Many organizations representing employee interests as well as some employers generally supported the updating mechanism, while most organizations representing employer interests opposed it. Many of the commenters opposing the proposed updating mechanism asserted that the Department lacked the authority to institute such a mechanism. After considering the comments received, the Department is finalizing the updating mechanism, with some modifications as discussed below, to keep the salary and compensation thresholds up to date with current data and maintain their effectiveness. Employers may elect to continue to claim the EAP exemption for affected employees by adjusting salary levels, hiring additional workers, spreading overtime hours to other employees, or compensating employees for overtime hours worked. The Department makes available a variety of resources to employers for understanding their obligations and achieving compliance.

Figure 7—10-Year Projected Number of Affected Workers

A longer effective date for the new standard salary level and HCE compensation methodologies would provide employers with more time to make adjustments after they are informed of the exact levels of the thresholds set in this final rule. In terms of its findings, concerning employment, the author found that expansions in overtime coverage actually had little effect on employment. He also found that average weekly earnings rose by about 1.4% for salaried workers, and found no evidence that firms reduced base pays in response to changes in the overtime threshold. Concerning salary status, he found that approximately 2.6% of affected workers are re-classified from salaried to hourly status.

Table 26—Projected Costs and Transfers, Standard Salary and HCE Compensation Levels

The Department believes that the pause provision will provide additional flexibility in the context of the triennial updates and will not impact the Department’s normal rulemaking powers. The FLSA sets minimum wage, overtime pay, and recordkeeping requirements for employment subject to its provisions. Unless exempt, covered employees must be paid at least the minimum wage and not less than one and one-half times their regular rates of pay for overtime hours worked.

III. Need for Rulemaking

However, the pool of workers for whom employers will be required to make and maintain records has increased under the final rule, and as a result the burden hours have increased. However, this is a duplication of the regulatory familiarization costs contained in section VII, economic impact analysis. The Department agrees with commenters that supported the NPRM’s objective of updating the salary level in part to account for the move to a one-test system.

Table 19—Annual Transfers by Region, Year 1

The Department further notes that its estimates of transfers are informed by its projection that employers will respond to the final rule in many ways. If, for example, an employer simply pays each affected employee the overtime premium for each hour worked in excess of 40 hours per week, without oxford house traditions making any adjustments to wages, hours, or duties, such an approach would maximize transfers from employers to employees. However, as discussed above, the Department believes that employers will respond to the final rule by adjusting wages, hours, and duties to minimize the cost of the rule.

B. Standard Salary Level

The Department recognizes that many commenters found the proposed methodology conservative, or overly conservative, with some commenters urging the Department to select a methodology that produces a higher salary level. Repeating the 2016 rule methodology, as some commenters requested, by setting the salary level at the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region would further reduce the impact of the move to a one-test system on lower-paid white-collar employees who perform significant amounts of nonexempt work. As discussed above, commenters that supported the 2016 rule methodology provided statistics demonstrating that this approach yields a salary level within historical norms. The 40th percentile would produce a salary level ($1,196 per week) that is above the midpoint between the long and short test salary levels. For the reasons previously discussed in detail, the Department believes its cost estimates are appropriate and do not provide a basis for changing the methodology used to set the salary level or for abandoning this rulemaking altogether.

The pause mechanism offers the Department added flexibility—in addition to its ability to engage in rulemaking at any time to change the rule—by allowing it the ability to delay a scheduled update as it engages in rulemaking. As the Department noted in the NPRM, the pause mechanism offers the Department 270 days—150 days before, and 120 days after, the effective date for the scheduled update—to complete the rulemaking process. The Department can still engage in rulemaking outside of this period and through that rulemaking can stop or delay a scheduled update or change any other aspect of the part 541 regulations.

However, too high a salary level shifts the impact of the move to a one-test system to employers by denying them the use of the exemption for lower-salaried employees who traditionally were exempt under the long duties test, thereby increasing their labor costs. The Department believes that the final rule reduces burden on employers of nonexempt workers who earn between the current and finalized standard salary level. Under this final rule, the exemption status of these workers will be determined based on the simpler salary level test. Between updates to the standard salary and HCE compensation levels, nominal wages typically increase, resulting in an increase in the number of workers qualifying for the EAP exemption, even if there has been no change in their real earnings. Thus, workers whom Congress intended to be covered by the minimum wage and overtime pay provisions of the FLSA may lose those protections. The mechanism the Department established in this rulemaking for updating the salary and compensation levels allows these thresholds to keep pace with changes in earnings and continue to serve as an effective dividing line between potentially exempt and nonexempt workers.

• The resulting salary level will work effectively with the standard duties test to better define who is employed in a bona fide EAP capacity.
• Of the 167.3 million wage and salary workers in the United States, the Department estimates that 143.7 million are covered by the FLSA and subject to the Department’s regulations (85.9 percent).
• Type 4 workers, those whose salaries are increased to the new standard salary level, remain exempt and their method of pay will not change.
• Following national expansion of Oxford House™ in 1989, a number of cases or controversies have arisen as some communities or companies have attempt to treat an Oxford House™ different than an ordinary family would have been treated.
• The reduction in hours is relatively small and is due to a decrease in labor demand from the increase in the average hourly wage as predicted by the incomplete fixed-job model (Table 15).

Furthermore, the Department expects that small entities will rely upon compliance assistance materials provided by the Department, including the small entity compliance guide that will be published, or industry associations to become familiar with the final rule. For example, in response to this rule, some employers may decrease the hours of newly nonexempt workers who usually work overtime. These hours may be transferred to other workers, such as non-overtime workers and exempt workers who are not affected by the rule. Depending on how these hours are transferred, it could lead to either a reduction or increase in earnings for other workers.

Entities with more affected EAP workers will likely spend more time reviewing the regulation than entities with fewer or no affected EAP workers (since a more careful reading of the regulation will probably follow the initial decision that the entity is affected). However, the Department did not know the distribution of affected EAP workers across entities, so it used an average cost per entity. The Department’s RIA estimates that the total first-year costs (direct employer costs and payroll increases from employers to workers) of the final rule would be approximately $2.7 billion for private employers and $197.7 million for state and local governments.