duties test. Assuming that a worker was paid on a salary basis, the exemptions would be met if a worker passed either a “long” test, which involved a more rigorous set of duties criteria, paired with a lower salary level, or a “short” test, which imposed fewer duties requirements, paired with a higher salary level. In the 1975 update, the last before the 2004 Final Rule, the Department set the long test salary levels at $155 per week for executive and administrative employees and $170 per week for professional employees. The short test salary level was set at $250 per week for all three EAP categories. In 2004, the Department replaced the two-test structure with a single “standard” duties test for each category, which closely resembles the former short test duties requirements, and a single salary level test of $455 per week based on an update of the 1975 long test salary level. The Department also introduced a highly compensated employee (HCE) exemption in the 2004 Final Rule, under which an employee may be exempt if he or she passes a very minimal duties test, receives at least $455 per week paid on a salary basis, and is highly compensated, defined in the 2004 Final Rule as earning total annual compensation, which may include commissions and nondiscretionary bonuses in addition to a salary, of at least $100,000. The HCE duties test is much more abbreviated than the historical short test duties requirements. The premise behind the salary level tests is that employers are more likely to pay higher salaries to workers in bona fide EAP jobs than to workers performing nonexempt duties. A high salary is considered a measure of an employer's good faith in classifying an employee as exempt, because an employer is less likely to have misclassified a worker as exempt if he or she is paid a high wage. Stein Report at 5; Weiss Report at 8. The salary level requirement was created to identify the dividing line distinguishing workers performing truly exempt duties from the nonexempt workers Congress intended to be protected by the FLSA's minimum wage and overtime provisions. Throughout the regulatory history of the FLSA, the Department has considered the salary level test the “best single test” of exempt status. Stein Report at 19. This bright-line test is easily observed, objective, and clear. Id.
Potentially affected EAP workers: EAP exempt workers who are not in named occupations and are included in the analysis (i.e., white collar, salaried, not eligible for another (non-EAP) overtime pay exemption). This is estimated to be 21.4 million workers. Price elasticity of demand (with respect to wage): The percentage change in labor hours demanded in response to a one percent change in wages. Real dollars (2013$): Dollars adjusted using the CPI-U to reflect the purchasing power they would have in 2013. Salary basis test: The EAP exemptions' requirement that workers be paid on a salary basis, that is, a pre-determined amount that cannot be reduced because of variations in the quality or quantity of the employee's work. Salary level test: The salary a worker must earn in order to be subject to the EAP exemptions. The Department distinguishes among four such tests: Standard salary level: The weekly salary level associated with the standard duties test that determines (in part) eligibility for the EAP exemptions. The standard salary level was set at $455 per week in the 2004 Final Rule. HCE compensation level: Workers who meet the standard salary level requirement but not the standard duties test nevertheless are exempt if they pass a minimal duties test and earn at least the HCE total annual compensation required amount. The HCE required compensation level was set at $100,000 per year in the 2004 Final Rule, of which at least $455 per week must be paid on a salary or fee basis. Short test salary level: The weekly salary level associated with the short duties test (eliminated in 2004). Long test salary level: The weekly salary level associated with the long duties test (eliminated in 2004).
employer costs in Year 1 were estimated to equal $592.7 million. Adjustment costs and management costs are ongoing and will need to be projected for future years (section VII.D.x.). Costs that are not quantified are discussed in section VII.D.iv.5. Adjustment costs and managerial costs associated with automatically updating the standard salary level are discussed in section VII.E.iii. 2. Regulatory Familiarization Costs A change in the standard EAP weekly salary test to the proposed level would impose direct costs on businesses by requiring them to review the regulation. It is not clear whether regulatory familiarization costs are a function of the number of establishments or the number of firms. The Department believes that generally the headquarters of a firm will conduct the regulatory review for the entire company; however, some firms provide more autonomy to their establishments, and in such cases regulatory familiarization may occur at the establishment level. To be conservative, the Department uses the number of establishments in its cost estimate because this provides a larger cost estimate. The Department believes that all establishments will incur regulatory familiarization costs, even if they do not employ exempt workers, because all establishments will need to confirm whether this proposed rulemaking includes any provisions that may impact their workers. Firms with more affected EAP workers will likely spend more
Weekly earnings after an increase to the proposed standard salary level were estimated using the new wage (i.e., the partial employment contract model wage) and the reduced number of overtime hours worked. At the proposed standard salary level, the average weekly earnings of all affected workers will increase from $730.58 to $736.54, a change of $5.96 (0.8 percent). However, these figures mask the impact on workers whose hours and earnings will change because Type 1 workers make up more than 70 percent of the pool of affected workers. If Type 1 workers, who do not work overtime, are excluded the average increase in weekly earnings is $23.72. At the proposed standard salary level, multiplying the average change of $5.96 by the 4.6 million affected standard EAP workers equals an increase in earnings of $27.7 million per week or $1,441 million in the first year (Table 24). Of the weekly total, $897,000 is due to the minimum wage provision and $26.8 million stems from the overtime pay provision. For workers affected by the change in the HCE compensation level, average weekly earnings increase by $22.16 ($51.91 if Type 1 workers, who do not work overtime, are excluded). When multiplied by 36,000 affected workers, the national increase in weekly earnings will be $801,000 per week, or $41.7 million in the first year. Thus, Year 1 transfer payments attributable to this proposed rule total $1,482.5 million. If the Department assumed Type 2 workers received no additional pay for occasional overtime hours prior to the rulemaking (as discussed above), then Year 1 transfers would instead be $1,499.1 million.