given to adjusting the threshold downward to reflect the 
realities of variations in industry and regional compensation levels.'' 
Similarly, the National Council of Chain Restaurants asks the 
Department to ``resist any pressure to raise the salary threshold to an 
even

[[Page 22165]]

higher level, which would wreak havoc on the chain restaurant industry, 
and retailers generally.'' The Food Marketing Institute also opposes 
increasing the minimum salary level above $425, noting that this salary 
level will already particularly affect independent, family-owned 
grocery stores.
    On the other hand, organizations representing employee interests 
oppose the standard salary level as being too low. Such organizations 
advocate salary levels ranging from $530 per week to $1,000 per week. 
The AFL-CIO and the International Association of Machinists and 
Aerospace Workers, for example, purporting to apply the approach set 
forth in the 1958 Kantor Report to the current ``long'' and ``short'' 
duties test structure, suggest salary levels of at least $610 per week 
for the long test and $980 for the short test. The United Food and 
Commercial Workers International Union would adjust the current salary 
levels for inflation using the Consumer Price Index (CPI), resulting in 
a ``minimum of $530/week for the first level ($580 for professionals), 
and $855 for the second level.'' The American Federation of State, 
County and Municipal Employees similarly comments that adjusting the 
current salary levels to reflect changes in the CPI would increase the 
salary level under the ``long'' test for executive and administrative 
employees to $530 per week ($580 for professional employees) and to 
$855 per week for the ``short'' test.
    The Department has long recognized that the salary paid to an 
employee is the ``best single test'' of exempt status (1940 Stein 
Report at 19), which has ``simplified enforcement by providing a ready 
method of screening out the obviously nonexempt employees'' and 
furnished a ``completely objective and precise measure which is not 
subject to differences of opinion or variations in judgment.'' As the 
Department stated in 1949:

    [T]he salary tests, even though too low in the later years to 
serve their purpose fully, have amply proved their effectiveness in 
preventing the misclassification by employers of obviously nonexempt 
employees, thus tending to reduce litigation. They have simplified 
enforcement by providing a ready method of screening out the 
obviously nonexempt employees, making an analysis of duties in such 
cases unnecessary. The salary requirements also have furnished a 
practical guide to the inspector as well as to employers and 
employees in borderline cases. In an overwhelming majority of cases, 
it has been found by careful inspection that personnel who did not 
meet the salary requirements would also not qualify under other 
sections of the regulations as the Divisions and the courts have 
interpreted them. In the years of experience in administering the 
regulations, the Divisions have found no satisfactory substitute for 
the salary test.
* * * * *
    Regulations of general applicability such as these must be drawn 
in general terms to apply to many thousands of different situations 
throughout the country. In view of the wide variation in their 
applicability the regulations cannot have the precision of a 
mathematical formula. The addition to the regulations of a salary 
requirement furnishes a completely objective and precise measure 
which is not subject to differences of opinion or variations in 
judgment. The usefulness of such a precise measure as an aid in 
drawing the line between exempt and nonexempt employees, 
particularly in borderline cases, seems to me to be established 
beyond doubt.

    1949 Weiss Report at 8-9. See also 1940 Stein Report at 42 
(``salary paid the employee is the best single test''); 1958 Kantor 
Report at 2-3 (salary levels ``furnish a practical guide to the 
investigator as well as to employers and employees in borderline cases, 
and simplify enforcement by providing a ready method of screening out 
the obviously nonexempt employees'').
    While the purpose of the FLSA is to provide for the establishment 
of fair labor standards, the law does not give the Department authority 
to set minimum wages for executive, administrative and professional 
employees. These employees are exempt from any minimum wage 
requirements. The salary level test is intended to help distinguish 
bona fide executive, administrative, and professional employees from 
those who were not intended by the Congress to come within these exempt 
categories. Any increase in the salary levels from those contained in 
the existing regulation, therefore, has to have as its primary 
objective the drawing of a line separating exempt from nonexempt 
employees. Moreover, it has long been recognized that ``such a dividing 
line cannot be drawn with great precision but can at best be only 
approximate.'' 1949 Weiss Report at 11.
    Some of the comments opposed to the proposed $425 minimum salary 
level question the Department's methodology for setting the appropriate 
salary levels. The Department determined the appropriate methodology 
for adjusting the salary levels after a thorough review of the 
regulatory history of previous increases. The initial minimum salary 
level requirement for exemption, adopted in the 1938 regulations, was 
$30 a week for executive and administrative employees. The 1938 
regulations did not include a salary requirement for professional 
employees, or a ``short test'' salary level. We could find no 
regulatory history from 1938 regarding the rationale for setting the 
salary level at $30 a week. But see 1940 Stein Report at 20-21 ($30 
salary level adopted from the National Industrial Recovery Act and 
State law). Since 1938, and as shown in Table 1, the Department has 
increased the salary levels on six occasions--in 1940, 1949, 1958, 
1963, 1970 and 1975. Until 1975, the Department increased salary levels 
every five to nine years, and the largest increase was only $50 per 
week.

                                  Table 1.--Weekly Salary Levels for Exemption
----------------------------------------------------------------------------------------------------------------
                                              Executive      Administrative     Professional       Short test
----------------------------------------------------------------------------------------------------------------
1938....................................               $30               $30              None              None
1940....................................                30                50                50              None
1949....................................                55                75                75              $100
1958....................................                80                95                95               125
1963....................................               100               100               115               150
1970....................................               125               125               140               200
1975....................................               155               155               170               250
----------------------------------------------------------------------------------------------------------------

    The regulatory history of these six increases reveals that, in 
determining appropriate salary levels, the Department has examined data 
on actual salaries and wages paid to exempt and nonexempt employees. In 
1940, the Department considered salary surveys by government agencies, 
experience under the National Industrial Recovery Act, and federal 
government salaries. 1940 Stein Report at 9, 20, 31-32. The Department 
then

[[Page 22166]]

used these salary data to determine the average salary that was the 
``dividing line'' between exempt and nonexempt employees, and to find 
the percentage of employees earning below various salary levels. The 
Department set the minimum required salary at levels below the average 
salary dividing exempt from nonexempt employees: ``Furthermore, these 
figures are averages, and the act applies to low-wage areas and 
industries as well as to high-wage groups. Caution therefore dictates 
the adoption of a figure that is somewhat lower, though of the same 
general magnitude.'' 1940 Stein Report at 32.
    In 1949, the Department looked at salary data from state and 
federal agencies, including the Bureau of Labor Statistics (BLS). The 
Department considered wages in small towns and low-wage industries, 
wages of federal employees, average weekly earnings for exempt 
employees and starting salaries for college graduates. 1949 Weiss 
Report at 10, 14-17, 19. The Department compared weekly earnings in 
1940 with weekly earnings in 1949 to determine the average percentage 
increase in earnings. As in 1940, the Department then set a salary 
level at a ``figure slightly lower than might be indicated by the 
data'' because of concerns regarding the impact of the salary level 
increases on small businesses: ``The salary test for bona fide 
executives must not be so high as to exclude large numbers of the 
executives of small establishments from the exemption.'' 1949 Weiss 
Report at 15.
    In 1958, the Department considered data collected during 1955 Wage 
and Hour Division investigations on ``the actual salaries paid'' to 
employees who ``qualified for exemption'' (i.e., met the applicable 
salary and duties tests), grouped by geographic region, broad industry 
groups, number of employees and size of city. 1958 Kantor Report at 6. 
The Department then set the salary tests for exempt employees ``at 
about the levels at which no more than about 10 percent of those in the 
lowest-wage 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.'' 1958 Kantor Report at 
6-7.
    The Department followed this same methodology when determining the 
appropriate salary level increase in 1963. The Department examined data 
on salaries paid to exempt workers collected in a special survey 
conducted by the Wage and Hour Division in 1961. 28 FR 7002 (July 9, 
1963). The salary level for executive and administrative employees was 
increased to $100 per week, for example, when the 1961 survey data 
showed that 13 percent of establishments paid one or more exempt 
executives less than $100 per week; and 4 percent of establishments 
paid one or more exempt administrative employees less than $100 a week. 
28 FR 7004 (July 9, 1963). The professional salary level was increased 
to $115 per week, when the 1961 survey data showed that 12 percent of 
establishments surveyed paid one or more professional employees less 
than $115 per week. 28 FR 7004. The Department noted that these salary 
levels approximated the same percentages used in 1958:

    Salary tests set at this level would bear approximately the same 
relationship to the minimum salaries reflected in the 1961 survey 
data as the tests adopted in 1958, on the occasion of the last 
previous adjustment, bore to the minimum salaries reflected in a 
comparable survey, adjusted by trend data to early 1958. At that 
time, 10 percent of the establishments employing executive employees 
paid one or more executive employees less than the minimum salary 
adopted for executive employees and 15 percent of the establishments 
employing administrative or professional employees paid one or more 
employees employed in such capacities less than the minimum salary 
adopted for administrative and professional employees. (28 FR 7004).

    The Department continued to use this methodology when adopting 
salary level increases in 1970. In 1970, the Department examined data 
from 1968 Wage and Hour Division investigations and 1969 BLS wage data. 
The Department increased the salary level for executive employees to 
$140 per week when the salary data showed that 20 percent of executive 
employees from all regions and 12 percent of executive employees in the 
West earned less than $130 a week. 35 FR 884 (January 22, 1970).
    The last increase to the salary levels was in 1975. Instead of 
following the prior approaches, in 1975 the Department set the salary 
levels based on increases in the Consumer Price Index, although it 
adjusted the salary level downward to eliminate any potential 
inflationary impact. 40 FR 7091 (February 19, 1975) (``However, in 
order to eliminate any inflationary impact, the interim rates 
hereinafter specified are set at a level slightly below the rates based 
on the CPI''). More to the point, the salary levels adopted were 
intended as interim levels ``pending the completion and analysis of a 
study by the Bureau of Labor Statistics covering a six month period in 
1975.'' Id. Thus, the Department again intended to increase the salary 
levels based on actual salaries paid to employees. However, the 
intended process was never completed, and the so-called ``interim'' 
salary levels have remained untouched for 29 years.
    In summary, the regulatory history reveals a common methodology 
used, with some variations, to determine appropriate salary levels. In 
almost every case, the Department examined data on actual wages paid to 
employees and then set the salary level at an amount slightly lower 
than might be indicated by the data. In 1940 and 1949, the Department 
looked to the average salary paid to the lowest level of exempt 
employee. Beginning in 1958, however, the Department set salary levels 
to exclude approximately the lowest-paid 10 percent of exempt salaried 
employees. Perhaps the best summary of this methodology appears in the 
1958 Kantor Report at pages 5-7:

    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-wage 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.

    Using this regulatory history as guidance, the Department reached 
the proposed minimum salary level of $425 per week after considering 
available data on actual salary levels currently being paid in the 
economy, broken out by broad industry categories and geographic areas. 
We reviewed a preliminary report on actual salary levels based on the 
BLS year 2000 Current Population Survey (CPS) Outgoing Rotations Group 
data set. These data included all full-time (defined as 35 hours or 
more per week),

[[Page 22167]]

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). We 
considered the data in Table 2 below showing the salary levels of the 
bottom 10 percent, 15 percent and 20 percent of all salaried employees, 
and salaried employees in the lower-wage South and retail sectors:

       Table 2.--Wages of Full-Time Salaried Employees (2000 CPS)
------------------------------------------------------------------------
                                               All      South    Retail
------------------------------------------------------------------------
10%.......................................   $18,195   $15,955   $15,600
15%.......................................    21,050    19,950    19,400
20%.......................................    24,455    22,200    21,800
------------------------------------------------------------------------

    As in the 1958 Kantor Report analysis, the Department's proposal 
looked to ``points near the lower end of the current range of 
salaries'' to determine an appropriate salary level for the standard 
test--although we relied on the lowest 20 percent of salaried employees 
in the South, rather than the lowest 10 percent, because of the 
proposed change from the ``short'' and ``long'' test structure and 
because the data included nonexempt salaried employees. Applying this 
analysis, the Department proposed a standard salary level of $425 per 
week, an increase of $270 per week over the existing rule's salary 
level of $155 per week.\13\ Using this level, approximately the bottom 
20 percent of all salaried employees covered by the FLSA would fall 
below the minimum salary requirement and be automatically entitled to 
overtime.
---------------------------------------------------------------------------

    \13\ The Department's proposal to eliminate the different salary 
level associated with the professional ``long'' duties test is 
adopted in the final regulations as most commenters supported this 
as simplifying the existing regulations.
---------------------------------------------------------------------------

    Many commenters find this methodology appropriate and reasonable. 
Comments filed by the U.S. House of Representatives Committee on 
Education and the Workforce, for example, ``commend the Department for 
its thoughtful analysis of the prior revisions to the salary level 
test,'' and ``endorse the Department's review of and adherence to 
regulatory precedent.''
    However, some commenters who oppose the proposed $425 minimum 
salary level as too low argue that the Department should adjust the 
existing salary levels for inflation by applying the Consumer Price 
Index. This methodology would result in salary levels of $530 per week 
($580 for professionals) for the ``long'' duties test and $855 per week 
for the ``short'' duties tests, according to the commenters.
    Other commenters, including the AFL-CIO, agree with the Department 
that the 1958 Kantor Report methodology of looking to the ``range of 
salaries actually paid'' to employees is the ``most accurate approach 
to set the salary levels,'' but assert that the Department 
``misrepresented and misused the Kantor Report.'' Thus, comments filed 
by the AFL-CIO, and adopted by many of their affiliated unions, state:

    The Department has taken several approaches in the past to 
decide how to increase the salary levels used in the regulations. 
The most accurate approach to set salary levels for exempt 
executive, administrative, and professional employees is first to 
determine the range of salaries actually paid to employees who 
qualify for the exemption in each of the three categories. The 
Department took this approach when it set new salary levels 
effective in 1959, based on the Kantor Report. The Kantor Report 
also noted, as the Department mentions in its preamble, 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.'' 68 Fed. Reg. at 15570, quoting Kantor Report at 
5. The Department's present proposal purports to use the approach of 
the Kantor Report. However * * * the Department has completely 
misrepresented and misused the Kantor Report. The actual methodology 
used in the Kantor Report would result today not in a ``standard 
salary'' of $425 as proposed by the Department, but instead in a 
``long test'' salary of $610 per week and a ``short test'' salary of 
$980 per week. (Emphasis in comment.)

The AFL-CIO claims that the Department ``misused'' the Kantor 
methodology by relying on year 2000 BLS data regarding salary levels of 
all salaried employees: ``Kantor's salary survey was limited to those 
executive, administrative and professional employees who were found to 
be exempt--that is, employees who were paid on a salary basis, and met 
the applicable salary and duties tests. * * * Instead, the DOL survey 
encompasses the broadest possible group--all salaried employees in 
every occupation, even those who could not be regarded by any stretch 
of the imagination as executive, administrative, or professional 
employees.'' The AFL-CIO thus suggests that the Department use more 
current salary data and look only at salaries of exempt employees.
    The National Association of Convenience Stores (NACS) also believes 
the Department misapplied the Kantor methodology, but resulting in a 
salary level that is too high, rather than too low as the AFL-CIO 
contends: ``Instead of setting the threshold at the lowest 10% of the 
salaries reviewed as was done in 1958, the proposed cutoff has been set 
at 20%. * * * NACS submits that, to remain faithful to the wise 
principles of the Kantor Report, the Labor Department should use the 
10% guideline and should apply it to the salaries in the lowest 
geographical or industry sector (whichever of the two data sets is 
lower), rather than to composite figures which represent a combination 
of high-wage and low-wage geographical and/or industry sectors.''
    The Department recognizes the strong views in this area, and has 
carefully considered the comments addressing the amount of the proposed 
minimum salary level. The Department continues to believe that its 
methodology is consistent with the regulatory history and, most 
importantly, is a reasonable approach to updating the salary level 
tests. For example, instead of investigating the lowest 10% of exempt 
salaried employees, an approach that depends on uncertain assumptions 
regarding which employees are actually exempt, the Department decided 
to set the minimum salary level based on the lowest 20% of all salaried 
employees. The Department felt this adjustment achieved much the same 
purpose as restricting the analysis to a lower percentage of exempt 
employees. Assuming that employees earning a lower salary are more 
likely non-exempt, both approaches are capable of reaching exactly the 
same endpoint, as discussed more fully below. The Department, in order 
to address the many comments regarding this assumption, decided for 
this final rule to directly test whether our method for setting the 
salary threshold was robust to different analytical approaches. In 
fact, the Department found that our proposed approach to setting salary 
levels was very consistent with past approaches. Therefore we disagree 
with the AFL-CIO's contention that the proposed analysis was flawed and 
not consistent with the Kantor approach.
    The final rule reflects the Department's long-standing tradition of 
avoiding the use of inflation indicators for automatic adjustments to 
these salary requirements. 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:

    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

[[Page 22168]]

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.

1949 Weiss Report at 12. The Department continues to believe that such 
a mechanical adjustment for inflation could have an inflationary impact 
or cause job losses. We are particularly concerned about, and required 
to consider, the impact that an inflation adjustment could have on 
lower-wage sectors such as businesses in rural areas, businesses in the 
retail and restaurant industry, and small businesses.
    Thus, as in the proposal, the Department determined the minimum 
salary level in the final rule by examining available data on actual 
salary levels currently being paid in the economy as suggested by the 
1958 Kantor Report. In the proposed rule, we relied on year 2000 salary 
data because it was the most current data available at that time. 
However, the Department should rely on the most current salary data 
available. Thus, for the final rule, we carefully reviewed a report on 
actual salary levels based on the 2002 Current Population Survey (CPS) 
Outgoing Rotation public use data set, the most current data available 
at the time the analysis was conducted.\14\ As explained in more detail 
under section VI of this preamble, the CPS data is the best available 
data source because of its size (more than 474,000 observations) and 
its breadth of detail (e.g., occupation classifications, salary, hours 
worked and industry). Consistent with the proposal, the Department 
examined a subset of the 2002 CPS data, broken out by broad industry 
categories and geographic areas, that included full-time (working 35 or 
more hours per week) employed workers age 16 years and older who are 
both covered by the Fair Labor Standards Act and subject to the Part 
541 salary tests. Thus, the Department relied on a data set that 
excluded: (1) The self-employed, unpaid volunteers and religious 
workers who are not covered by the FLSA; (2) agricultural workers, 
certain transportation workers, and certain automobile dealerships 
employees who are exempt from overtime under other provisions of the 
Act; (3) teachers, academic administrative personnel, certain medical 
professionals, outside sales employees, lawyers and judges who are not 
subject to the Part 541 salary tests; and (4) federal employees who are 
not subject to the Part 541 regulations.
---------------------------------------------------------------------------

    \14\ The 2003 CPS data was made available after much of the 
economic analysis was completed. The Department reviewed the 2003 
data in order to ensure that it had considered the most current 
salary information available. As explained in detail in Appendix B, 
an analysis of the 2003 data demonstrates that using this data would 
not alter the determination of the minimum salary level because the 
results are consistent under both data sets.
---------------------------------------------------------------------------

    Using this subset of the 2002 CPS data, the final rule again 
follows the 1958 Kantor Report analysis and looks to ``points near the 
lower end of the current range of salaries'' to determine an 
appropriate salary level. The Department acknowledges that the 1958 
Kantor Report used data regarding the wages of exempt employees, and 
set the salary level so that ``no more than about 10 percent'' of such 
exempt employees ``in the lowest-wage 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.'' 1958 Kantor Report at pages 5-7. The Department's proposal 
used a different data set--all salaried employees covered by the FLSA, 
rather than just exempt employees. However, the proposal accounted for 
these differences in data by setting a salary level excluding from the 
exemptions approximately the lowest 20 percent of all salaried 
employees, rather than the Kantor Report's 10 percent of exempt 
employees.
    In developing the salary level for the final rule, the Department 
first looked at the proposed salary level of $425 per week to determine 
what percentage of salaried employees would fail to meet the test. As 
shown in Table 3, approximately 18 percent of full-time salaried 
employees in the South region and in the retail industry would fail to 
meet the $425 salary level. Because the Department was concerned by 
this drop from the 20 percent level used in the proposal, we assessed 
the salary level that would be necessary in order to exclude 20 percent 
of all salaried employees in the South region and in the retail 
industry.
    As shown in Table 3, applying the 2002 CPS data, the lowest 20 
percent of full-time salaried employees in the South region earn 
approximately $450 per week. The lowest 20 percent of full-time 
salaried employees in the retail industry earn approximately $455 per 
week. The lowest 20 percent of all salaried employees earn somewhere 
between $475 and $500 per week.
    The Department maintains that this slight departure from the Kantor 
Report analysis was appropriate and within its discretion. As the AFL-
CIO itself noted, the ``Department has taken several approaches in the 
past to decide how to increase the salary levels used in the 
regulations.'' The regulatory history described above reveals that 
these various approaches have three things in common: (1) Relying on 
actual wages earned by employees; (2) setting the salary level slightly 
lower than indicated by the data because of the impact on lower-wage 
industries and regions; and (3) rejecting suggestions to mechanically 
adjust the salary levels based on an inflationary measure. 
Historically, however, the Department has looked at different wage 
surveys in an effort to find the best data available.
    Nonetheless, to address concerns of the AFL-CIO, the National 
Association of Convenience Stores and other commenters regarding the 
Department's methodology, we also examined salary ranges for employees 
in the subset of 2002 CPS data who, applying a methodology modified 
from the GAO Report,\15\ likely qualify as exempt employees under 
Section 13(a)(1) of the FLSA and the existing Part 541 regulations. 
Section VI of this preamble includes a detailed description of the 
Department's methodology for estimating the number and salary levels of 
exempt employees. The result of this analysis is Table 4, showing 
salary ranges for likely exempt workers. As shown in Table 4, the 
lowest 10 percent of all likely exempt salaried employees earn 
approximately $500 per week. The lowest 10 percent of likely exempt 
salaried employees in the South earn just over $475 per week. The 
lowest 10 percent of likely exempt salaried employees in the retail 
industry earn approximately $450 per week.
---------------------------------------------------------------------------

    \15\ Fair Labor Standards Act: White Collar Exemptions in the 
Modern Work Place, GAO/HEHS-99-164, September 30, 1999.

[[Page 22169]]



                                     Table 3.--Full-Time Salaried Employees
----------------------------------------------------------------------------------------------------------------
                           Earnings                                                Percentile
----------------------------------------------------------------------------------------------------------------
                   Weekly                          Annual            All             South            Retail
----------------------------------------------------------------------------------------------------------------
$155........................................           $8,060              1.6              1.6              1.8
255.........................................           13,260              4.6              5.3              5.4
355.........................................           18,460             10.0             11.8             12.0
380.........................................           19,760             11.1             13.3             13.3
405.........................................           21,060             14.1             16.9             17.1
425.........................................           22,100             15.2             18.3             18.1
450.........................................           23,400             16.7             20.2             19.9
455.........................................           23,660             16.8             20.2             20.0
460.........................................           23,920             16.9             20.4             20.1
465.........................................           24,180             18.3             21.9             21.9
470.........................................           24,440             18.4             21.9             21.9
475.........................................           24,700             18.7             22.3             22.3
500.........................................           26,000             22.7             26.9             27.4
550.........................................           28,600             25.8             30.6             30.7
600.........................................           31,200             32.4             37.9             38.3
650.........................................           33,800             36.0             41.7             42.5
700.........................................           36,400             41.9             47.9             49.6
750.........................................           39,000             45.8             51.6             53.6
800.........................................           41,600             50.8             56.8             58.9
850.........................................           44,200             54.2             59.9             61.8
900.........................................           46,800             57.9             63.6             64.9
950.........................................           49,400             60.7             66.6             67.9
1,000.......................................           52,000             66.6             72.1             73.5
1,100.......................................           57,200             70.8             75.9             76.9
1,200.......................................           62,400             76.0             80.8             80.8
1,300.......................................           67,600             79.2             83.5             83.3
1,400.......................................           72,800             82.8             86.6             85.9
1,500.......................................           78,000             85.8             89.2             88.7
1,600.......................................           83,200             88.0             90.9             90.3
1,700.......................................           88,400             89.6             92.2             91.4
1,800.......................................           93,600             91.1             93.3             93.0
1,900.......................................           98,800             92.0             94.0             93.7
1,925.......................................          100,100             93.7             95.3             95.1
1,950.......................................          101,400             93.7             95.4             95.1
1,975.......................................          102,700             93.9             95.5             95.2
2,000.......................................          104,000             94.2             95.6             95.4
2,100.......................................          109,200             94.6             96.1             95.9
2,200.......................................          114,400             95.2             96.5             96.2
2,300.......................................          119,600             95.4             96.6             96.5
2,400.......................................          124,800             96.2             97.1             97.1
2,500.......................................          130,000             97.0             97.6             97.8
----------------------------------------------------------------------------------------------------------------


                                        Table 4.--Likely Exempt Employees
----------------------------------------------------------------------------------------------------------------
                           Earnings                                                Percentile
----------------------------------------------------------------------------------------------------------------
                   Weekly                          Annual            All             South            Retail
----------------------------------------------------------------------------------------------------------------
$155........................................           $8,060              0.0              0.0              0.0
255.........................................           13,260              1.3              1.6              1.6
355.........................................           18,460              3.6              4.2              5.3
380.........................................           19,760              4.0              4.9              6.2
405.........................................           21,060              5.4              6.5              8.4
425.........................................           22,100              5.9              7.2              9.0
450.........................................           23,400              6.6              8.1             10.2
455.........................................           23,660              6.7              8.2             10.2
460.........................................           23,920              6.7              8.2             10.3
465.........................................           24,180              7.7              9.2             11.7
470.........................................           24,440              7.8              9.3             11.8
475.........................................           24,700              7.9              9.5             12.0
500.........................................           26,000             10.3             12.3             15.3
550.........................................           28,600             12.3             14.9             18.1
600.........................................           31,200             17.2             20.5             24.6
650.........................................           33,800             20.0             23.9             29.3
700.........................................           36,400             25.2             29.9             36.3
750.........................................           39,000             28.9             33.7             40.7
800.........................................           41,600             33.7             39.0             46.0
850.........................................           44,200             37.3             42.4             49.4
900.........................................           46,800             41.2             46.7             53.0
950.........................................           49,400             44.5             50.4             56.9

[[Page 22170]]


1,000.......................................           52,000             51.3             57.2             63.5
1,100.......................................           57,200             56.7             62.2             67.6
1,200.......................................           62,400             63.5             69.3             72.9
1,300.......................................           67,600             67.9             73.3             76.4
1,400.......................................           72,800             73.1             77.9             80.4
1,500.......................................           78,000             77.5             81.9             83.7
1,600.......................................           83,200             80.8             84.7             85.9
1,700.......................................           88,400             83.3             86.8             87.7
1,800.......................................           93,600             85.7             88.6             90.0
1,900.......................................           98,800             87.2             89.8             90.8
1,925.......................................          100,100             89.8             92.0             92.7
1,950.......................................          101,400             89.9             92.1             92.8
1,975.......................................          102,700             90.1             92.3             92.9
2,000.......................................          104,000             90.6             92.6             93.1
2,100.......................................          109,200             91.3             93.3             93.6
2,200.......................................          114,400             92.2             93.9             94.1
2,300.......................................          119,600             92.6             94.2             94.4
2,400.......................................          124,800             93.9             95.0             95.4
2,500.......................................          130,000             95.2             95.9             96.4
----------------------------------------------------------------------------------------------------------------


                                       Table 5.--Full-Time Hourly Workers
----------------------------------------------------------------------------------------------------------------
                           Earnings                                                Percentile
----------------------------------------------------------------------------------------------------------------
                   Weekly                          Annual            All             South            Retail
----------------------------------------------------------------------------------------------------------------
$155........................................           $8,060              1.2              1.3              2.0
255.........................................           13,260              7.6              9.5             13.7
355.........................................           18,460             25.8             30.4             41.4
380.........................................           19,760             31.4             36.6             47.9
405.........................................           21,060             38.5             44.4             55.9
425.........................................           22,100             41.3             47.5             59.1
450.........................................           23,400             46.1             52.4             64.1
455.........................................           23,660             46.4             52.8             64.5
460.........................................           23,920             47.3             53.6             65.4
465.........................................           24,180             47.9             54.3             65.9
470.........................................           24,440             48.3             54.8             66.4
475.........................................           24,700             48.7             55.2             66.9
500.........................................           26,000             54.8             61.5             71.9
550.........................................           28,600             60.6             67.0             76.7
600.........................................           31,200             68.2             73.9             82.6
650.........................................           33,800             72.2             77.5             85.8
700.........................................           36,400             76.3             81.1             88.7
750.........................................           39,000             79.6             83.9             90.9
800.........................................           41,600             83.6             87.1             93.2
850.........................................           44,200             85.9             88.9             94.1
900.........................................           46,800             88.0             90.7             95.1
950.........................................           49,400             89.6             92.0             95.7
1,000.......................................           52,000             91.9             93.9             96.7
1,100.......................................           57,200             94.0             95.5             97.4
1,200.......................................           62,400             95.8             96.9             98.0
1,300.......................................           67,600             96.7             97.6             98.3
1,400.......................................           72,800             97.6             98.2             98.8
1,500.......................................           78,000             98.2             98.6             99.1
1,600.......................................           83,200             98.7             99.0             99.4
1,700.......................................           88,400             99.0             99.2             99.5
1,800.......................................           93,600             99.2             99.4             99.6
1,900.......................................           98,800             99.3             99.4             99.6
1,925.......................................          100,100             99.4             99.5             99.7
1,950.......................................          101,400             99.4             99.5             99.7
1,975.......................................          102,700             99.4             99.5             99.7
2,000.......................................          104,000             99.5             99.6             99.7
2,100.......................................          109,200             99.6             99.6             99.7
2,200.......................................          114,400             99.6             99.6             99.7
2,300.......................................          119,600             99.7             99.7             99.8
2,400.......................................          124,800             99.7             99.7             99.8
2,500.......................................          130,000             99.8             99.8             99.8
----------------------------------------------------------------------------------------------------------------



[[Continued on page 22171]]


From the Federal Register Online via GPO Access [wais.access.gpo.gov]
]                         
 
[[pp. 22171-22220]] Defining and Delimiting the Exemptions for Executive, 
Administrative, Professional, Outside Sales and Computer Employees

[[Continued from page 22170]]

[[Page 22171]]

    Under the final rule, the minimum salary level for an employee to 
be exempt is increased from $155 per week ($8,060/year) to $455 per 
week ($23,660/year), a large increase by almost any yardstick. The $455 
minimum salary level, as shown in Table 6, is an unprecedented increase 
in both absolute dollar amount and percentage terms. The $455 minimum 
salary level is a $10.34 annual dollar increase from 1975 to 2004, the 
highest annual dollar increase in the 65-year history of the FLSA.

                                                     Table 6.--Comparison of Salary Level Increases
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                       Executive long
                                                                       Years since      test salary     Dollar change    Percent change   Average annual
                                                                      last increase        level                                          dollar change
--------------------------------------------------------------------------------------------------------------------------------------------------------
1949...............................................................  ...............              $55  ...............  ...............  ...............
1958...............................................................                9               80               25             45.5             2.78
1963...............................................................                5              100               20             25.0             4.00
1970...............................................................                7              125               25             25.0             3.57
1975...............................................................                5              155               30             24.0             6.00
2004...............................................................               29              455              300            193.5            10.34
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The Department believes that a $455 minimum salary level for 
exemption is consistent with the Department's historical practice of 
looking to ``points near the lower end of the current range of 
salaries'' to determine an appropriate salary level. A minimum salary 
level of $455 per week represents the lowest 10.2 percent of likely 
exempt employees in the lower-wage retail industry; the lowest 8.2 
percent of likely exempt employees in the South; and the lowest 6.7 
percent of all likely exempt employees. The $455 level also represents 
the lowest 20.0 percent of salaried employees in the retail industry; 
the lowest 20.2 percent of salaried employees in the South; and the 
lowest 16.8 percent of all salaried employees. As shown in Table 5, the 
$455 minimum salary level also automatically excludes 46.4 percent of 
hourly workers from the exemptions. In addition, based on the comments 
from the business community, the Department believes this increase is 
clearly at the upper boundary of what is capable of being absorbed by 
employers without major disruptions to local labor markets. 
Accordingly, the Department concludes that a minimum salary level of 
$455 per week ``will assist in demarcating the `bona fide' executive, 
administrative and professional employees without disqualifying any 
substantial number of such employees.'' Kantor Report at 5.
    Concerns by employer groups that a $455 per week salary level will 
disproportionately impact small businesses, businesses in rural areas, 
and retail businesses are misplaced. The Department examined the 2002 
CPS data broken out by industry and geographic area, and as in the 
Kantor Report, selected a salary level ``near the lower end of the 
current range of salaries'' to ensure the minimum salary level is 
practicable over the broadest possible range of industries, business 
sizes and geographic regions. Kantor Report at 5.
    Similarly, the AFL-CIO's attempt to apply the Kantor Report 
analysis, yielding a result of $610 per week, is also flawed. Rather 
than starting with the 2002 CPS data, the AFL-CIO began its analysis by 
identifying the salary level for the lowest 10 percent of likely exempt 
employees from the 1998 data in the GAO Report. Then, the AFL-CIO 
adjusted that salary level for inflation by applying the Employment 
Cost Index. The problem with this approach is that the GAO Report 
methodology, as discussed in Section VI, inappropriately excludes from 
the analysis exempt employees in lower-wage regions and industries. The 
AFL-CIO then exacerbates the GAO's biased result by using the ECI to 
adjust the 1998 data, rather than using the available 2002 data. Table 
4 contains more accurate data on current salary ranges of likely exempt 
employees. Applying these data, the AFL-CIO suggestion of a $610 salary 
level represents approximately the lowest 17 percent of all likely 
exempt salaried employees, the lowest 21 percent of such employees in 
the South, and the lowest 25 percent of such employees in retail--not 
the lowest 10 percent used by Kantor.
    Finally, the comments raise a number of additional issues which the 
Department considered but did not find persuasive. First, several 
commenters urge the Department to adopt different salary levels for 
different areas of the country (or urban and rural areas) or for 
different kinds or sizes of businesses. The Department does not believe 
that this approach is administratively feasible because of the large 
number of different salary levels this would require. In addition, we 
believe that the traditional methodology addresses the concerns of such 
commenters by looking toward the lower end of the salary levels and 
considering salaries in the South and in the retail industry. We also 
considered but rejected comments requesting a special rule for part-
time employees. The regulations have never included a different salary 
level for part-time employees, and such a rule appears unnecessary.
    Second, some commenters ask the Department to provide for future 
automatic increases of the salary levels tied to some inflationary 
measure, the minimum wage or prevailing wages. Other commenters suggest 
that the Department provide some mechanism for regular review or 
updates at a fixed interval, such as every five years. Commenters who 
made these suggestions are concerned that the Department will let 
another 29 years pass before the salary levels are again increased. The 
Department intends in the future to update the salary levels on a more 
regular basis, as it did prior to 1975, and believes that a 29-year 
delay is unlikely to reoccur. The salary levels should be adjusted when 
wage survey data and other policy concerns support such a change. 
Further, the Department finds nothing in the legislative or regulatory 
history that would support indexing or automatic increases. Although an 
automatic indexing mechanism has been adopted under some other 
statutes, Congress has not adopted indexing for the Fair Labor 
Standards Act. In 1990, Congress modified the FLSA to exempt certain 
computer employees paid an hourly wage of at least 6\1/2\ times the 
minimum wage, but this standard lasted only until the next minimum wage 
increase six years later. In 1996, Congress froze the minimum hourly 
wage for the computer exemption at $27.63 (6\1/2\ times the 1990 
minimum wage of $4.25 an hour). In addition, as noted above, the 
Department has repeatedly rejected requests to mechanically rely on 
inflationary measures when setting the salary levels in the past 
because of

[[Page 22172]]

concerns regarding the impact on lower-wage geographic regions and 
industries. This reasoning applies equally when considering automatic 
increases to the salary levels. The Department believes that adopting 
such approaches in this rulemaking is both contrary to congressional 
intent and inappropriate.
    Third, the Puerto Rico Chamber of Commerce recommends a special 
salary test for Puerto Rico of $360 per week (the same as the proposed 
salary level test for American Samoa). The Department considered this 
comment and concluded that such a differential in Puerto Rico would be 
inconsistent with the FLSA Amendments of 1989 (Pub. L. 101-157), which 
deleted Puerto Rico and the Virgin Islands from the special industry 
wage order proceedings under section 6(a)(1) of the FLSA allowing 
industry minimum wage rates that are lower than the U.S. mainland 
minimum wage. Before 1989, Puerto Rico, the Virgin Islands, and 
American Samoa all had minimum wages below the U.S. mainland and 
consequently lower salary level tests traditionally were established 
for employees in these jurisdictions. However, since Puerto Rico is now 
subject to the same minimum wage as the U.S. mainland, there is no 
longer a basis for a special salary level test. The final rule 
maintains the special minimum salary level for employees in American 
Samoa at approximately the same ratio to the mainland test (84 percent) 
used under the existing rule--which computes to $380 per week.
    Fourth, the National Association of Chain Drug Stores (NACDS) 
comments that the exception to a minimum salary test for physicians 
should apply to pharmacists. The NACDS states that the educational 
requirements and professional standards for pharmacists have increased 
substantially since these regulations were last revised. For example, 
pharmacists graduating today complete a doctoral program before they 
are licensed to practice. In the Department's view, pharmacists can 
qualify, along with doctors, teachers, lawyers, etc., as professionals 
under the FLSA exemption. However, the fact that the standards for the 
profession are rising does not mean that the minimum salary requirement 
to be exempt should be removed. The Department also considered but 
rejected suggestions from commenters that we remove the salary 
requirements for registered nurses and others. The Department does not 
think it is appropriate to expand the original, limited number of 
professions that were not subject to the salary test.
    Fifth, several commenters favor a final rule that would eliminate 
the salary tests entirely. These commenters point out that this 
approach would eliminate concerns about how the salary levels might 
affect lower wage regions and industries. They argue that the duties 
tests have been the only active tests for some time, given the erosion 
of the value of the salary levels in the prior existing rule. Fairfax 
County states that the salary test should be eliminated because of the 
wide variation across the country in living costs and labor market 
viability. The National Automobile Dealers Association and others 
comment that the salary tests were simply unnecessary. The Central Iowa 
Society for Human Resource Management comments that job content should 
be the deciding factor, not salary level. On the other hand, many 
commenters oppose this approach. The Department has carefully 
considered the comments in this area and has not adopted this 
alternative, among other reasons, because this approach would be 
inconsistent with the Department's long-standing recognition that the 
amount of salary paid to an employee is the ``best single test'' of 
exempt status. 1940 Stein Report at 19. Moreover, this alternative 
would require a significant restructuring of the regulations and 
probably the use of more rigid duties tests. Thus, this alternative 
conflicts with a key purpose of this rulemaking, namely, to simplify 
and streamline these regulations.
Section 541.601 Highly Compensated Employees
    Proposed section 541.601 set forth a new rule for highly 
compensated employees. Under the proposed rule, an employee who had a 
guaranteed total annual compensation of at least $65,000 was deemed 
exempt under section 13(a)(1) of the Act if the employee performed an 
identifiable executive, administrative or professional function as 
described in the standard duties tests. Subsection (b) of the proposed 
rule defined ``total annual compensation'' to include ``base salary, 
commissions, non-discretionary bonuses and other non-discretionary 
compensation'' as long as that compensation was ``paid out to the 
employee as due on at least a monthly basis.'' Proposed subsection (b) 
also provided for prorating the $65,000 annual compensation for 
employees who work only part of the year, and allowed an employer to 
make a lump-sum payment sufficient to bring the employee to the $65,000 
level by the next pay period after the end of the year. Proposed 
subsection (c) stated that a ``high level of compensation is a strong 
indicator of an employee's exempt status, thus eliminating the need for 
a detailed analysis of the employee's job duties,'' and provided an 
example to illustrate the duties requirement applicable to highly 
compensated employees under this rule: ``an employee may qualify as a 
highly compensated executive employee, for example, if the employee 
directs the work of two or more other employees, even though the 
employee does not have authority to hire and fire.'' Proposed 
subsection (d) provided that the highly compensated rule applied only 
to employees performing office or non-manual work, and was not 
applicable to ``carpenters, electricians, mechanics, plumbers, iron 
workers, craftsmen, operating engineers, longshoremen, construction 
workers, teamsters and other employees who perform manual work * * * no 
matter how highly paid they might be.''\16\
---------------------------------------------------------------------------

    \16\ Even if the requirements of section 541.601 are not met, an 
employee may still be tested for exemption under the standard tests 
for the executive, administrative or professional exemption.
---------------------------------------------------------------------------

    The final section 541.601 raises the total annual compensation 
required for exemption as a highly compensated employee to $100,000, an 
increase of $35,000 from the proposal. The final rule also makes a 
number of additional changes, including: Requiring that the total 
annual compensation must include at least $455 per week paid on a 
salary or fee basis; modifying the definition of ``total annual 
compensation'' to include commissions, nondiscretionary bonuses and 
other nondiscretionary compensation even if they are not paid to the 
employee on a monthly basis; allowing the make-up payment to be paid 
within one month after the end of the year and clarifying that such a 
payment counts toward the prior year's compensation; allowing a similar 
make-up payment to employees who terminate employment before the end of 
the year; and deleting the word ``guaranteed'' to clarify that 
compliance with this provision does not create an employment contract. 
In addition, the final rule modifies the duties requirement to provide 
that the employee must ``customarily and regularly'' perform one or 
more exempt duties. Finally, subsection (d) in the final rule has been 
modified to better reflect the language of new subsection 541.3(a) and 
now provides:

    This section applies only to employees performing office or non-
manual work. Thus, for example, non-management production-line 
workers and non-management employees in maintenance, construction 
and similar occupations such as carpenters, electricians, mechanics, 
plumbers, iron workers, craftsmen, operating engineers,

[[Page 22173]]

longshoremen, construction workers, laborers and other employees who 
perform work involving repetitive operations with their hands, 
physical skill and energy are not exempt under this section no 
matter how highly paid they might be.

    Comments on proposed section 541.601 disagree sharply. The AFL-CIO 
and other affiliated unions object entirely to section 541.601, 
claiming the section is beyond the scope of the Department's authority. 
The unions characterize this section as a ``salary-only'' test that 
will exempt every employee earning above the highly compensated salary 
level. The unions argue that Congress did not intend to exempt all 
employees who are paid over a certain level. If Congress intended to 
exempt employees who are paid over a certain level, the unions argue, 
it could easily have done so. Comments submitted by unions and other 
employee advocates also argue that the highly compensated test should 
be deleted entirely because proposed section 541.601 will allow the 
exemption for employees traditionally entitled to overtime pay. Such 
commenters also argue that the proposed $65,000 level is too low and 
the proposed duties requirements too lax.
    In contrast, organizations representing employer interests 
generally support the new provision, although a number of these 
commenters ask for technical modifications. However, some employer 
commenters argue that the total annual compensation requirement of 
$65,000 per year is too high. In addition, a significant number of 
employer commenters find a duties requirement in proposed section 
541.601 unnecessary, and ask the Department to eliminate it. The 
Morgan, Lewis & Bockius law firm, for example, argues that the duties 
test for highly compensated employees can be eliminated because 
employees paid more than 80 percent of all full-time salaried workers 
are not the persons Congress sought to protect from exploitation when 
it passed the FLSA. The U.S. Chamber of Commerce comments that a 
``bright line'' (i.e., salary only) test for highly compensated 
employees would add significant clarity to the regulations and is 
consistent with the historical approach of guaranteeing overtime 
protections to workers earning below the minimum salary level, 
regardless of duties performed. The Society for Human Resource 
Management adds that high compensation is indicative of likely exempt 
status and a bright line rule for highly compensated employees based on 
earnings alone would eliminate the need for an expensive and 
potentially confusing legal inquiry into whether the employee's duties 
truly are exempt.
    The Department agrees with the AFL-CIO that the Secretary does not 
have authority under the FLSA to adopt a ``salary only'' test for 
exemption, and rejects suggestions from employer groups to do so. 
Section 13(a)(1) of the FLSA requires that the Secretary ``define and 
delimit'' the terms executive, administrative and professional 
employee. The Department has always maintained that the use of the 
phrase ``bona fide executive, administrative or professional capacity'' 
in the statute requires the performance of specific duties. For 
example, the 1940 Stein report stated: ``Surely if Congress had meant 
to exempt all white collar workers, it would have adopted far more 
general terms than those actually found in section 13(a)(1) of the 
act.'' 1940 Stein Report at 6-7. In fact, as the AFL-CIO and other 
unions note, Congress rejected several statutory amendments during the 
FLSA's early history which would have established ``salary only'' 
tests. In 1940, for example, Congress rejected an amendment which would 
have provided the exemption to all employees earning more than $200 per 
week. H.R. 8624, 76th Cong. (1940). See also Deborah Malamud, 
Engineering the Middle Class: Class Line-Drawing in New Deal Hours 
Legislation, 96 Mich. L. Rev. 2212, 2299-2303 (August 1998) (discussing 
four separate proposals to exempt all highly paid employees between 
1939 and 1940). Finally, as the unions also correctly note, in Jewell 
Ridge Coal Corp. v. United Mine Workers of America, Local No. 6167, 325 
U.S. 161, 167 (1949), the Supreme Court stated that ``employees are not 
to be deprived of the benefits of the Act simply because they are well 
paid.'' See also Overnite Motor Transportation Co. v. Missel, 316 U.S. 
572, 578 (1942) (the primary purposes of the overtime provisions were 
to ``spread employment'' and assure workers additional pay ``to 
compensate them for the burden of a workweek beyond the hours fixed in 
the Act'').
    However, the Department rejects the view that section 541.601 does 
not contain a duties test. As noted above, the proposed section did 
require that an exempt highly compensated employee perform ``any one or 
more exempt duties or responsibilities of an executive, administrative 
or professional employee identified in subparts B, C or D of this 
part.'' Some commenters find this language insufficient and confusing, 
arguing that it would allow employees to qualify for exemption under 
section 541.601 even if they performed only a single exempt duty once a 
year. The Department never intended to exempt as ``highly compensated'' 
employees those who perform exempt duties only on an occasional or 
sporadic basis. Accordingly, to clarify this duties requirement for 
highly compensated employees and ensure exempt duties remain a 
meaningful aspect of this test, the final rule adds to section 
541.601(a) that an employee must ``customarily and regularly'' perform 
work that satisfies one or more of the elements of the standard duties 
test for an executive, administrative or professional employee.
    The Department has the authority to adopt a more streamlined duties 
test for employees paid at a higher salary level. Indeed, no commenter 
challenges this authority. The Part 541 regulations have contained 
special provisions for ``high salaried'' employees since 1949. Although 
commonly referred to as the ``short'' duties tests today, the existing 
regulations actually refer to these tests as the ``special proviso for 
high salaried executives'' (29 CFR 541.119), the ``special proviso for 
high salaried administrative employees'' (29 CFR 541.214), and the 
``special proviso for high salaried professional employees'' (29 CFR 
541.315). Perhaps the courts appropriately refer to these special 
provisions as the ``short'' tests today because the associated salary 
level is only $250 per week ($13,000 annually)--hardly ``high 
salaried'' in today's economy.
    In any case, these special provisions applying more lenient duties 
standards to employees earning higher salaries have been in the Part 
541 regulations for 52 years. The rationale for a highly compensated 
test was set forth in the 1949 Weiss Report and is still valid today:

    The experience of the Divisions has shown that in the categories 
of employees under consideration the higher the salaries paid the 
more likely the employees are to meet all the requirements for 
exemption, and the less productive are the hours of inspection time 
spent in analysis of the duties performed. At the higher salary 
levels in such classes of employment, the employees have almost 
invariably been found to meet all the other requirements of the 
regulations for exemption. In the rare instances when these 
employees do not meet all the other requirements of the regulations, 
a determination that such employees are exempt would not defeat the 
objectives of section 13(a)(1) of the act. The evidence supported 
the experience of the Divisions, and indicated that a short-cut test 
of exemption along the lines suggested above would facilitate the 
administration of the regulations without defeating the purposes of 
section 13(a)(1). A number of management representatives stated that 
such a provision

[[Page 22174]]

would facilitate the classification of employees and would result in 
a considerable saving of time for the employer.
    The definition of bona fide ``executive,'' ``administrative,'' 
or ``professional'' in terms of a high salary alone is not 
consistent with the intent of Congress as expressed in section 
13(a)(1) and would be of doubtful legality since many persons who 
obviously do not fall into these categories may earn large salaries. 
The Administrator would undoubtedly be exceeding his authority if he 
included within the definition of these terms craftsmen, such as 
mechanics, carpenters, or linotype operators, no matter how highly 
paid they might be. A special proviso for high salaried employees 
cannot be based on salary alone but must be drawn in terms which 
will actually exclude craftsmen while including only bona fide 
executive, administrative, or professional employees. The evidence 
indicates that this objective can best be achieved by combining the 
high salary requirements with certain qualitative requirements 
relating to the work performed by bona fide executive, 
administrative or professional employees, as the case may be. Such 
requirements will exclude craftsmen and others of the type not 
intended to come within the exemption.

1949 Weiss Report at 22-23.
    Section 541.601 is merely a reformulation of such a test. Although 
final section 541.601 strikes a slightly different balance than the 
existing regulations `` a much higher salary level associated with a 
more flexible duties standard `` that balance, in the experience of the 
Department, still meets the goals of the 1949 Weiss Report of providing 
a ``short-cut test'' that combines ``high salary requirements with 
certain qualitative requirements relating to the work performed by bona 
fide executive, administrative or professional employees,'' while 
excluding ``craftsmen and others of the type not intended to come 
within the exemption.'' Thus, the final section 541.601 provides that 
an exempt highly compensated employee must earn $100,000 per year and 
``customarily and regularly'' perform exempt duties, and that 
``carpenters, electricians, mechanics, plumbers, iron workers, 
craftsmen, operating engineers, longshoremen, construction workers, 
laborers and other employees who perform work involving repetitive 
operations with their hands, physical skill and energy are not exempt 
under this section no matter how highly paid they might be.''
    The Department also received a substantial number of comments on 
the proposed $65,000 earnings level. Some commenters such as the 
National Association of Manufacturers, the American Corporate Counsel 
Association, the Society for Human Resource Management and the FLSA 
Reform Coalition endorse the proposed $65,000 level as appropriately 
serving the purposes of the FLSA. However, other employer groups state 
that the salary level is too high. The U.S. Chamber of Commerce asks 
the Department to lower the earnings level to $50,000 per year. The 
National Retail Federation also suggests a $50,000 level, arguing that 
the $65,000 standard is prohibitively high for most retailers. The 
National Grocers Association and the International Mass Retail 
Association similarly state that $65,000 is far too high a level, 
particularly in the retail industry. The National Association of 
Convenience Stores suggests that the Department should set the salary 
level for highly compensated employees at $36,000 per year or, in the 
alternative, at a level related to the minimum salary level for 
exemption, such as $44,200 per year, twice the proposed minimum.
    Other commenters, including labor unions, argue that $65,000 is too 
low. The National Employment Lawyers Association argues that the 
$65,000 proposed level is not much higher than the annualized level of 
$57,470 per year for computer employees exempt under section 13(a)(17) 
of the FLSA, which retains substantial duties tests. The National 
Association of Wage Hour Consultants notes that, although the top 20 
percent of salaried employees earn $65,000 in base wages, that number 
does not include other types of compensation (e.g., commissions) that 
the proposal includes within the definition of ``total annual 
compensation.'' Accordingly, this commenter argues, the Department 
either should raise the salary level to $80,000 per year or modify the 
provision to exclude non-salary compensation. The American Federation 
of Government Employees suggests that the salary level should be fixed 
at the rate for a federal GS-15/step 1 employee ($85,140 per year, at 
the time the comment was submitted, without the locality pay 
differentials that can raise the total to in excess of $100,000). Two 
employers suggest that the section 541.601 salary level should conform 
to the Internal Revenue Service pay threshold for highly compensated 
employees, which is currently $90,000 per year.
    The Department continues to find that employees at higher salary 
levels are more likely to satisfy the requirements for exemption as an 
executive, administrative or professional employee. The purpose of 
section 541.601 is to provide a ``short-cut test'' for such highly 
compensated employees who ``have almost invariably been found to meet 
all the other requirements of the regulations for exemption.'' 1949 
Weiss Report at 22. Thus, the highly compensated earnings level should 
be set high enough to avoid the unintended exemption of large numbers 
of employees--such as secretaries in New York City or Los Angeles--who 
clearly are outside the scope of the exemptions and are entitled to the 
FLSA's minimum wage and overtime pay protections.
    Accordingly, the Department rejects the comments from employer 
groups that the highly compensated salary level should be reduced to as 
low as $36,000 per year, and instead sets the highly compensated test 
at $100,000 per year. In the Department's experience, employees earning 
annual salaries of $36,000 often fail the duties tests for exemption, 
while virtually every salaried ``white collar'' employee with a total 
annual compensation of $100,000 per year would satisfy any duties test. 
Employees earning $100,000 or more per year are at the very top of 
today's economic ladder, and setting the highly compensated test at 
this salary level provides the Department with the confidence that, in 
the words of the Weiss report: ``in the rare instances when these 
employees do not meet all other requirements of the regulations, a 
determination that such employees are exempt would not defeat the 
objectives of section 13(a)(1) of the Act.'' 1949 Weiss Report at 22-
23.
    Only roughly 10 percent of likely exempt employees who are subject 
to the salary tests earn $100,000 or more per year (Table 4). This is 
broadly symmetrical with the Kantor approach of setting the minimum 
salary level for exemption at the lowest 10 percent of likely exempt 
employees. In contrast, approximately 35 percent of likely exempt 
employees subject to the salary tests exceed the proposed $65,000 
salary threshold. In addition, less than 1 percent of full-time hourly 
workers (0.6 percent) earn $100,000 or more (Table 5). Thus, at the 
$100,000 or more per year salary level, the highly compensated 
provision will not be available to the vast majority of both salaried 
and hourly employees. Unlike the $65,000 or more per year salary level, 
setting the highly compensated test at the $100,000 avoids the 
potential of unintended exemptions of large numbers of employees who 
are not bona fide executive, administrative or professional employees. 
At the same time, because the Department believes that many employees 
who earn between $65,000 and $100,000 per year also satisfy the 
standard duties tests, the section 13(a)(1) exemptions will still be 
available for such employees. The

[[Page 22175]]

Department believes this $100,000 level is also necessary to address 
commenters' concerns regarding the associated duties test, the 
possibility that workers in high-wage regions and industries could 
inappropriately lose overtime protection, and the effect of future 
inflation. The Department recognizes that the duties test for highly 
compensated employees in final section 541.601 is less stringent than 
the existing ``short'' duties tests associated with the existing 
special provisions for ``high salaried'' employees (29 CFR 541.119, 
541.214, 541.315). But this change is more than sufficiently off-set by 
the $87,000 per year increase in the highly compensated level. Under 
the existing regulations, a ``high salaried executive'' earns only 
$13,000 annually, which is approximately 60 percent higher than the 
minimum salary level of $8,060. Under the final rule, a highly 
compensated employee must earn $100,000 per year, which is more than 
400 percent higher than the final minimum salary level of $23,660 
annually.\17\
---------------------------------------------------------------------------

    \17\ In addition, the final compensation level of $100,000 for 
highly compensated employees is almost twice the highest salary 
level that the AFL-CIO advocates as necessary to update the salary 
level associated with the existing ``short'' duties tests. The AFL-
CIO did not suggest an alternative salary level for section 541.601, 
likely because of its strong objections to this section as a whole. 
However, the AFL-CIO suggests that the salary level associated with 
the existing ``short'' duties test should be increased either to 
$855 per week ($44,460 annually) if based on inflation or to $980 
per week ($50,960 annually) if based on the Kantor Report.
---------------------------------------------------------------------------

    A number of commenters question the definition of ``total annual 
compensation'' and the mechanics of applying the highly compensated 
test. First, a number of commenters are concerned that the requirement 
that an employee must be ``guaranteed'' the total annual compensation 
amount would be interpreted as creating an employment contract for an 
employee who otherwise would be an at-will employee. Because the 
Department did not intend this result, we have deleted the word 
``guaranteed.''
    Second, several commenters, including the Morgan, Lewis & Bockius 
law firm, the Securities Industry Association and the HR Policy 
Association, suggest that employers should be permitted to prorate the 
total annual compensation amount if an employee uses leave without pay, 
such as under the Family and Medical Leave Act. The Department does not 
believe that such deductions are appropriate. The test for highly 
compensated employees is intended to provide an alternative, simplified 
method of testing a select group of employees for exemption. We believe 
that the test for highly compensated employees should remain 
straightforward and easy to administer by maintaining a single, overall 
compensation figure applicable to every employee. Determining the 
variety of reasons that might qualify for deduction, such as for a 
medical leave of absence, a military leave of absence, or an 
educational leave of absence, and establishing rules about the lengths 
of time such absences must cover before deductions could be made, would 
unnecessarily complicate this rule.
    Third, because the final rule increases the compensation level 
significantly, from $65,000 to $100,000, the Department agrees with 
comments that the definition of ``total annual compensation'' should 
include commissions, nondiscretionary bonuses and other 
nondiscretionary compensation earned during a 52-week period, even if 
such compensation is not ``paid out to the employee as due on at least 
a monthly basis'' as proposed in subsection 541.601(b)(1). Numerous 
commenters state that such payments often are paid on a quarterly or 
less frequent basis. Accordingly, we have deleted this requirement from 
the final rule. However, we have not adopted comments suggesting that 
discretionary bonuses should be included in ``total annual 
compensation'' because there is not enough information in the record on 
the frequency, size and types of such payments. The Department also 
does not agree with comments that the costs of employee benefits, such 
as payments for medical insurance and matching 401(k) pension plan 
payments, should be included in computing total annual compensation. 
The inclusion of such costs in the calculations for testing highly 
compensated employees would make the test administratively unwieldy.
    Fourth, final subsection 541.601(b)(1) contains a new safeguard 
against possible abuses that are of concern to some commenters, 
including the AFL-CIO: the ``total annual compensation'' must include 
at least $455 per week paid on a salary or fee basis. This change will 
ensure that highly compensated employees will receive at least the same 
base salary throughout the year as required for exempt employees under 
the standard tests, while still allowing highly compensated employees 
to receive additional income in the form of commissions and 
nondiscretionary bonuses. As explained below, the salary basis 
requirement is a valuable and easily applied criterion that is a 
hallmark of exempt status. Accordingly, the Department has modified the 
final subsection 541.601(b)(1) to provide:

    ``Total annual compensation'' must include at least $455 per 
week paid on a salary or fee basis. Total annual compensation may 
also include commissions, nondiscretionary bonuses and other 
nondiscretionary compensation earned during a 52-week period. Total 
annual compensation does not include board, lodging and other 
facilities as defined in Sec.  541.606, and does not include 
payments for medical insurance, payments for life insurance, 
contributions to retirement plans and the cost of other fringe 
benefits.

    Fifth, the final rule also continues to permit a catch-up payment 
at the end of the year. Such a catch-up payment is necessary because, 
according to some commenters, many highly compensated employees receive 
commissions, profit sharing and other incentive pay that may not be 
calculated or paid by the end of the year. However, some commenters 
state that it would be difficult to compute the amount of any such 
payment due by the first pay period following the end of the year, as 
required by proposed section 541.601(b)(2). They emphasize that it 
takes some time after the close of the year to compute the amounts of 
any commissions or bonuses that are due, such as those based on total 
sales or profits. Thus, for example, the Mortgage Bankers Association, 
the Consumer Bankers Association and the Consumer Mortgage Coalition 
suggest that employers be allowed one month to make the catch-up 
payment. The Department recognizes that an employer may need some time 
after the close of the year to make calculations and determine the 
amount of any catch-up payment that is due. Accordingly, we have 
clarified that such a payment may be made during the last pay period of 
the year or within one month after the close of the year. The final 
rule also provides that a similar, but prorated, catch-up payment may 
be made within one month after termination of employment for employees 
whose employment ends before the end of the 52-week period. Finally, 
the final rule clarifies that any such payments made after the end of 
the year may only be counted once, toward the ``total annual 
compensation'' for the preceding year. To ensure appropriate evidence 
is maintained of such catch-up payments, employers may want to document 
and advise the employee of the purpose of the payment, although this is 
not a requirement of the final rule.
    Finally, some commenters suggest applying the highly compensated 
test to outside sales and computer employees. Outside sales employees 
have never been subject to a salary level or a salary

[[Page 22176]]

basis test as a requirement for exemption, and the Department did not 
propose to add these requirements. Since outside sales employees are 
not subject to the standard salary level test, it would not be 
appropriate to apply the highly compensated test to these employees. We 
have not applied the highly compensated test to computer employees 
because, as explained under subpart E, Congress has already created 
special compensation provisions for this industry in section 13(a)(17) 
of the Act.
Section 541.602 Salary Basis
    In its proposal, the Department retained the requirement that, to 
qualify for the executive, administrative or professional exemption, an 
employee must be paid on a ``salary basis.'' Proposed section 
541.602(a) set forth the general rules for determining whether an 
employee is paid on a salary basis, which were retained virtually 
unchanged from the existing regulation. Under this subsection (a), an 
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.'' With a few identified exceptions, 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.'' Subsection 
(a) also provides that an ``employee is not paid on a salary basis if 
deductions from the employee's predetermined compensation are made for 
absences occasioned by the employer or by the operating requirements of 
the business. If the employee is ready, willing and able to work, 
deductions may not be made for time when work is not available.'' 
Exempt employees, however, ``need not be paid for any workweek in which 
they perform no work.''
    Proposed subsection (b) included several exceptions to the salary 
basis rules that are in the existing regulations. An employer may make 
deductions from the guaranteed pay: when the employee is ``absent from 
work for a full day for personal reasons, other than sickness or 
disability''; for absences of a full day or more due to sickness or 
disability, if taken in accordance with a bona fide plan, policy or 
practice providing wage replacement benefits; for any hours not worked 
in the initial and final weeks of employment; for hours taken as unpaid 
FMLA leave; as offsets for amounts received by an employee for jury or 
witness fees or military pay; or for penalties imposed in good faith 
for ``infractions of safety rules of major significance.'' The proposed 
subsection (b) also added a new exception to the salary basis rule for 
deductions for ``unpaid disciplinary suspensions of a full day or more 
imposed in good faith for infractions of workplace conduct rules,'' 
such as rules prohibiting sexual harassment or workplace violence. Such 
suspensions must be imposed ``pursuant to a written policy applied 
uniformly to all workers.''
    The Department's final rule retains both the requirement that an 
exempt employee must be paid on a ``salary basis'' and the exceptions 
to this rule specified in the proposal, with only a few minor 
modifications. We have changed the phrase ``a full day or more'' to 
read ``one or more full days'' throughout section 541.602 to clarify 
that certain deductions can only be made for full day increments. In 
addition, the final rule modifies the text of the new disciplinary 
deduction exception to indicate more clearly that the disciplinary 
policy must be applicable to all employees.
    A number of commenters, such as the Fisher & Phillips law firm, the 
National Association of Convenience Stores and the American Bakers 
Association, urge the Department to abandon the salary basis test 
entirely, arguing that this requirement serves as a barrier to the 
appropriate classification of exempt employees. These comments note 
that the explanation in the proposal that payment on a salary basis is 
the quid pro quo for an exempt employee not receiving overtime pay 
reflects an inappropriate regulation of the compensation of an 
otherwise exempt employee.
    In contrast, commenters such as the AFL-CIO and the Goldstein, 
Demchak, Baller, Borgen & Dardarian law firm view the salary basis 
requirement as a hallmark of exempt status. In fact, many commenters 
such as the New York State Public Employees Federation, the National 
Employment Lawyers Association, and the National Employment Law 
Project, request that the salary basis test be tightened.
    After considering the salary basis test in light of its historical 
context and judicial acceptance, the Department has decided that it 
should be retained. As early as 1940, the Department noted that there 
was ``surprisingly wide agreement'' among employers and employees 
``that a salary qualification in the definition of the term `executive' 
is a valuable and easily applied index to the `bona fide' character of 
the employment. * * * '' 1940 Stein Report at 19. The basis of that 
agreement was that ``[t]he term `executive' implies a certain prestige, 
status, and importance'' that is captured by a salary test. Id. Also, 
because ``executive'' employees are denied the protection of the Act, 
``[i]t must be assumed that they enjoy compensatory privileges,'' 
including a salary ``substantially higher'' than the minimum wages 
guaranteed under the Act. Id. The 1940 Stein Report recommended a 
salary test for executives that would be satisfied if the ``employee is 
guaranteed a net compensation of not less than $30 a week `free and 
clear.' '' Id. at 23 (emphasis added). The Report concluded that the 
inclusion of a salary test was vital in defining administrative and 
professional employees as well. Id. at 26 (``[A] salary criterion 
constitutes the best and most easily applied test of the employer's 
good faith in claiming that the person whose exemption is desired is 
actually of such importance to the firm that he is properly describable 
as an employee employed in a bona fide administrative capacity''); id. 
at 36 ([I]n order to avoid disputes, to assist in the effective 
enforcement of the act and to prevent abuse, it appears essential * * * 
to include a salary test in the definition [of professional]'').
    Based on the 1940 Stein Report's recommendation, the Department 
promulgated regulations providing that an exempt executive must be 
``compensated for his services on a salary basis at not less than $30 
per week.'' 29 CFR 541(e) (1940 Supp.). The regulations required that 
exempt administrative and professional employees (except physicians and 
attorneys) must be paid ``on a salary or fee basis at a rate of not 
less than $200 per month.'' 29 CFR 541.2(a) (administrative), 541.3(b) 
(professional) (emphasis added).
    In 1944, the Wage and Hour Division issued Release No. A-9, which 
addressed the meaning of ``salary basis.'' The Release stated that an 
employee will be considered to be paid on a salary basis if ``under his 
employment agreement he regularly receives each pay period, on a 
weekly, biweekly, semi-monthly, monthly or annual basis, a 
predetermined amount constituting all or part of his compensation, 
which amount is not subject to reduction because of variations in the 
number of hours worked or in the quantity or quality of the work 
performed during the pay period.'' Release No. A-9 (Aug. 24, 1944), 
reprinted in Wage & Hour Manual (BNA) 719 (cum. ed. 1944-1945). The 
Release further explained that because ``bona fide executive, 
administrative, and professional employees are normally allowed some 
latitude with respect to the time spent at work,'' such employees 
should

[[Page 22177]]

generally be free to go home early or occasionally take a day off 
without reduction in pay. Id.
    After hearings conducted in 1947, the Wage and Hour Division 
recommended retention of the salary basis test in the 1949 Weiss 
Report, stating:

    The evidence at the hearing showed clearly that bona fide 
executive, administrative, and professional employees are almost 
universally paid on a salary or fee basis. Compensation on a salary 
basis appears to have been almost universally recognized as the only 
method of payment consistent with the status implied by the term 
``bona fide'' executive. Similarly, payment on a salary (or fee) 
basis is one of the recognized attributes of administrative and 
professional employment.

    1949 Weiss Report at 24. Based on the Weiss Report recommendations, 
the Department issued revised Part 541 regulations in 1949 that 
retained the salary basis test. 29 CFR 541.1(f), 541.2(e), 541.3(e) 
(1949 Supp.). Shortly thereafter, the Department published the first 
version of 29 CFR 541.118 (1949 Supp.) in a new Subpart B, entitled 
``Interpretations.'' Section 541.118(a) provided as follows:

    An employee will be considered to be paid on a salary basis 
within the meaning of the regulations in Subpart A of this part, if 
under his employment agreement he regularly receives each pay period 
on a weekly, or less frequent basis, a predetermined amount 
constituting all or part of his compensation, which amount is not 
subject to reduction because of variations in the number of hours 
worked in the workweek or in the quality or quantity of the work 
performed. The employee must receive his full salary for any week in 
which he performs any work without regard to the number of days or 
hours worked.

    In 1954, the Administrator issued a revised section 541.118(a) that 
retained the salary basis test, but added a number of exceptions to the 
rule. In 1958, the Wage and Hour Division again conducted hearings for 
the purpose of determining whether the salary levels should be changed. 
Although the resulting 1958 Kantor Report related primarily to the 
salary levels, it reiterated that salary is a ``mark of [the] status'' 
of an exempt employee, and reaffirmed the criterion's importance as an 
enforcement tool, noting that the Department had ``found no 
satisfactory substitute for the salary tests.'' 1958 Kantor Report at 
2-3. Since 1954, the salary basis test has remained unchanged.
    The Department thus has determined over the course of many years 
that executive, administrative and professional employees are nearly 
universally paid on a salary basis. This practice reflects the widely-
held understanding that employees with the requisite status to be bona 
fide executives, administrators or professionals have discretion to 
manage their time. Such employees are not paid by the hour or task, but 
for the general value of services performed. See Kinney v. District of 
Columbia, 994 F.2d 6, 11 (D.C. Cir. 1993); Brock v. Claridge Hotel & 
Casino, 846 F.2d 180, 184 (3d Cir.), cert. denied, 488 U.S. 925 (1988). 
There is nothing in this rulemaking record that contradicts the 
Department's long-standing view. The comments accusing the Department 
of improperly regulating the wages of exempt employees miss the mark. 
The quid pro quo referenced in the proposal was simply a way to explain 
that payment on a salary basis reflects an employee's discretion to 
manage his or her time and to receive compensatory privileges 
commensurate with exempt status.
    Many commenters, including the FLSA Reform Coalition, the Fisher & 
Phillips law firm, the U.S. Chamber of Commerce, the HR Policy 
Association and the Oklahoma Office of Personnel Management, support 
the proposed new exception to the salary basis rule for ``unpaid 
disciplinary suspensions of a full day or more imposed in good faith 
for infractions of workplace conduct rules.'' These commenters note 
that this additional exception will permit employers to apply the same 
progressive disciplinary rules to both exempt and nonexempt employees, 
and is needed in light of federal and state laws requiring employers to 
take appropriate remedial action to address employee misconduct. A 
number of commenters ask the Department to construe the term 
``workplace misconduct'' more broadly to include off-site, off-duty 
conduct. The National Association of Manufacturers suggests that the 
term should be clarified, at a minimum, to refer to the standards of 
conduct imposed by state and federal anti-discrimination laws.
    In contrast, commenters such as the AFL-CIO, the Communications 
Workers of America, the New York State Public Employees Federation and 
the National Employment Law Project oppose the new exception, arguing 
that the current rule properly recognizes that receiving a salary 
includes not being subject to disciplinary deductions of less than a 
week. These commenters argue that employers have other ways to 
discipline exempt employees without violating the salary basis test.
    The final rule includes the exception to the salary basis 
requirement for deductions from pay due to suspensions for infractions 
of workplace conduct rules. The Department believes that this is a 
common-sense change that will permit employers to hold exempt employees 
to the same standards of conduct as that required of their nonexempt 
workforce. At the same time, as one commenter notes, it will avoid 
harsh treatment of exempt employees--in the form of a full-week 
suspension--when a shorter suspension would be appropriate. It also 
takes into account, as the comments of Representative Norwood, 
Representative Ballenger and the American Bakers Association recognize, 
that a growing number of laws governing the workplace have placed 
increased responsibility and risk of liability on employers for their 
exempt employees' conduct. See Burlington Industries, Inc. v. Ellerth, 
524 U.S. 742 (1998); Faragher v. City of Boca Raton, 524 U.S. 775 
(1998) (liability for sexual harassment by supervisory employees may be 
imputed to the employer where employer fails to take prompt and 
effective remedial action). At the same time, the Department does not 
intend that the term ``workplace conduct'' be construed expansively. As 
the term indicates, it refers to conduct, not performance or 
attendance, issues. Moreover, consistent with the examples included in 
the regulatory provision, it refers to serious workplace misconduct 
like sexual harassment, violence, drug or alcohol violations, or 
violations of state or federal laws. Although we believe that this 
additional exception to the general no-deduction rule is warranted (as 
was the exception added in 1954 for infractions of safety rules of 
major significance), it should be construed narrowly so as not to 
undermine the essential guarantees of the salary basis test. See 
Mueller v. Reich, 54 F.3d 438 (7th Cir. 1995). However, the fact that 
the employee misconduct occurred off the employer's property should not 
preclude an employer from imposing a disciplinary suspension, as long 
as the employer has a bona fide workplace conduct rule that covers such 
off-site conduct.
    Commenters such as the FLSA Reform Coalition, the Fisher & Phillips 
law firm and the National Association of Chain Drug Stores urge the 
Department to delete the proposed requirement that any pay deductions 
for workplace conduct violations must be imposed pursuant to a 
``written policy applied uniformly to all workers.'' These commenters 
question the need for the policy to be in writing, and are concerned 
that the uniform application requirement would breed litigation and 
diminish employer flexibility to take individual circumstances into 
account. The American Corporate Counsel

[[Page 22178]]

Association notes that it ``would not object if the present draft were 
further modified to condition full-day docking on the employer either 
adopting a written policy notifying employees of the potential for a 
suspension without pay as a disciplinary measure or providing the 
employee with written notice of a finding of job-related misconduct.'' 
The Department has decided to retain the requirement that the policy be 
in writing, on the assumption that most employers would put (or already 
have) significant conduct rules in writing, and to deter misuse of this 
exception. This provision is a new exception to the salary basis test, 
and the Department does not believe restricting this new exception to 
written disciplinary policies will lead to changes in current employer 
practices regarding such policies. However, the written policy need not 
include an exhaustive list of specific violations that could result in 
a suspension, or a definitive declaration of when a suspension will be 
imposed. The written policy should be sufficient to put employees on 
notice that they could be subject to an unpaid disciplinary suspension. 
We have clarified the regulatory language to provide that the written 
policy must be ``applicable to all employees,'' which should not 
preclude an employer from making case-by-case disciplinary 
determinations. Thus, for example, the ``written policy'' requirement 
for this exception would be satisfied by a sexual harassment policy, 
distributed generally to employees, that warns employees that 
violations of the policy will result in disciplinary action up to and 
including suspension or termination.
    Commenters raise a number of other issues related to deductions 
from salary. First, in response to comments from the National 
Association of Convenience Stores and the Fisher & Phillips law firm, 
we have changed the phrase ``of a full day or more'' to ``one or more 
full days'' in sections 541.602(b)(1), (2) and (5), to clarify that a 
deduction of one and one-half days, for example, is impermissible.
    Second, commenters, such as the National Association of Chain Drug 
Stores, the U.S. Chamber of Commerce, the HR Policy Association and the 
National Retail Federation, suggest that partial day deductions be 
permitted for any leave requested by an employee, including for 
sickness or rehabilitation, or for disciplinary suspensions. We believe 
that partial day deductions generally are inconsistent with the salary 
basis requirement, and should continue to be permitted only for 
infractions of safety rules of major significance, for leave under the 
Family and Medical Leave Act, or in the first and last weeks of 
employment.
    Third, several commenters, such as the Morgan, Lewis & Bockius law 
firm, suggest an additional exception to the general no-docking rule: 
payments in the nature of restitution, fines, settlements or judgments 
an employer must make based on the misconduct of an employee. Such an 
additional exception, in our view, would be inappropriate and 
unwarranted because it would grant employers unfettered discretion to 
dock large amounts from the salaries of exempt employees in 
questionable circumstances (judgments against employers because of 
discriminatory employment actions taken by an exempt employee, for 
example). The new disciplinary deduction exception only allows 
deductions for unpaid suspensions of one or more days--not fines, 
settlements or judgments which could arguably be blamed on an exempt 
employee.
    Fourth, the U.S. Chamber of Commerce and a few other commenters 
request that the Department expand proposed section 541.602 (b)(7) to 
include employee absences under an employer's family or medical leave 
policy. Subsection (b)(7) provides an exception from the no-deduction 
rule for weeks in which an exempt employee takes unpaid leave under the 
Family and Medical Leave Act (FMLA). This exception was mandated by 
Congress when it passed the FMLA in 1993. 29 U.S.C. 2612(c) (``Where an 
employee is otherwise exempt under regulations issued by the Secretary 
pursuant to section 13(a)(1) of the Fair Labor Standards Act of 1938, * 
* * the compliance of an employer with this title by providing unpaid 
leave shall not affect the exempt status of the employee. * * * ''). 
There is no basis to enlarge the statutory exception. We also would 
note that deductions may be made for absences of one or more full days 
occasioned by sickness under section 541.602(b)(2).
    Fifth, several commenters, including the National Association of 
Manufacturers and the American Corporate Counsel Association, urge the 
Department expressly to recognize that compensation shortages resulting 
from payroll system errors may not constitute impermissible 
``dockings.'' We do not believe it is appropriate to provide such a 
general rule in the context of this rulemaking. Whether payroll system 
errors constitute impermissible ``dockings'' depends on the facts of 
the particular case, including the frequency of the errors, whether the 
errors are caused by employee data entry or the computer system, 
whether the employer promptly corrects the errors, and the feasibility 
of correcting the payroll system programming to eliminate the errors.
    Sixth, a few commenters, such as the National Association of Chain 
Drug Stores and the National Council of Chain Restaurants, suggest that 
employers should be able to recover leave and salary advances from an 
employee's final pay. Recovery of salary advances would not affect an 
employee's exempt status, because it is not a deduction based on 
variations in the quality or quantity of the work performed. Recovery 
of partial-day leave advances, however, essentially are deductions for 
personal absences and would constitute an impermissible deduction. 
Whether recovery for a full-day leave is permissible depends on whether 
such a leave is covered by one of the section 541.602(b) exceptions.
    Seventh, the New York State Public Employees Federation requests 
that if the Department retains the disciplinary deduction provision, it 
should eliminate the current pay-docking rule applicable to public 
employers. The public accountability rationale for the public employer 
pay-docking rule (section 541.709) continues to be valid, however, and 
is not affected by the new exception for disciplinary suspensions.
    Finally, a number of commenters, including the Society for Human 
Resource Management, the National Association of Chain Drug Stores, the 
National Council of Chain Restaurants and the National Retail 
Federation, ask the Department to confirm that certain payroll and 
record keeping practices continue to be permissible under the new 
rules. We agree that employers, without affecting their employees' 
exempt status, may take deductions from accrued leave accounts; may 
require exempt employees to record and track hours; may require exempt 
employees to work a specified schedule; and may implement across-the-
board changes in schedule under certain circumstances. See, e.g., 
Webster v. Public School Employees of Washington, Inc., 247 F.3d 910 
(9th Cir. 2001) (accrued leave accounts); Douglas v. Argo-Tech Corp., 
113 F.3d 67 (6th Cir. 1997) (record and track hours); Aaron v. City of 
Wichita, Kansas, 54 F.3d 652 (10th Cir.) (accrued leave accounts, 
record and track hours), cert. denied, 516 U.S. 965 (1995); Graziano v. 
The Society of the New York Hospital, 1997 WL 639026 (S.D.N.Y. 1997) 
(accrued leave accounts); Wage and Hour Opinion Letter of 2/23/98, 1998 
WL 852696 (across-the-board changes in schedule); Wage and Hour Opinion

[[Page 22179]]

Letter of 4/15/95 (accrued leave accounts); Wage and Hour Opinion 
Letter of 3/30/94, 1994 WL 1004763 (accrued leave accounts); and Wage 
and Hour Opinion Letter of 4/14/92, 1992 WL 845095 (accrued leave 
accounts).
Section 541.603 Effect of Improper Deductions From Salary
    Proposed section 541.603 discussed the effect of improper 
deductions from salary and established a new ``safe harbor'' rule. 
Subsection (a) of the proposal set forth the general rule that: ``An 
employer who makes improper deductions from salary shall lose the 
exemption if the facts demonstrate that the employer has a pattern and 
practice of not paying employees on a salary basis. A pattern and 
practice of making improper deductions demonstrates that the employer 
did not intend to pay employees in the job classification on a salary 
basis.'' Factors for determining whether an employer had such a 
``pattern and practice'' listed in this subsection included: The 
``number of improper deductions; the time period during which the 
employer made improper deductions; the number and geographic location 
of employees whose salary was improperly reduced; the number and 
geographic location of managers responsible for taking the improper 
deductions; the size of the employer; whether the employer has a 
written policy prohibiting improper deductions; and whether the 
employer corrected the improper pay deductions.'' Proposed subsection 
(a) also provided that ``isolated or inadvertent'' deductions would not 
result in loss of the exemption. Proposed section 541.603(b) further 
provided: ``If the facts demonstrate that the employer has a policy of 
not paying on a salary basis, the exemption is lost during the time 
period in which improper deductions were made for employees in the same 
job classification working for the same managers responsible for the 
improper deductions. Employees in different job classifications who 
work for different managers do not lose their status as exempt 
employees.'' Finally, proposed section 541.603(c) included a new ``safe 
harbor'' provision: ``If an employer has a written policy prohibiting 
improper pay deductions as provided in Sec.  541.602, notifies 
employees of that policy and reimburses employees for any improper 
deductions, such employer would not lose the exemption for any 
employees unless the employer repeatedly and willfully violates that 
policy or continues to make improper deductions after receiving 
employee complaints.''
    The final rule makes a number of substantive changes to the 
proposed section 541.603. We have modified the first two sentences of 
subsection (a) to better clarify that the effect of improper deductions 
depends upon whether the facts demonstrate that the employer intended 
to pay employees on a salary basis, and to substitute the phrase 
``actual practice'' of making improper deductions for the ``pattern and 
practice'' language in proposed subsection (a). The final subsection 
(a) makes four changes in the factors to consider when determining 
whether an employer has an actual practice of making improper 
deductions: (1) Adding consideration of ``the number of employee 
infractions warranting discipline'' as compared to the number of 
deductions made; (2) modifying the written policy factor to state, 
``whether the employer has a clearly communicated policy permitting or 
prohibiting improper deductions'' (3) deleting the ``size of employer'' 
factor; and (4) deleting the ``whether the employer corrected the 
improper deductions'' factor. The final rule moves the language 
regarding isolated or inadvertent improper deductions to subsection 
(c), and inserts language, developed from the existing regulations, 
requiring an employer to reimburse employees for isolated or 
inadvertent improper deductions. The ``safe harbor'' provision, found 
in final section 541.603(d), substitutes ``clearly communicated 
policy'' for the proposed ``written policy''; adds that the policy must 
include a complaint mechanism; deletes the term ``repeatedly''; 
clarifies that the safe harbor is not available if the employer 
``willfully violates the policy by continuing to make improper 
deductions after receiving employee complaints''; and clarifies that if 
an employer fails to reimburse employees for any improper deductions or 
continues to make improper deductions after receiving employee 
complaints, the exemption is lost during the time period in which the 
improper deductions were made for employees in the same job 
classification working for the same manager responsible for the actual 
improper deductions.
    Proposed subsection 541.603(a) contained the general rule regarding 
the effect of improper deductions from salary on the exempt status of 
employees: ``An employer who makes improper deductions from salary 
shall lose the exemption if the facts demonstrate that the employer has 
a pattern and practice of not paying employees on a salary basis.'' 
Many commenters, including the FLSA Reform Coalition, the National 
Association of Manufacturers, the U.S. Chamber of Commerce and the AFL-
CIO, express concern that the phrase ``pattern and practice of not 
paying employees on a salary basis'' in proposed subsection 541.603(a) 
was ambiguous and would engender litigation and perhaps result in 
unintended consequences. The final rule clarifies that the central 
inquiry to determine whether an employer who makes improper deductions 
will lose the exemption is whether ``the facts demonstrate that the 
employer did not intend to pay employees on a salary basis.'' The final 
subsection (a) replaces the proposed ``pattern and practice'' language 
with the phrase ``actual practice,'' and also states that an ``actual 
practice of making improper deductions demonstrates that the employer 
did not intend to pay employees on a salary basis.'' The phrase 
``pattern and practice'' is a legal term of art in other employment law 
contexts which we had no intent to incorporate into these regulations. 
These changes should provide better guidance to the regulated 
community.
    Most commenters support the listed factors in subsection (a) for 
determining when an employer has an actual practice of making improper 
deductions. Responding to comments submitted by the Fisher & Phillips 
law firm and the National Association of Convenience Stores, the final 
rule states that the number of improper deductions should be considered 
``particularly as compared to the number of employee infractions 
warranting discipline.'' The Second Circuit in Yourman v. Giuliani, 229 
F.3d 124, 130 (2nd Cir. 2000), cert. denied, 532 U.S. 923 (2001), 
provided the following useful comparison: an employer that regularly 
docks the pay of managers who come to work five hours late has more of 
an ``actual practice'' of improper deduction than does an employer that 
only sporadically docks the pay of managers who come to work five 
minutes late, even though the penalties imposed by this second employer 
could far outnumber the penalties imposed by the first. Thus, it is the 
ratio of deductions to infractions that is most informative, rather 
than simply the number of deductions, because the total number of 
deductions is significantly influenced by the size of the employer. In 
light of this change, we have also deleted the size of the employer as 
a relevant factor in final subsection (a), as we did not intend that 
this section be applied differently depending on the size of the 
employer, and have deleted ``whether the employer

[[Page 22180]]

has corrected the improper pay deductions'' as a relevant factor in 
determining whether an employer has an actual practice of improper pay 
deductions. We have modified the written policy factor to state: 
``Whether the employer has a clearly communicated policy permitting or 
prohibiting improper deductions'' because, as discussed below under 
subsection 541.603(d), the U.S. Small Business Administration Office of 
Advocacy and other commenters state that the written policy factor may 
be prejudicial to small businesses.
    Final subsection 541.603(b), as in the proposal, addresses which 
employees will lose the exemption, and for what time period, if an 
employer has an actual practice of making improper deductions. The 
proposal provided that the exemption would be lost ``during the time 
period in which improper deductions were made for employees in the same 
job classification working for the same managers responsible for the 
improper deductions.'' The comments express strongly contrasting views 
on whether proposed section 541.603(b) should be retained or modified 
either to mitigate the impact on employers or to expand the 
circumstances in which employees would lose their exempt status. 
Commenters such as the Federal Wage Hour Consultants, the Society for 
Human Resource Management and the National Association of Chain Drug 
Stores support the proposal as resolving many of the misunderstandings 
that exist under the existing regulations and current case law. Other 
commenters, however, including the FLSA Reform Coalition, the U.S. 
Chamber of Commerce, the National Council of Chain Restaurants, the 
National Retail Federation, the HR Policy Association, and the County 
of Culpeper, Virginia, suggest that improper deductions should affect 
only the exempt status of the individual employees actually subjected 
to the impermissible pay deductions. These commenters argue that the 
possibility that employees who have never experienced a salary 
reduction could also lose their exempt status was first raised by the 
decision in Abshire v. County of Kern, California, 908 F.2d 483 (9th 
Cir. 1990), cert. denied, 498 U.S. 1068 (1991), and has led to 
extensive litigation thereafter. The HR Policy Association states that 
the Supreme Court in Auer v. Robbins, 519 U.S. 452 (1997), ``did not 
rectify the central flaw in the current interpretation: that a few 
deductions made against a couple of employees arguably converts whole 
classes of employees to nonexempt.''
    In contrast, commenters such as the AFL-CIO, the McInroy & Rigby 
law firm, the National Employment Law Project, the Goldstein, Demchak, 
Baller, Borgen & Dardarian law firm and the National Employment Lawyers 
Association urge the Department to modify the proposed provision to 
state that employees will lose their exempt status if they are subject 
to an employment policy permitting impermissible deductions, even 
absent any actual deductions. These comments note that the Supreme 
Court in Auer deferred to the Department's view, as expressed in its 
legal briefs to the Court, that employees should lose their exempt 
status if there is either an actual practice of making impermissible 
deductions or an employment policy that creates a significant 
likelihood of such deductions.
    After giving this complex issue careful consideration, the 
Department has decided to retain in final subsection 541.603(b) the 
proposed approach that an employer who has an actual practice of making 
improper deductions will lose the exemption during the time period in 
which the improper deductions were made for employees in the same job 
classification working for the same managers responsible for the actual 
improper deductions. The final regulation also retains the language 
that employees in different job classifications or who work for 
different managers do not lose their status as exempt employees. Any 
other approach, on the one hand, would provide a windfall to employees 
who have not even arguably been harmed by a ``policy'' that a manager 
has never applied and may never intend to apply, but on the other hand, 
would fail to recognize that some employees may reasonably believe that 
they would be subject to the same types of impermissible deductions 
made from the pay of similarly situated employees.
    The final rule represents a departure from the Department's 
position in Auer v. Robbins, 519 U.S. 452 (1997). In Auer, the Supreme 
Court, deferring to arguments made in an amicus brief filed by the 
Department, found that the existing salary basis test operated to deny 
exempt status when ``there is either an actual practice of making such 
deductions or an employment policy that creates a `significant 
likelihood' of such deductions.'' Id. at 461. In deferring to the 
Department, the Supreme Court stated:

    Because the salary-basis test is a creature of the Secretary's 
own regulations, his interpretation of it is, under our 
jurisprudence, controlling unless ``plainly erroneous or 
inconsistent with the regulation.''
* * * * *
    Petitioners complain that the Secretary's interpretation comes 
to us in the form of a legal brief; but that does not, in the 
circumstances of this case, make it unworthy of deference.

Id. at 461-62 (citations omitted). Thus, in Auer, the Supreme Court 
relied on arguments made in the Department's amicus brief interpreting 
ambiguous regulations existing at the time of the decision. The 
``significant likelihood'' test is not found in the FLSA itself or 
anywhere in the existing Part 541 regulations. Moreover, nothing in 
Auer prohibits the Department from making changes to the salary basis 
regulations after appropriate notice and comment rulemaking. See Keys 
v. Barnhart, 347 F.3d 990, 993 (7th Cir. 2003).
    We are concerned with those employees who actually suffer harm as a 
result of salary basis violations and want to ensure that those 
employees receive sufficient back pay awards and other appropriate 
relief. We disagree, however, with those comments arguing that only 
employees who suffered an actual deduction should lose their exempt 
status. An exempt employee who has not suffered an actual deduction 
nonetheless may be harmed by an employer docking the pay of a similarly 
situated co-worker. An exempt employee in the same job classification 
working for the same manager responsible for making improper 
deductions, for example, may choose not to leave work early for a 
parent-teacher conference for fear that her pay will be reduced, and 
thus is also suffering harm as a result of the manager's improper 
practices. Because exempt employees in the same job classification 
working for the same managers responsible for the actual improper 
deductions may reasonably believe that their salary will also be 
docked, such employees have also suffered harm and therefore should 
also lose their exempt status. The Department's construction best 
furthers the purposes of the section 13(a)(1) exemptions because it 
realistically assesses whether an employer intends to pay employees on 
a salary basis. For the same reasons, final subsection (a) provides 
that ``whether the employer has a clearly communicated policy 
permitting or prohibiting improper deductions'' is one factor to 
consider when determining whether the employer has an actual practice 
of not paying employees on a salary basis.
    A number of commenters, such as the FLSA Reform Coalition, the U.S. 
Chamber of Commerce and the National

[[Page 22181]]

Employment Lawyers Association, ask the Department to clarify how 
section 541.603(b) would apply if deductions result from a corporate-
wide policy or the advice a manager receives from the human resources 
department. We believe that final section 541.603 calls for a case-by-
case factual inquiry. Thus, for example, under final subsection 
541.603(a), a corporate-wide policy permitting improper deductions is 
some evidence that an employer has an actual practice of not paying 
employees on a salary basis, but not sufficient evidence by itself to 
cause the exemption to be lost if a manager has never used that policy 
to make any actual deductions from the pay of other employees. 
Moreover, in such a circumstance, the existence of a clearly 
communicated policy prohibiting such improper deductions would weigh 
against the conclusion that an actual practice exists.
    Final subsection (c) contains language taken from proposed 
subsection 541.603(a) and the existing ``window of correction'' in 
current subsection 541.118(a)(6) regarding the effect of ``isolated'' 
or ``inadvertent'' improper deductions. Some commenters request 
additional clarification regarding the meaning of these terms. 
Inadvertent deductions are those taken unintentionally, for example, as 
a result of a clerical or time-keeping error. See, e.g., Jones v. 
Northwest Telemarketing, Inc., 2000 WL 568352, at *3 (D. Or. 2000); 
Reeves v. Alliant Techsystems, Inc., 77 F. Supp. 2d 242, 251 (D.R.I. 
1999). See also Furlong v. Johnson Controls World Services, Inc., 97 F. 
Supp. 2d 1312, 1317 (S.D. Fla. 2000) (partial day deductions, made 
pursuant to the employer's mistaken belief that the employee's absences 
were covered by the Family and Medical Leave Act's statutory exemption 
to the salary basis test due to the employee's representations and 
actions, are considered inadvertent). Whether deductions are 
``isolated'' is determined by reference to the factors set forth in 
final subsection 541.603(a). Other commenters object to the proposed 
``isolated or inadvertent'' language because the proposal did not 
require employees to be reimbursed for the improper deductions that are 
isolated or inadvertent.
    The AFL-CIO, for example, states that the ``underlying purpose of 
the window of correction is not simply to ensure that an employer does 
not lose the FLSA exemption because of inadvertent or isolated 
incidents of improper pay deductions, but rather to provide a means for 
an employer who has demonstrated an objective intention to pay its 
employees on a salary basis to remedy improper deductions and avoid 
further liability.'' We agree with commenters who state that employees 
whose salary has been improperly docked should be reimbursed, even if 
the improper deductions were isolated or inadvertent. Thus, final 
subsection (c) provides: ``Improper deductions that are either isolated 
or inadvertent will not result in loss of the exemption for any 
employees subject to such improper deductions, if the employer 
reimburses the employees for such improper deductions.'' The Department 
continues to adhere to current law that reimbursement does not have to 
be made immediately upon the discovery that an improper deduction was 
made. See, e.g., Moore v. Hannon Food Service, Inc., 317 F.3d 489, 498 
(5th Cir.), cert. denied, 124 S. Ct. 76 (2003) (reimbursement made five 
days before trial held sufficient because reimbursement ``may be made 
at any time'').
    The existing ``window of correction'' is not a model of clarity. It 
has been difficult for the Department to administer, been the source of 
considerable litigation, and produced divergent interpretations in the 
courts of appeals. Most notably, federal courts have reached different 
conclusions regarding the interpretation and application of existing 
section 541.118(a)(6), ``or is made for reasons other than lack of 
work.'' Compare Moore v. Hannon Food Service, Inc., 317 F.3d 489 (5th 
Cir.), cert. denied, 124 S. Ct. 76 (2003), with Takacs v. Hahn 
Automotive Corp., 246 F.3d 776 (6th Cir.), cert. denied, 534 U.S. 889 
(2001), Whetsel v. Network Property Services, L.L.C., 246 F.3d 897 (7th 
Cir. 2001), Yourman v. Giuliani, 229 F.3d 124 (2nd Cir. 2000), cert. 
denied, 532 U.S. 923 (2001), and Klem v. County of Santa Clara, 208 
F.3d 1085 (9th Cir. 2000).
    There is no need to resolve the conflict between these cases for 
purposes of the final rule because of the changes made in this 
subsection (c) and the new safe harbor provision in final subsection 
(d). Under final subsection (c), isolated and inadvertent improper 
deductions do not result in loss of the exemption if the employer 
reimburses the employee for such improper deductions. Further, as 
discussed below, for other actual improper deductions, employers can 
preserve the exemption by taking advantage of the safe harbor 
provision. The safe harbor provision applies regardless of the reason 
for the improper deduction--whether improper deductions were made for 
lack of work or for reasons other than lack of work. For the reasons 
discussed below, the Department believes that the new ``safe harbor'' 
is the best approach going forward. However, we recognize that some 
cases, based on events arising before the effective date of these 
revisions, will be governed by the prior version of the ``window of 
correction.'' This final rule is not intended to govern those cases in 
any way, or to express a view regarding the correct interpretation of 
the prior version of the ``window of correction.'' Instead, we intend 
only to adopt a different approach going forward for the reasons stated 
herein.
    Many commenters, including the National Association of 
Manufacturers, the Society for Human Resource Management, the Federal 
Wage Hour Consultants, the American Health Care Association and the 
American Bakers Association, generally support the proposed safe harbor 
provision, moved to subsection (d) in the final rule. These commenters 
state that the proposal was an ``excellent common sense approach'' that 
promoted proactive steps by employers to protect employees without 
risking liability and resolved a conflict in the case law. Other 
commenters, however, while supporting the goal of the proposed safe 
harbor, believe it to be confusing and suggest modifications. The 
American Corporate Counsel Association, for example, notes that the 
interplay between sections 541.603(a), (b) and (c) ``is not immediately 
obvious to trained professionals responsible for securing compliance.'' 
The U.S. Chamber of Commerce (Chamber) comments that the phrase 
``repeatedly and willfully'' in the proposed provision was vague, and 
the Chamber supports the construction of the ``window of correction'' 
in Moore v. Hannon Food Service, Inc., 317 F.3d 489 (5th Cir.), cert. 
denied, 124 S. Ct. 76 (2003). The Chamber also argues that the proposal 
only provides an incentive for employers to adopt policies prohibiting 
improper deductions, but not to take corrective action; believes that 
the requirement for a written policy was impractical; and suggests 
eliminating the provision denying use of the safe harbor to employers 
that make improper deductions after receiving employee complaints. The 
U.S. Small Business Administration Office of Advocacy also objects to 
the written policy requirement as excluding some small businesses. The 
National Association of Manufacturers objects to the elimination of the 
phrase ``for reasons other than lack of work'' in the existing 
regulations.
    Commenters such as the AFL-CIO, the National Employment Lawyers 
Association, the National Employment Law Project and the Public Justice

[[Page 22182]]

Center oppose the proposed safe harbor provision, arguing that it 
eviscerated the salary basis requirement by permitting an employer to 
avoid overtime liability even after making numerous impermissible 
deductions.
    After careful consideration of the comments and case law, the 
Department continues to believe that the proposed safe harbor provision 
is an appropriate mechanism to encourage employers to adopt and 
communicate employment policies prohibiting improper pay deductions, 
while continuing to ensure that employees whose pay is reduced in 
violation of the salary basis test are made whole. Thus, the final rule 
retains the proposed language with several changes. In our view, this 
provision achieves the goals, supported by many comments, of both 
encouraging employers to adopt ``proactive management practices'' that 
demonstrate the employers' intent to pay on a salary basis, and 
correcting violative payroll practices. Cf. Kolstad v. American Dental 
Ass'n, 527 U.S. 526, 545 (1999) (Title VII of the Civil Rights Act is 
intended to promote prevention and remediation). In addition, employees 
will benefit from this additional notification of their rights under 
the FLSA and the complaint procedures. We intend this safe harbor 
provision to apply, for example, where an employer has a clearly 
communicated policy prohibiting improper deductions, but a manager 
engages in an actual practice (neither isolated nor inadvertent) of 
making improper deductions. In this situation, regardless of the 
reasons for the deductions, the exemption would not be lost for any 
employees if, after receiving and investigating an employee complaint, 
the employer reimburses the employees for the improper deductions and 
makes a good faith commitment to comply in the future. We believe it 
furthers the purposes of the FLSA to permit the employer who has a 
clearly communicated policy prohibiting improper pay deductions and a 
mechanism for employee complaints, to reimburse the affected employees 
for the impermissible deductions and take good faith measures to 
prevent improper deductions in the future. This is generally consistent 
with trends in employment law. An employer, for example, that has 
promulgated a policy against sexual harassment and takes corrective 
action upon receipt of a complaint of harassment may avoid liability. 
See Faragher v. City of Boca Raton, 524 U.S. 775 (1998), and Burlington 
Industries, Inc. v. Ellerth, 524 U.S. 742 (1998). Consistent with final 
subsection 541.603(b), final subsection (c) also provides that, if an 
employer fails to reimburse employees for any improper deductions or 
continues to make improper deductions after receiving employee 
complaints, ``the exemption is lost during the time period in which the 
improper deductions were made for employees in the same job 
classification working for the same managers responsible for the actual 
improper deductions.''
    The comments raise several additional issues. First, as previously 
noted, some commenters object to the requirement that an employer have 
a written policy in order to utilize the safe harbor. The U.S. Small 
Business Administration Office of Advocacy, for example, notes that 
small business representatives express concern that the safe harbor's 
requirement for a pre-existing written policy ``may exclude some small 
businesses which do not produce written compliance materials in the 
ordinary course of business.'' The U.S. Chamber of Commerce similarly 
heard concerns from its small business members that the requirement for 
a written policy would be impractical. It suggests that ``[w]hile 
employers seek to comply with the law, the safe harbor seems geared to 
those already sufficiently versed in the law and is likely to be of 
little effect to less sophisticated employers.'' Other commenters, such 
as the American Health Care Association, the American Corporate Counsel 
Association, and the National Association of Manufacturers, believe 
that adopting a written policy is an essential part of the employer's 
responsibility. We intend the safe harbor to be available to employers 
of all sizes. Thus, although a written policy is the best evidence of 
the employer's good faith efforts to comply with the Part 541 
regulations, we have concluded, consistent with an employer's 
obligation under Farragher and Ellerth, that a written policy is not 
essential. However, the policy must have been communicated to employees 
prior to the actual impermissible deduction. Thus, final subsection (d) 
provides that the safe harbor is available to employers with a 
``clearly communicated policy'' prohibiting improper pay deductions. To 
protect against possible abuses, final subsection (d) adds the 
requirement that the clearly communicated policy must include a 
``complaint mechanism.'' Final subsection (d) also states that the 
``clearly communicated'' standard may be met, for example, by 
``providing a copy of the policy to employees at the time of hire, 
publishing the policy in an employee handbook or publishing the policy 
on the employer's Intranet.'' For small businesses, the ``clearly 
communicated policy'' could be a statement to employees that the 
employer intends to pay the employees on a salary basis and will not 
make deductions from salary that are prohibited under the Fair Labor 
Standards Act; such a statement would also need to include information 
regarding how the employees could complain about improper deductions, 
such as reporting the improper deduction to a manager or to an employee 
responsible for payroll. To further assist small businesses, the 
Department intends to publish a model safe harbor policy that would 
comply with final subsection 541.603(d).
    Second, some commenters, such as the HR Policy Association and the 
National Employment Lawyers Association, support a requirement in the 
subsection (d) safe harbor provision that the employer must ``promise 
to comply'' in the future. Although other commenters oppose such a 
requirement, we believe that this promise is inherent in adopting the 
required employment policy and the duty to cease making improper 
deductions after receiving employee complaints. Thus, the Department 
has included as an explicit requirement for the safe harbor rule in 
final subsection (d) that the employer make a good faith commitment to 
comply in the future. There may be many ways that an employer could 
make and evidence its ``good faith commitment'' to comply in the future 
including, but not limited to: adopting or re-publishing to employees 
its policy prohibiting improper pay deductions; posting a notice 
including such a commitment on an employee bulletin board or employer 
Intranet; providing training to managers and supervisors; reprimanding 
or training the manager who has taken the improper deduction; or 
establishing a telephone number for employee complaints.
    Third, to avoid confusion that some commenters noted with the 
``actual practice'' determination under final subsection (a), we have 
changed the phrase ``repeatedly and willfully'' to ``willfully,'' and 
defined ``willfully'' as continuing to make improper deductions after 
receiving employee complaints. This definition of ``willfully'' is 
consistent with McLaughlin v. Richland Shoe, 486 U.S. 128, 133-35 
(1988) (``willfulness'' means that ``the employer either knew or showed 
reckless disregard for the matter of whether its conduct was prohibited 
by the statute''). Thus, as stated above, an employer with a clearly

[[Page 22183]]

communicated policy that prohibits improper pay deductions and includes 
a complaint mechanism will not lose the exemption for any employee if 
the employer reimburses employees for the improper deductions after 
receiving employee complaints and makes a good faith commitment to 
comply in the future. This rule applies, moreover, regardless of the 
reasons for the improper pay deductions. The safe harbor is available 
both for improper deductions made because there is no work available 
and for improper deductions made for reasons other than lack of work. 
If the employer fails to reimburse the employees for improper 
deductions or continues to make improper deductions after receiving 
employee complaints, final subsection (d) clarifies that ``the 
exemption is lost during the time period in which the improper 
deductions were made for employees in the same job classification 
working for the same managers responsible for the actual improper 
deductions.''
    Fourth, the HR Policy Association, the U.S. Chamber of Commerce, 
the National Association of Chain Drug Stores and others ask the 
Department to allow employers a reasonable amount of time to 
investigate after receiving an employee complaint to determine whether 
the deductions were improper, to take action to halt any improper 
deductions, and to correct any improper deductions. We have not changed 
the text of the regulation in response to this suggestion because the 
Department views it as self-evident that, before reimbursing the 
employee or taking other corrective action, an employer will need a 
reasonable amount of time to investigate an employee's complaint that 
an improper deduction was made. The amount of time it will take to 
complete the investigation will depend upon the particular 
circumstances, but employers should begin such investigations promptly. 
The mere fact that other employee complaints are received by the 
employer before timely completion of the investigation should not, by 
itself, defeat the safe harbor.
    Finally, a number of commenters, such as the Food Marketing 
Institute, ask the Department to clarify the burdens of proof. We do 
not intend to modify the burdens that courts currently apply. See 
Schaefer v. Indiana Michigan Power Co., 358 F.3d 394 (6th Cir. 2004) 
(employer has the burden to show employee was paid on a salary basis); 
Yourman v. Giuliani, 229 F.3d 124 (2nd Cir. 2000) (employee has the 
burden to show actual practice of impermissible deductions), cert. 
denied, 532 U.S. 923 (2001).
Section 541.604 Minimum Guarantee Plus Extras
    Under proposed section 541.604, an exempt employee may receive 
additional compensation beyond the minimum amount that is paid as a 
guaranteed salary. For example, an employee may receive, in addition to 
the guaranteed minimum paid on a salary basis, extra compensation from 
commissions on sales or a percentage of the profits. An exempt employee 
may also receive additional compensation for extra hours worked beyond 
the regular workweek, such as half-time pay, straight time pay, or a 
flat sum. Proposed section 541.604(b) provided that an exempt 
employee's salary may be computed on an hourly, daily or shift basis, 
if the employee is given a guarantee of at least the minimum weekly 
required amount paid on a salary basis regardless of the number of 
hours, days or shifts worked, and ``a reasonable relationship exists 
between the guaranteed amount and the amount actually earned.'' The 
reasonable relationship requirement is satisfied where the weekly 
guarantee is ``roughly equivalent'' to the employee's actual usual 
earnings. Thus, for example, the proposal stated that where an employee 
is guaranteed at least $500 per week, and the employee normally works 
four or five shifts per week and is paid $150 per shift, the reasonable 
relationship requirement is satisfied.
    The final rule does not make any substantive changes to the 
proposed rule, but does make a number of clarifying changes. The 
reasonable relationship requirement incorporates in the regulation Wage 
and Hour's long-standing interpretation of the existing salary basis 
regulation, which is set forth in the agency's Field Operations 
Handbook and in opinion letters. The courts also have upheld the 
reasonable relationship requirement. See, e.g., Brock v. Claridge Hotel 
& Casino, 846 F.2d 180, 182-83 (3rd Cir.) (salary basis requirement not 
met where employees are paid by the hour and the guarantee is ``nothing 
more than an illusion''), cert. denied, 488 U.S. 925 (1988). Some 
commenters, although not a significant number, object to the reasonable 
relationship requirement or question the clarity of the regulatory 
text, while others ask for additional specificity about the various 
types of additional compensation that may be paid above and beyond the 
guaranteed salary. The Department has made minor wording changes in 
response to the comments to clarify this provision.
    The National Association of Manufacturers (NAM) suggests that the 
Department list the range of compensation options, such as cash 
overtime in any increment, compensatory time off, and shift or holiday 
differentials, that employers may provide in addition to the guaranteed 
salary without violating the salary basis requirement. NAM gave the 
specific example of an employer who allows an exempt worker to take a 
day off as a reward for hours worked on a weekend outside the 
employee's normal schedule. The proposed regulation provided some 
examples and stated that additional compensation ``may be paid on any 
basis.'' We agree that the examples described above would not violate 
the salary basis test. However, we have not and could not include in 
the regulations every method employers might use to provide employees 
with extra compensation for work beyond their regular workweek. Thus, 
we have added only one of the examples NAM suggests regarding 
compensatory time off.
    The National Technical Services Association states that it was 
unclear whether the reasonable relationship requirement applies in all 
cases to employees who receive a salary and additional compensation. We 
have clarified that this requirement applies only when an employee's 
actual pay is computed on an hourly, daily or shift basis. Thus, for 
example, if an employee receives a guaranteed salary plus a commission 
on each sale or a percentage of the employer's profits, the reasonable 
relationship requirement does not apply. Such an employee's pay will 
understandably vary widely from one week to the next, and the 
employee's actual compensation is not computed based upon the 
employee's hours, days or shifts of work.
    A few commenters, including the National Association of Convenience 
Stores, the Fisher & Phillips law firm and the American Council of 
Engineering Companies, advocate the elimination of the reasonable 
relationship test. They question whether it was appropriate for the 
Department to require a reasonable relationship between the guaranteed 
salary and the employee's actual usual compensation when the payments 
are based on the employee's quantity of work, when the Department does 
not have such a requirement for salaries plus commissions or other 
similar compensation. They state that, so long as the employee also is 
guaranteed compensation of not less than the minimum required amount, 
it ought to be irrelevant how an employee's pay is computed. Moreover, 
they state that the terms ``reasonable relationship'' and

[[Page 22184]]

``roughly equivalent'' are uncertain and will be subject to litigation. 
Fisher & Phillips also states that the first sentence of proposed 
section 541.604(a) is ambiguous because it suggests that the extra 
compensation must somehow be paid consistent with the salary basis 
requirements. The Department does not agree with the comments 
suggesting the elimination of the reasonable relationship requirement. 
If it were eliminated, an employer could establish a pay system that 
calculated exempt employees' pay based directly upon the number of 
hours they work multiplied by a set hourly rate of pay; employees could 
routinely receive weekly pay of $1,500 or more and yet be guaranteed 
only the minimum required $455 (thus effectively allowing the employer 
to dock the employees for partial day absences). Such a pay system 
would be inconsistent with the salary basis concept and the salary 
guarantee would be nothing more than an illusion. We believe that the 
proposed regulation provided clear guidance about the reasonable 
relationship requirement. The Department has never suggested a 
particular percentage requirement in prior opinion letters, and this 
issue has rarely arisen in litigation over the years. The proposed rule 
clarified these terms by stating that an employee who is guaranteed 
compensation of ``at least $500 for any week in which the employee 
performs any work, and who normally works four or five shifts each 
week, may be paid $150 per shift consistent with the salary basis 
requirement.'' Therefore, we have not made any changes to the proposal 
in this regard. However, we have modified the introductory sentence to 
clarify that the extra compensation does not have to be paid on a 
salary basis.
    One commenter states that the ``minimum guarantee plus extras'' 
concept allows too much flexibility and essentially allows an employer 
to circumvent the prohibition against docking for absences due to a 
lack of work. The commenter gives the example of registered nurses 
whose average pay is $30 per hour, who would earn the guaranteed 
minimum in two shifts. The commenter believes that the entire balance 
of the workweek could be compensated as ``extra compensation.'' Thus, 
the commenter expresses concern that a nurse could be paid for all 
additional shifts on a straight time basis, with no overtime, and if 
the hospital had a lack of work, the nurse might not receive more than 
the two shifts required to earn the minimum guarantee. This commenter 
views such a system as effectively converting a nurse into an hourly 
employee not paid overtime, or a salaried employee whose pay was 
reduced due to variations in the quantity of work performed. However, 
under the final rule, if an employee is compensated on an hourly basis, 
or on a shift basis, there must be a reasonable relationship between 
the amount guaranteed per week and the amount the employee typically 
earns per week. Thus, if a nurse whose actual compensation is 
determined on a shift or hourly basis usually earns $1,200 per week, 
the amount guaranteed must be roughly equivalent to $1,200; the 
employer could not guarantee such an employee only the minimum salary 
required by the regulation.
    Another commenter states that allowing an exempt employee to be 
paid based on an hourly computation is inconsistent with the general 
requirement that exempt employees must be paid on a salary basis. This 
comment does not take account of the fact that the employees affected 
by the reasonable relationship requirement must receive a salary 
guarantee that applies in any week in which they perform any work. The 
tolerance for computing their actual pay on an hourly, shift or daily 
basis is for computation purposes only; it does not negate the fact 
that such employees must receive a salary guarantee that will be in 
effect any time the employer does not provide sufficient hours or 
shifts for them to reach the guarantee. We believe that the reasonable 
relationship requirement, which has been a Wage and Hour Division 
policy for at least 30 years (see FOH Sec.  22b03), ensures that the 
salary guarantee for such employees is a meaningful guarantee rather 
than a mere illusion.
Section 541.605 Fee Basis
    Proposed section 541.605 simplified the fee basis provision in the 
current rule, but made no substantive change. Thus, the proposed rule 
provided that administrative and professional employees may be paid on 
a fee basis, rather than a salary basis: ``An employee may be paid on a 
`fee basis' within the meaning of these regulations if the employee is 
paid an agreed sum for a single job regardless of the time required for 
its completion.'' Generally, a ``fee'' is paid for a unique job. 
``Payments based on the number of hours or days worked and not on the 
accomplishment of a given single task are not considered payments on a 
fee basis.''
    The final rule does not make any changes to the proposed rule. Very 
few comments were submitted on this provision. The Fisher & Phillips 
law firm notes that the Sixth Circuit in Elwell v. University Hospitals 
Home Care Services, 276 F.3d 832 (6th Cir. 2002), held that a 
compensation plan that combines fee payments and hourly pay does not 
qualify as a fee basis because it ties compensation, at least in part, 
to the number of hours or days worked and not on the accomplishment of 
a given single task. It asks the Department to amend the rule to permit 
combining the payment of a fee with additional, non-fee-based 
compensation. The Department has decided not to change the long-
standing fee basis rule because the only appellate decision that 
addresses this issue accepted the ``fee-only'' requirement, and Fisher 
& Phillips conceded that this is an ``arcane and rarely-used'' 
provision. We continue to believe that payment of a fee is best 
understood to preclude payment of additional sums based on the number 
of days or hours worked. Another commenter asks the Department to 
revise the rule to eliminate the necessity for ``employers to track 
hours on a project or assignment in order to determine the exempt 
status of employees.'' However, as in the current rule, the final rule 
reasonably prescribes that in determining the adequacy of a fee 
payment, reference should be made to a standard workweek of 40 hours. 
Thus, ``[t]o determine whether the fee payment meets the minimum amount 
of salary required for exemption under these regulations, the amount 
paid to the employee will be tested by determining the time worked on 
the job and whether the fee payment is at a rate that would amount to 
at least $455 per week if the employee worked 40 hours.''
Section 541.606 Board, Lodging or Other Facilities
    Proposed section 541.606 defined the terms, ``board, lodging or 
other facilities.'' The Department did not receive substantive comments 
on this section, and has made no changes in the final rule.

Subpart H, Definitions and Miscellaneous Provisions

Section 541.700 Primary Duty
    Proposed section 541.700 defined the term ``primary duty'' as ``the 
principal, main, major or most important duty that the employee 
performs.'' The proposed rule stated that a determination of an 
employee's primary duty ``must be based on all the facts in a 
particular case,'' and set forth four nonexclusive factors to consider: 
``the relative importance of the exempt duties as compared with other 
types of duties; the amount of time spent performing exempt work; the 
employee's relative freedom from direct

[[Page 22185]]

supervision; and the relationship between the employee's salary and the 
wages paid to other employees for the same kind of nonexempt work.'' 
The proposed rule also provided that exempt employees are not required 
to spend over 50 percent of their time performing exempt work. However, 
because the amount of time spent performing exempt work ``can be a 
useful guide,'' employees who spend over 50 percent of their time 
performing exempt work ``will be considered to have a primary duty of 
performing exempt work.'' The section contained an example illustrating 
the circumstances in which employees spending less than 50 percent of 
their time performing exempt work can meet the primary duty test, and 
stated that the fact an employer has ``well-defined operating policies 
or procedures should not by itself defeat an employee's exempt 
status.''
    Section 541.700 of the final rule retains essentially the same 
principles as the proposed rule, but has been reorganized and 
supplemented with additional language and a second example to clarify 
the ``primary duty'' concept. Section 541.700(a) now sets forth the 
general principles regarding the ``primary duty'' requirement. The 
basic definition of ``primary duty,'' as the ``principal, main, major 
or most important duty that the employee performs,'' is unchanged. 
However, the final rule reinserts language from existing section 
541.304 that the words ``primary duty'' places the ``major emphasis on 
the character of the employee's job as a whole.'' The final section 
541.700(b) discusses in more detail the factor of the amount of time an 
employee spends performing exempt work. With only minor changes from 
the proposed rule, subsection (b) states that the ``amount of time 
spent performing exempt work can be a useful guide in determining 
whether exempt work is the primary duty of an employee. Thus, employees 
who spend more than 50 percent of their time performing exempt work 
will generally satisfy the primary duty requirement.'' In addition, 
subsection (b) now includes language reinserted from existing section 
541.103 with some editorial changes that: ``Time alone, however, is not 
the sole test, and nothing in this section requires that exempt 
employees spend more than 50 percent of their time performing exempt 
work. Employees who do not spend more than 50 percent of their time 
performing exempt duties may nonetheless meet the primary duty 
requirement if the other factors support such a conclusion.'' The final 
section 541.700(c) contains two examples applying the factors listed in 
subsection (a). The first example is modified from the proposed rule by 
deleting the proposed language ``handling customer complaints'' and 
substituting the phrase ``managing the budget.'' As explained elsewhere 
in this preamble, handling customer complaints may be exempt or 
nonexempt work depending on the facts of a particular case. Thus, 
``managing the budget'' is used as a better example of clearly exempt 
work. The second, new example states: ``However, if such assistant 
managers are closely supervised and earn little more than the nonexempt 
employees, the assistant managers generally would not satisfy the 
primary duty requirement.'' Finally, the sentence in the proposed rule 
regarding operating policies or procedures has been deleted here 
because it seems relevant only to the administrative exemption and is 
addressed in that subpart of the final regulations.
    Most of the commenters support the clarifying changes to the 
definition of ``primary duty'' in section 541.700. For example, the HR 
Policy Association, the U.S. Chamber of Commerce, the National 
Restaurant Association, and the National Association of Manufacturers 
welcome clarification of the primary duty concept, particularly with 
respect to the amount of time spent performing exempt work, and found 
section 541.700 simpler to apply and more reflective of the current 
workplace. The National Association of Federal Wage Hour Consultants 
states that: `` `Primary Duty' is currently one of the most 
misunderstood sections of the regulations. Too often enforcement 
personnel, the business community and its representatives confuse 
`primary' with a `mechanical' percentage test, i.e., 50-plus percent.''
    Some commenters object to the definition of ``primary duty'' in 
section 541.700 as the ``principal, main, major or most important duty 
that the employee performs.'' Commenters such as the National 
Employment Lawyers Association, for example, argue that terms such as 
``most important'' are vague, expand the primary duty analysis ``far 
beyond its current bounds,'' and would lead to increased litigation.
    This language is the first time the Department has attempted to 
include a short, general statement defining the term ``primary'' in the 
regulations, but it is not a change in current law. Numerous federal 
courts, relying primarily on dictionary definitions, have defined the 
term ``primary'' to mean ``most important,'' ``principal'' or 
``chief.'' See, e.g., Mellas v. City of Puyallup, 1999 WL 841240, at *2 
(9th Cir. 1999) (``most important'' duty); Dalheim v. KDFW-TV, 918 F.2d 
1220, 1227 (5th Cir. 1990) (``[T]he essence of the test is to determine 
the employee's chief or principal duty * * * [T]he employee's primary 
duty will usually be what she does that is of principal value to the 
employer''); Donovan v. Burger King Corp., 675 F.2d 516, 521 (2nd Cir. 
1982) (primary duty defined as the employee's ``principal 
responsibilities'' that are ``most important or critical to the 
success'' of the employer); Donovan v. Burger King Corp., 672 F.2d 221, 
226 (1st Cir. 1982) (primary duty defined as the ``principal'' or 
``chief'' duty, rather than ``over one-half'') (internal quotation 
marks omitted). Because the Department relied on these cases, the 
existing regulations, and dictionary definitions to formulate the 
general definition of ``primary,'' the commenters' concerns are without 
merit.
    The major comments expressing opposition to proposed section 
541.700 view the primary duty definition to be a major departure from a 
purported existing ``bright-line'' test in the current regulations 
requiring exempt employees to spend more than 50 percent of their time 
performing exempt work. The American Federation of Government Employees 
(AFGE), for example, states that proposed section 541.700 was 
``essentially, the destruction of the most crucial test in the entire 
FLSA exemption area.'' The AFGE, like other commenters objecting to 
this section, believes that the current primary duty test ``provides an 
absolutely essential `bright line' for exemption analysis: 50% of an 
employee's actual job performance must be engaged in exempt 
activities.'' Abandonment of this ``bright-line test,'' such commenters 
assert, will result in increased confusion and litigation. The National 
Employment Lawyers Association similarly states: ``If the definition of 
`primary duty' is to have meaning as a limit on the exemptions, it must 
contain a time component that has more effect than being one of five 
enumerated factors to consider.''
    After careful consideration, the Department must reject these 
objections. These comments fail to take account of the existing 
regulations and federal case law. Comments objecting to section 541.700 
are simply wrong in asserting that the current law defines ``primary 
duty'' by a bright-line 50 percent test. The existing section 541.103 
has for decades provided that ``it may be taken as a good rule of thumb 
that primary duty means the major part, or over 50 percent, of the 
employee's time'' but that ``[t]ime alone, however, is not the sole 
test.'' Thus, section 22c02 of the

[[Page 22186]]

Wage and Hour Field Operations Handbook states that ``the 50% test is 
not a hard-and-fast rule but rather a flexible rule of thumb. In many 
cases, an exempt employee may spend less than 50% of his time in 
managerial duties but still have management as his primary duty.'' 
Federal courts also recognize that the current regulations establish a 
50 percent ``rule of thumb''--not a ``bright-line'' test. Federal 
courts have found many employees exempt who spent less than 50 percent 
of their time performing exempt work. See, e.g., Jones v. Virginia Oil 
Co., 2003 WL 21699882, at *4 (4th Cir. 2003) (management found to be 
the ``primary duty'' of employee who spent 75 to 80 percent of her time 
on basic line-worker tasks); Murray v. Stuckey's, Inc., 939 F.2d 614, 
618-20 (8th Cir. 1991) (manager met the ``primary duty'' test despite 
spending 65 to 90 percent of his time in non-management duties), cert. 
denied, 502 U.S. 1073 (1992); Glefke v. K.F.C. Take Home Food Co., 1993 
WL 521993, at *4-5 (E.D. Mich. 1993) (employee found exempt despite 
assertion that she spent less than 20 percent of time on managerial 
duties because ``the percentage of time is not determinative of the 
primary duty question, rather, it is the collective weight of the four 
factors''); Stein v. J.C. Penney Co., 557 F. Supp. 398, 404-05 (W.D. 
Tenn. 1983) (employee spending 70 to 80 percent of his time on non-
managerial work held exempt because the ``overall nature of the job'' 
is determinative, not ``the precise percentage of time involved in a 
particular type of work'').
    Adopting a strict 50-percent rule for the first time would not be 
appropriate, as evidenced by the comments discussed in the Structure 
and Organization section above, because of the difficulties of tracking 
the amount of time spent on exempt tasks. An inflexible 50-percent rule 
has the same flaws as an inflexible 20-percent rule. Such a rule would 
require employers to perform a moment-by-moment examination of an 
exempt employee's specific daily and weekly tasks, thus imposing 
significant new monitoring requirements (and, indirectly, new 
recordkeeping burdens).
    Other commenters objecting to section 541.700, such as the 
International Federation of Professional & Technical Engineers, assert 
that section 541.700 adopts an ``Alice in Wonderland'' approach. They 
assert that this section creates an ``outcome-oriented double 
standard'' because it provides that employees who spend more than 50 
percent of their time performing exempt work generally satisfy the 
primary duty test, while employees spending less than 50 percent do not 
necessarily fail the test.
    But what the commenters call an ``Alice in Wonderland'' double 
standard actually appears in the current Part 541 regulations. For 
decades, current section 541.103 has created a presumption of exempt 
status for employees crossing the 50-percent threshold while 
recognizing no presumption of nonexempt status for those who do not 
cross the threshold. The existing section 541.103 states:

    Thus, an employee who spends over 50 percent of his time in 
management would have management as his primary duty. Time alone, 
however, is not the sole test, and in situations where the employee 
does not spend over 50 percent of his time in managerial duties, he 
might nevertheless have management as his primary duty if the other 
pertinent factors support such a conclusion.

See also Auer v. Robbins, 65 F.3d 702, 712 (8th Cir. 1995) (``if an 
employee spends less than 50% of his time on managerial duties, he is 
not presumed to have a primary duty of nonmanagement''), aff'd on 
another issue, 519 U.S. 452 (1997). The final rule retains this current 
language with only minor editorial changes.
    The final rule lists the same four non-exclusive factors as the 
proposal for determining the primary duty of an employee: (1) The 
relative importance of the exempt duties as compared with other types 
of duties; (2) the amount of time spent performing exempt work; (3) the 
employee's relative freedom from direct supervision; and (4) the 
relationship between the employee's salary and the wages paid to other 
employees for the same kind of nonexempt work. The time spent 
performing exempt work has always been, and will continue to be, just 
one factor for determining primary duty. Spending more than 50 percent 
of the time performing exempt work has been, and will continue to be, 
indicative of exempt status. Spending less than 50 percent of the time 
performing exempt work has never been, and will not be, dispositive of 
nonexempt status.
    Several commenters request clarification as to whether the 
determination of an employee's primary duty is made by looking to a 
single duty or many duties. The Morgan, Lewis & Bockius law firm, for 
example, suggests that the Department change ``primary duty'' to 
``primary duties,'' in order to reduce the perception that any single 
task, rather than the aggregate of job tasks, defines an employee's 
primary duty. In contrast, the AFL-CIO asserts that the term is 
properly considered in the singular.
    The current law is actually somewhere in the middle of these two 
viewpoints. Although ``primary duty'' is generally singular, an 
employee's primary duty can encompass multiple tasks. Thus, for 
example, an employee would have ``management'' as his primary duty if 
he performed tasks such as preparing budgets, negotiating contracts, 
planning the work, and reporting on performance. As stated in the 1949 
Weiss Report at 61, the search for an employee's primary duty is a 
search for the ``character of the employee's job as a whole.'' Thus, 
both the current and final regulations ``call for a holistic approach 
to determining an employee's primary duty,'' not ``day-by-day scrutiny 
of the tasks of managerial or administrative employees.'' Counts v. 
South Carolina Electric & Gas Co., 317 F.3d 453, 456 (4th Cir. 2003) 
(``Nothing in the FLSA compels any particular time frame for 
determining an employee's primary duty''). To clarify this ``holistic 
approach,'' the Department has reinserted in subsection (a) the 
language from current 541.304 that the determination of an employee's 
primary duty must be based on all the facts in a particular case ``with 
the major emphasis on the character of the employee's job as a whole.''
    The Department considered but has not incorporated in the final 
rule other various proposals to add, delete or modify section 541.700. 
For example, because the Department does not intend to eliminate the 
amount of time spent on exempt tasks as a factor for determining 
primary duty, we reject the suggestion of the Morgan, Lewis & Bockius 
law firm and others to remove the language stating that time is a 
``useful guide.'' The Smith Currie law firm proposes adding ``in the 
discretion of the employer'' to the definition of primary duty. 
However, the primary duty determination is based on all the facts and 
circumstances of each case, not upon the ``discretion'' of the 
employer. Similarly, the National Association of Chain Drug Stores 
(NACDS) proposes allowing employers the opportunity, as they have under 
the Americans with Disabilities Act, to create a ``rebuttable 
presumption'' regarding an employee's primary duty by identifying the 
principal duties of the employee in a job description. NACDS suggests 
adding ``as determined or expressed by the employer in any agreement, 
job status form, job offer, job description or other document created 
by the employer in good faith and acknowledged by the employee verbally

[[Page 22187]]

or in writing.'' The Department recognizes that such documents or 
agreements may be of some evidentiary value. However, the work actually 
performed by an employee--not any description or agreement--controls 
the determination of the employee's primary duty. See 1949 Weiss Report 
at 86 (rejecting proposal to permit employer and employee to reach 
agreement as to whether exemptions apply); 1940 Stein Report at 25 (``a 
title alone is of little or no assistance in determining the true 
importance of an employee to the employer. Titles can be had cheaply 
and are of no determinative value''). The Food Marketing Institute 
comments that the definition should explicitly state that employees, 
such as managers in retail establishments, ``should not be subject to 
arbitrary calculations of the time they spend performing manual labor. 
* * *'' As set forth in the cases cited above, and in the examples in 
the final rule, the Department has made clear that managers may perform 
exempt work less than 50 percent of the time and nevertheless have a 
primary duty of management, depending upon the collective weight of the 
factors. Final section 541.106 also provides that an employee's 
managerial duties can be performed concurrently with nonexempt tasks. 
No further clarification of this point is necessary. Finally, the 
Fisher & Phillips law firm seeks modification of the wage comparison 
factor to reflect that exempt employees are frequently eligible for 
other forms of compensation not widely available to nonexempt 
employees. Because final section 541.700(a) already provides that all 
the facts and circumstances of each case are relevant, such facts may 
be taken into account in determining primary duty without further 
changes in this section.
Section 541.701 Customarily and Regularly
    Proposed section 541.701 defined the phrase ``customarily and 
regularly'' to mean ``a frequency that must be greater than occasional 
but which, of course, may be less than constant. Tasks or work 
performed `customarily and regularly' includes work normally and 
recurrently performed every workweek; it does not include isolated or 
one-time tasks.''
    The final section 541.701 retains the proposed language without 
change.
    The Department received a few comments on section 541.701 that the 
``every workweek'' requirement in section 541.701 does not reflect that 
some exempt tasks may not be performed every week or only once each 
week. The Grocery Manufacturers of America (GMA), for example, states 
that this language is ambiguous and does not take into account that 
certain activities, such as lengthy preparation and presentation time 
that often goes into significant sales efforts, may not take place 
``recurrently'' within a given week. GMA proposes that the term 
``customarily and regularly'' should mean ``duties performed at least 
once in each workweek.'' Similarly, the McInroy & Rigby law firm and 
the Miller Canfield law firm seek clarification of the ``workweek-by-
workweek'' timeframe and its application in determining exempt 
activities.
    The Department does not believe any changes to section 541.701 are 
necessary. A similar definition of the term ``customarily and 
regularly'' has appeared for decades in section 541.107(b) of the 
existing regulations, and case law does not indicate significant 
difficulties with applying the definition. The term ``customarily and 
regularly'' requires a case-by-case determination, based on all the 
facts and circumstances, over a time period of sufficient duration to 
exclude anomalies. See, e.g., Wage and Hour Opinion of August 20, 1992, 
1992 WL 845098 (analysis should be ``over a significant time span, 
especially in smaller organizations * * * to eliminate the possibility 
of significant cycles in work requirements and to support that there 
are sufficient exempt duties on a week-in-week-out basis to support the 
exemption claimed''); Wage and Hour Field Operations Handbook, section 
22c00(d) (``The determination as to whether an employee customarily and 
regularly supervises other employees * * * depends on all the facts and 
circumstances''). Nothing in this section requires that, to meet the 
definition of ``customarily and regularly,'' a task be performed more 
than once a week or that a task be performed each and every workweek.
Section 541.702 Exempt and Nonexempt Work
    Proposed section 541.702 stated, ``The term `exempt work' means all 
work described in Sec. Sec.  541.100, 541.101, 541.102, 541.200, 
541.206, 541.300, 541.301, 541.302, 541.303, 541.304, 541.400 and 
541.500, and the activities directly and closely related to such work. 
All other work is considered `nonexempt.' '' The final rule deletes the 
inadvertent reference to a non-existent section 541.206 and the 
reference to the now-deleted ``sole charge'' exemption in proposed 
section 541.102. The Department received no significant comments on 
this section, and thus has made no other changes.
Section 541.703 Directly and Closely Related
    Proposed section 541.703 defined the phrase ``directly and closely 
related'' to mean ``tasks that are related to exempt duties and that 
contribute to or facilitate performance of exempt work.'' Subsection 
(a) further explains that ``directly and closely related'' work ``may 
include physical tasks and menial tasks that arise out of exempt 
duties, and the routine work without which the exempt employee's more 
important work cannot be performed properly. Work `directly and closely 
related' to the performance of exempt duties may also include 
recordkeeping; monitoring and adjusting machinery; taking notes; using 
the computer to create documents or presentations; opening the mail for 
the purpose of reading it and making decisions; and using a photocopier 
or fax machine. Work is not `directly and closely related' if the work 
is remotely related or completely unrelated to exempt duties.'' 
Proposed section 541.703(b) set forth 10 examples to illustrate the 
type of work that is and is not normally considered as directly and 
closely related to exempt work.
    The final section 541.703 retains the proposed language without 
change.
    The AFL-CIO comments that under the proposed section, ``it is hard 
to imagine any type of nonexempt work failing to qualify as `directly 
and closely related.' ''
    The Department notes that the explanation of the phrase ``directly 
and closely related'' in final section 541.703(a) is taken from the 
current sections 541.108 and 541.202, including the specific language 
concerning what is not ``directly and closely related'' to which the 
AFL-CIO objected. See current 29 CFR 541.202(d) (``These `directly and 
closely related' duties are distinguishable from * * * those which are 
remotely related or completely unrelated to the more important tasks'') 
(emphasis added). Similarly, the notion that ``directly and closely 
related'' work contributes to or facilitates the performance of exempt 
work is a long-standing and common sense concept reflected in the 
current rule. See current 29 CFR 541.202(c). The Department did not 
intend any substantive change to the meaning of the phrase ``directly 
and closely related'' and intends that the term be interpreted in 
accordance with the long-standing meaning under the current rule. See 
Harrison v. Preston Trucking Co., 201 F. Supp. 654, 658-59 (D. Md. 
1962) (``[T]he test is not whether the work is essential to the proper

[[Page 22188]]

performance of the more important work, but whether it is related'').
    The International Association of Fire Fighters comments, without 
offering any specific suggestions, that the Department should add 
examples to the section concerning what is not ``directly and closely 
related'' to exempt work. Other commenters make specific suggestions 
for additional tasks and examples including, among others, computer 
employees performing software debugging and other tasks (Contract 
Services Association), therapists or counselors participating in 
outdoor activities with patients as part of a treatment program (FLSA 
Reform Coalition) and financial consultants engaging in activities 
related to acquiring customers (Securities Industry Association).
    The Department has retained the proposed rule without any 
additions. The question of whether work is ``directly and closely 
related'' to the performance of exempt work is ``one of fact depending 
upon the particular situation involved.'' See 1949 Weiss Report at 30. 
The final rule provides 10 representative examples to assist in 
illustrating the ``directly and closely related'' concept. Each of the 
examples is taken directly from the current rule. In the interest of 
streamlining the regulations, the proposed and final rule consolidated 
the most salient examples. Given the fact-intensive nature of the 
inquiry, the Department believes that, similar to the approach taken in 
the current rule, providing guiding principles and these specific 
illustrative examples best enables a determination of what is and is 
not ``directly and closely related.'' The Department believes final 
section 541.703 is straightforward and amply offers guiding principles 
that readily can be applied.
Section 541.704 Use of Manuals
    Subpart H of the final regulations moves regulatory language on the 
use of manuals from proposed section 541.204, regarding the 
administrative exemption, to a new section 541.704 because the section 
is equally applicable to the other section 13(a)(1) exemptions. Final 
section 541.704 makes a number of minor editorial changes to the 
proposed language, none of which are intended as substantive. Final 
section 541.704 states:

    The use of manuals, guidelines or other established procedures 
containing or relating to highly technical, scientific, legal, 
financial or other similarly complex matters that can be understood 
or interpreted only by those with advanced or specialized knowledge 
or skills does not preclude exemption under section 13(a)(1) of the 
Act or the regulations in this part. Such manuals and procedures 
provide guidance in addressing difficult or novel circumstances and 
thus use of such reference material would not affect an employee's 
exempt status. The section 13(a)(1) exemptions are not available, 
however, for employees who simply apply well-established techniques 
or procedures described in manuals or other sources within closely 
prescribed limits to determine the correct response to an inquiry or 
set of circumstances.

    Some commenters object to the language in proposed subsections 
541.204(b) and (c) regarding the use of manuals, although most 
commenters are supportive of the proposed language. One commenter 
suggests that the Department eliminate the phrase ``very difficult or 
novel circumstances'' so as not to exclude from the exemptions a highly 
skilled employee who must rely on or comply with manuals in other 
routine circumstances. Other commenters suggest that the regulations 
should distinguish manuals used to apply prescribed skills and 
knowledge in recurring and routine situations from manuals that simply 
set forth the bounds within which discretion and independent judgment 
are to be exercised with substantial leeway. These commenters state 
that the regulations should reinforce the idea that sharply-constrained 
authority to make day-to-day decisions within a narrow range of options 
will not satisfy the tests for exemption.
    The Department has retained the provision on manuals in final 
section 541.704, with only minor wording changes. The proposal 
appropriately differentiated between manuals that dictate how an 
employee must apply prescribed skills in recurring and routine 
situations, and manuals that provide guidance involving highly complex 
information pertinent to difficult or novel circumstances. The 
provision adopted by the Department is consistent with existing case 
law. The employee in McAllister v. Transamerica Occidental Life 
Insurance Co., 325 F.3d 997 (8th Cir. 2003), for example, was a claims 
coordinator responsible for handling the most complex death and 
disability insurance claims independently, including the complex and 
large dollar cases involving contestable claims, fraud and 
disappearances. The employee oversaw the investigation of claims, 
reviewed investigation files and determined if further investigation 
was necessary. The court found the employee to be an exempt 
administrator even though she relied upon a claims manual. The court 
quoted a statement made in the introduction to the manual itself, 
stating that the manual could not be written in sufficient detail to 
cover all facets of claims handling and that a large percentage of the 
work could not be guided by the manual. The court held the employee was 
exempt because the manual gave her authority to decide whether to 
pursue a fraudulent claim investigation and she had significant 
settlement authority. She did not merely apply specific, well-
established guidance or constraining standards. See also Haywood v. 
North American Van Lines, Inc., 121 F.3d 1066, 1073 (7th Cir. 1997) 
(employee administratively exempt even though she followed established 
procedures because the guidelines gave employees latitude in 
negotiating a settlement, including advising employees to use ``common 
sense''); Dymond v. United States Postal Service, 670 F.2d 93 (8th Cir. 
1982) (finding postal inspectors exempt even though some of their 
duties required them to follow a field manual that contained detailed 
procedures and standards). Compare Brock v. National Health Corp., 667 
F. Supp. 557, 566 (M.D. Tenn. 1987) (``staff accountants'' utilizing 
two major reference manuals not exempt as administrative employees 
where they simply ``tabulated numbers by merely following the 
prescribed steps set out in a manual''). See also Ale v. Tennessee 
Valley Authority, 269 F.3d 680, 686 (6th Cir. 2001) (training officer 
not exempt administrative employee where employee simply applied 
knowledge in following prescribed procedures and determining whether 
specified standards were met under Administrative Orders); Cooke v. 
General Dynamics Corp., 993 F. Supp. 56, 65 (D. Conn. 1997) (citing 
section 541.207(c)(2)'s preclusion of administrative exemption to ``an 
inspector who must follow `well-established techniques and procedures 
which may have been cataloged and described in manuals or other 
sources' '').
    Final section 541.704 is intended to avoid the absurd result, noted 
by several commenters, reached in Hashop v. Rockwell Space Operations 
Co., 867 F. Supp. 1287 (S.D. Tex. 1994). The plaintiffs in the Rockwell 
Space Operations case were instructors who trained ``Space Shuttle 
ground control personnel during simulated missions.'' Id. at 1291. The 
plaintiffs were responsible for assisting in development of the script 
for the simulated missions, running the simulation, and debriefing 
Mission Control on whether the trainees handled simulated anomalies 
correctly. Id. at 1292. The plaintiffs had college degrees in 
electrical engineering,

[[Page 22189]]

mathematics or physics. Id. at 1296. Nonetheless, the court found the 
plaintiffs were not exempt professionals because the appropriate 
responses to simulated Space Shuttle malfunctions were contained in a 
manual. Id. at 1298. In the Department's view, the reliance by an 
engineer or physicist on a manual outlining appropriate responses to a 
Space Shuttle emergency (or a problem in a nuclear reactor, as another 
example) should not transform a learned professional scientist into a 
nonexempt technician.
    The Department believes that the discussion of company manuals in 
the final rule is consistent with the weight of existing case law. The 
Rockwell Space Operations case appears to be an anomaly which has not 
been followed by other courts. In addition, final section 541.704 
properly distinguishes between manuals that provide specific directions 
on routine and recurring circumstances and those that provide general 
guidance on addressing open-ended or novel circumstances.
Section 541.705 Trainees (Proposed Sec.  541.704)
    Proposed section 541.704 stated that the exemptions are not 
available to ``employees training for employment in an executive, 
administrative, professional, outside sales or computer employee 
capacity who are not actually performing the duties of an executive, 
administrative, professional, outside sales or computer employee.''
    Proposed section 541.704 has been renumbered to 541.705 in the 
final regulation, but the proposed language is adopted without change.
    The U.S. Chamber of Commerce (Chamber) suggests that this section 
should be modified to allow employees in bona fide executive training 
programs to qualify under the exemptions. The Chamber argues that the 
``principal'' duty of those in such training programs is not the varied 
nonexempt tasks they may perform, but rather, it is receiving the 
skills and knowledge necessary to assume managerial and/or executive 
roles. Furthermore, the Chamber states, the ``primary duty'' of such 
trainees is substantially different from nonexempt employees.
    The Department has no statutory authority to provide exemptions for 
management trainees who do not perform exempt duties and therefore must 
reject the Chamber's request to expand proposed section 541.704. See 
Wage and Hour Opinion of August 26, 1976, 1976 WL 41748; 1949 Weiss 
Report at 47-48. Employees, including trainees, who do not ``actually 
perform'' the duties of an exempt executive, administrative, 
professional, outside sales or computer employee cannot be considered 
exempt. See Wage and Hour Opinion of March 7, 1994, 1994 WL 1004555; 
Dole v. Papa Gino's of America, Inc., 712 F. Supp. 1038, 1042 (D. Mass. 
1989) (associate managers performing ``crew member'' work to ``learn by 
doing'' were nonexempt trainees).
    Other comments request additional clarification of the definition 
of ``trainee,'' ask whether trainees who would become exempt upon 
completion of their training should be exempt while in training, and 
ask whether ``interns'' are trainees.
    The Department does not believe further clarification is necessary 
because section 541.705 is relatively straightforward. The inquiry in 
all cases simply involves determining whether or not the employee is 
``actually performing the duties of'' an executive, administrative, 
professional, outside sales or computer employee. The Department 
recognizes that there may be formalized, bona fide executive or 
management training programs that involve employees ``actually 
performing'' exempt work, but other training programs can involve 
performance of significant nonexempt work. For example, an employee in 
a management training program of a restaurant who spends the first 
month of the program washing dishes and the second month of the program 
cooking does not have a primary duty of management. Accordingly, it is 
not appropriate to adopt a blanket exemption for all ``trainees.''
Section 541.706 Emergencies (Proposed Sec.  541.705)
    Proposed section 541.705(a) provided that an ``exempt employee will 
not lose the exemption by performing work of a normally nonexempt 
nature because of the existence of an emergency. Thus, when emergencies 
arise that threaten the safety of employees, a cessation of operations 
or serious damage to the employer's property, any work performed in an 
effort to prevent such results is considered exempt work.'' Proposed 
section 541.705(b) stated that an `` `emergency' does not include 
occurrences that are not beyond control or for which the employer can 
reasonably provide in the normal course of business. Emergencies 
generally occur only rarely, and are events that the employer cannot 
reasonably anticipate.'' Proposed section 541.705(c) set forth four 
illustrative examples to assist in distinguishing exempt emergency work 
from routine work that would not be considered exempt.
    Proposed section 541.705 has been renumbered as 541.706, but the 
final rule retains the proposed language without change.
    Comments from the Printing Industries of America and the Kullman 
Firm ask that the Department specifically include labor strikes and 
lockouts in this provision. Other comments, including those from the 
Miller Canfield law firm, suggest additional examples involving 
emergencies that endanger the public safety.
    In light of the clear guiding principles set forth in proposed 
section 541.705, the Department sees no reason to change the language 
of the final provision. The Department agrees with Miller Canfield that 
emergencies arising out of an employer's business and affecting the 
public health or welfare can qualify as emergencies under this section, 
applying the same standards as emergencies that affect the safety of 
employees or customers. The main purpose of this provision is to 
provide a measure of common sense and flexibility in the regulations to 
allow for real emergencies ``of the kind for which no provision can 
practicably be made by the employer in advance of their occurrence.'' 
See 1949 Weiss Report at 42. The Department also recognizes that, 
depending upon the circumstances, a labor strike may qualify as an 
emergency for some short time period, although all the facts must be 
considered in order to determine the length of the ``emergency'' 
situation. See Dunlop v. Western Union Telegraph Co., 22 Wage & Hour 
Cas. (BNA) 859 (D.N.J. 1976).
    The list of situations in which exempt employees could perform 
nonexempt work without loss of the exemption is not meant to be 
exhaustive. Other such instances of exempt employees performing 
nonexempt work under unanticipated circumstances without loss of the 
exemption could arise on a case-by-case basis. In addition, it 
continues to be the Department's position that nonexempt work cannot 
routinely be assigned to exempt employees solely for the convenience of 
an employer without calling into question the application of the 
exemption to that employee.
Section 541.707 Occasional Tasks (Proposed Sec.  541.706)
    Proposed section 541.706 provided that occasional, infrequently 
recurring tasks, ``that cannot practicably be performed by nonexempt 
employees, but are the means for an exempt employee to properly carry 
out exempt functions and responsibilities, are

[[Page 22190]]

considered exempt work.'' To determine whether such work is exempt 
work, proposed section 541.706 set forth the following factors: 
``whether the same work is performed by any of the executive's 
subordinates; practicability of delegating the work to a nonexempt 
employee; whether the executive performs the task frequently or 
occasionally; and existence of an industry practice for the executive 
to perform the task.''
    Proposed section 541.706 has been renumbered to 541.707. Since this 
section is equally applicable to all the exemptions, the final section 
541.707 deletes the inadvertent references to ``executives'' throughout 
and instead refers to ``exempt employees.''
    Various commenters state that the regulations should take into 
account that exempt employees may choose, consistent with the nature of 
the employer's establishment and its operational requirements at a 
particular time, to perform nonexempt work necessary to accomplish the 
employee's primary duty. The Department believes that this issue has 
been adequately addressed in final section 541.106 (concurrent duties), 
and no changes are necessary here.
Section 541.708 Combination Exemptions (Proposed Sec.  541.707)
    Proposed section 541.707 provided that employees ``who perform a 
combination of exempt duties as set forth in these regulations for 
executive, administrative, professional, outside sales and computer 
employees may qualify for exemption. Thus, for example, an employee who 
works 40 percent of the time performing exempt administrative duties 
and another 40 percent of the time performing exempt executive duties 
may qualify for exemption. In other words, work that is exempt under 
one section of this part will not defeat the exemption under any other 
section.''
    Proposed section 541.707 has been renumbered as section 541.708. 
The final rule modifies the second sentence of section 541.708 to read: 
``Thus, for example, an employee whose primary duty involves a 
combination of exempt administrative and exempt executive work may 
qualify for exemption.''
    The final rule retains the allowance for ``tacking,'' or combining 
exempt work which may fall under different subparts of Part 541, while 
responding to comments raising concerns about the interplay of 
``primary duty'' with the example set forth in proposed section 
541.707. The FLSA Reform Coalition and the American Insurance 
Association, for example, point out that the example in the proposed 
section suggests that an employee who works 40 percent of the time 
performing exempt administrative duties would be nonexempt absent the 
additional time spent on executive duties. The Department agrees with 
these concerns, and also agrees that such a suggestion in the proposal 
is contrary to the definition of ``primary duty'' in section 541.700. 
Under section 541.700, such an employee would be an exempt 
administrator, even without the executive duties, if his or her 
administrative tasks constituted the employee's primary duty, 
regardless of the amount of time spent on them. Accordingly, the 
Department has changed the second sentence of the proposed section as 
follows, to clarify the intent and interplay of final section 541.708 
with the primary duty concept of section 541.700: ``Thus, for example, 
an employee whose primary duty involves a combination of exempt 
administrative and exempt executive work may qualify for exemption.'' 
The Department's clarification responds to similar comments by the HR 
Policy Association, the Society for Human Resource Management, the Food 
Marketing Institute, the National Council of Agricultural Employers and 
the Public Sector FLSA Coalition.
Section 541.709 Motion Picture Producing Industry (Proposed Sec.  
541.708)
    Proposed section 541.708 provided an exception to the salary basis 
requirements for otherwise exempt executive, administrative, and 
professional employees in the motion picture producing industry. 
Generally, so long as such employees are earning a base rate of at 
least $650 a week based on a six-day workweek, employers may classify 
them as exempt even though they work partial workweeks and are paid a 
daily rate, rather than a weekly salary.
    Proposed section 541.708 has been renumbered as section 541.709. 
The final section 541.709 retains the proposed language, except for a 
single clarifying correction in grammar (changing ``under subparts B, C 
and D of this part'' to ``under subparts B, C or D of this part''). The 
final rule also adjusts the $650 figure to $695, consistent with the 
increased minimum salary level for exemption.
    The Department received only a few comments on this section. 
However, the Akin, Gump, Strauss, Hauer & Feld law firm argues, on 
behalf of a number of entertainment technology companies, that the 
rationale for section 541.709 is the project-based nature of the motion 
picture industry, one in which otherwise exempt employees are hired for 
finite periods of time and often work partial workweeks. Since the same 
``peculiar employment circumstances'' existing in the motion picture 
producing industry also exist throughout much of the entertainment 
industry, the firm states, section 541.709 should be expanded to cover 
the ``entertainment industry'' generally. The commenter suggests that 
the definition of the entertainment industry in the Employee Retirement 
Income Security Act (ERISA) could be adopted for purposes of section 
541.709.
    In adopting the exception for the motion picture producing industry 
in 1953, the Department agreed with the Association of Motion Picture 
Producers that given the ``peculiar employment conditions'' of the 
industry, the producers are not able to economically employ needed 
specialists on a constant basis, but must frequently employ such 
employees for partial workweeks. Accordingly, the industry developed 
over the years ``methods of compensation which reflect this pattern of 
operations.'' See 18 FR 2881 (May 19, 1953); 18 FR 3930 (July 7, 1953).
    Without further information and consideration of particular 
employment circumstances, the Department cannot extend the exception to 
the entire entertainment industry as suggested. The Department is not 
unaware, however, that technological advances in the past half century 
make it more likely that, on a case-by-case basis, the rationale 
underlying section 541.709 might be applied more broadly depending upon 
the specific facts. In that regard, the Department issued an opinion 
letter in 1963 extending the exception to employees of producers of 
television films and videotapes, noting, ``the production of T.V. films 
and videotapes encompasses the same employment practices and conditions 
which characterize the production of motion pictures.'' Wage and Hour 
Opinion of October 29, 1963; see also Wage and Hour Field Operations 
Handbook, section 22b09 (adopting this extension to television and 
videotapes).
    An additional commenter argues for the elimination of the 
``exemption'' for production assistants and post-production assistants. 
This commenter misunderstands that section 541.709 relates only to an 
exception from the salary basis requirements for otherwise exempt 
employees in the industry.
Section 541.710 Employees of Public Agencies (Proposed Sec.  541.709)
    Proposed section 541.709(a) provided that an ``employee of a public 
agency

[[Page 22191]]

who otherwise meets the salary basis requirements of Sec.  541.602 
shall not be disqualified from exemption under Sec. Sec.  541.100, 
541.200, 541.300 or 541.400 on the basis that such employee is paid 
according to a pay system established by statute, ordinance or 
regulation, or by a policy or practice established pursuant to 
principles of public accountability, under which the employee accrues 
personal leave and sick leave and which requires the public agency 
employee's pay to be reduced or such employee to be placed on leave 
without pay for absences for personal reasons or because of illness or 
injury of less than one work-day when accrued leave is not used by an 
employee because: (1) Permission for its use has not been sought or has 
been sought and denied; (2) Accrued leave has been exhausted; or (3) 
The employee chooses to use leave without pay.'' Proposed section 
541.709(b) stated that ``deductions from the pay of an employee of a 
public agency for absences due to a budget-required furlough shall not 
disqualify the employee from being paid on a salary basis except in the 
workweek in which the furlough occurs and for which the employee's pay 
is accordingly reduced.''
    Proposed section 541.709 has been renumbered as final section 
541.710, and retains the proposed language without change.
    The language in section 541.710 is from the current section 
541.5(d), and the reasons for its promulgation were explained in 57 FR 
37677 (August 19, 1992) and continue to be valid. The Department 
received comments from public employers and employees during the 
current rulemaking addressing many of the provisions of the entire 
proposal, including the salary basis of payment. None of their 
comments, however, addressed the constitutional or statutory public 
accountability requirements in the funding of state and local 
governments that was the original rationale for this particular 
provision. The Department continues to believe this is a necessary 
exception to the salary basis requirement for public employees, and it 
is included in the final regulations.