Sept. 4, VIA ELECTRONIC SUBMISSION at

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1 Sept. 4, 2015 VIA ELECTRONIC SUBMISSION at Mary Ziegler Director, Division of Regulations, Legislation and Interpretation Wage and Hour Division U.S. Department of Labor 200 Constitution Ave., NW, Room S-3502 Washington, D.C Re: Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, File Number RIN 1235-AA11 Dear Ms. Ziegler, WorldatWork respectfully submits these comments regarding the U.S. Department of Labor s (the Department) July 6, 2015, Notice of Proposed Rulemaking (NPRM) to amend the Fair Labor Standards Act of 1938 (FLSA) regulations by implementing minimum-wage and overtime-pay exemptions for executive, administrative, professional, outside sales and computer employees commonly referred to as white-collar or EAP exemptions. WorldatWork Background Information WorldatWork is a nonprofit human resources association for professionals and organizations focused on compensation, benefits, work-life effectiveness and total rewards strategies to attract, motivate, retain and engage a productive workforce. WorldatWork and its affiliates provide comprehensive education, certification, research, advocacy and community, enhancing careers of professionals and, ultimately, achieving better results for the organizations they serve. WorldatWork has more than 70,000 members and subscribers worldwide. Founded in 1955, WorldatWork is affiliated with more than 70 local human resources associations and has offices in Scottsdale, Ariz., and Washington, D.C. WorldatWork members believe there is a powerful exchange relationship between employer and employee, as demonstrated through the WorldatWork Total Rewards Model. Total rewards involves the integration of six key elements that effectively attract, motivate, retain and engage the talent required to achieve desired organizational results. The six key elements are: compensation, benefits, work-life effectiveness, recognition, performance management and talent development. The model recognizes that total rewards operates in the context of overall business and human resources strategies, as well as organizational culture and a complex external environment. Within this context, an employer leverages the six total rewards elements to offer and align a value proposition that benefits the organization and the employee. An effective total rewards strategy Washington, D.C. Office th Street NW Suite 800 Washington, D.C USA Phone: 202/

2 results in satisfied, engaged and productive employees, who in turn create desired business performance and results. Comments on FLSA Part 541 Notice of Proposed Rulemaking, File Number RIN 1235-AA11 WorldatWork appreciates the Department s attempt to modernize and streamline the FLSA Part 541 regulations dealing with minimum-wage and overtime standards. The Department s objective to set an appropriate line of demarcation between exempt and nonexempt is commendable, but the proposal as written does not achieve this objective. Instead, the proposal will likely provide further hardship on employers, as well as employees. A healthy relationship between employers and employees is one in which employees can freely choose a particular workplace because of its wages, benefits and total rewards. This relationship must include an employer s ability to offer a variety of rewards that attract, motivate, retain and engage employees in order to achieve an organization s desired business results. From an employee s perspective, these rewards contribute to the decision to join and stay with a particular employer. Compensation s positive influence on an employer in terms of long-term results and productivity gains has far-reaching benefits for organizations and individual employees; the communities in which they operate, live and work; and the overall U.S. and global economies. There are many approaches to achieving this positive effect from the employment relationship, all of which consider a broad array of ideas, values and goals. To achieve these societal benefits, organizations need several degrees of decision-making flexibility to adapt compensation to a mutually beneficial result. Furthermore, WorldatWork believes that compensation professionals, in collaboration with their organizations leadership, are best suited to design and implement compensation programs for their employees. Any government intervention that hinders either the employer s or employee s ability to determine an appropriate compensation agreement should be limited, purposeful, reasonable and carefully defined. WorldatWork will disagree with public policy initiatives that unilaterally punish all employers in an attempt to penalize isolated bad practices. A broad or vague policy will often unfairly punish established compensation practices that are carefully designed to address specific individual needs or employment considerations. In anticipation of the proposed rule, WorldatWork developed a strategic response that would garner the most input from our compensation professionals. This effort included: Meeting with a focus group comprised of WorldatWork s Compensation Advisory Council (a group of senior-level compensation practitioners from large employers who serve as volunteer advisers) Briefing our members on the pending changes to FLSA Part 541 with a Q-and-A during our annual conference in May 2015 Conducting a webinar on the proposed rule after the formal release on July 6 2 P age

3 Conducting a Quick Survey on Proposed FLSA Changes (2015 WorldatWork survey) of WorldatWork members on the specific proposals announced in the Department s proposal Running an analysis on Aug. 6, 2015 simulating the impact on the 40 th percentile of full-time salaried earners over a five-year period (conducted by a WorldatWork senior practice leader, an internal subject-matter expert with 29 years of human resources experience). 1 The 2015 WorldatWork survey was sent to 9,681 WorldatWork members on July 17, 2015, and closed on July 27, There were 1,455 responses, a 15% response rate. The dataset was cleaned, resulting in a final dataset of 1,443 responses. 41% of respondents were from private-sector, publicly traded companies; 31% were from privatesector, privately held companies; and 28% were from nonprofit/not-for-profit or public-sector companies/organizations. Workforces ranged from fewer than 100 employees (5%) to 100,000 or more (3%), with the core of respondents ranging from 1,000 to 19,999 employees (60%). The industries with the highest response rate were Finance and Insurance, All Other Manufacturing and Health Care and Social Assistance. Together, these industries represented 40% of respondents. Our questions focused on key aspects of the proposal, and we allowed participants to provide openended responses so they could offer input specific to their industries. Questions that garnered overwhelming responses dealt with the net effect on the overall workforce (73% of respondents stated they would have more nonexempt employees), the effect on morale (79% of respondents indicated that a reclassification to nonexempt status would have a negative effect) and workplace flexibility (48% of respondents said their employees would experience decreased flexibility as hourly nonexempt workers). I. The Department s Proposal to Increase the Salary-Level Test and Automatically Index the Salary Test Would Negatively Impact the Ability for Employers to Develop Compensation Plans That Will Attract, Motivate, Retain and Engage Employees. The Department proposes increasing the minimum weekly salary level for EAP exemptions to the 40 th percentile of weekly earnings in 2016 for all full-timed salaried employees nationwide, based on U.S. Bureau of Labor Statistics data. In addition, the Department proposes automatically adjusting the minimum salary level on an annual basis using either a fixed percentile of full-time earners or the Consumer Price Index for all Urban Consumers (CPI-U). WorldatWork opposes both proposals. A. The Proposed Initial Increase to the Salary-Level Test, Doubling the Current Level, Is Too High and Will Not Achieve the Administration s Goal of Significantly Increasing Employee Wages. 1 WorldatWork. Conducted on Aug. 6, Impact of 40 th Percentile of Full-Time Salaried Earners. Vol. 1. Unpublished: WorldatWork. 3 P age

4 WorldatWork opposes the proposed increase to the salary level. In the 2015 WorldatWork survey, 65% of respondents said the proposed increase, which more than doubles the current level with one update, is too high. The Department states that adjusting the salary level to an appropriate line of demarcation between exempt and nonexempt employees is simple and administratively easy. However, WorldatWork is concerned about the potential impact this proposal will have on employees including issues relating to job morale, workplace flexibility, lack of overtime, loss of benefits and regional economic differences as well as the administrative burden increases will impose on employers. In the 2015 WorldatWork survey, 79% of respondents said the proposed rule would have a negative effect on the reclassified employee s morale, as exemption classification is a perceived measure of status desired by employees. Additionally, 48% of respondents believed that employees will have decreased job flexibility, and less than 1 in 4 (23%) responded that reclassified employees would enjoy the same flexibility as or more flexibility than before. Under exempt status, employees are usually paid the same salary regardless of the hours worked, and thus are afforded a level of work flexibility to take a couple hours off for an appointment or tend to a family matter without being docked in pay. Reclassified nonexempt employees will be forced to take this time as unpaid, or use up valuable paid time off if it is available, which will limit their ability to address personal obligations and family responsibilities. A second area of concern, raised by WorldatWork s Compensation Advisory Council, is whether employee wages will ultimately rise with this change. Labor costs are frequently among the singlelargest costs for businesses and are closely monitored to avoid budget overruns. Therefore, council members believe employers will likely offset the cost of paying newly classified nonexempt employees overtime through some corresponding reduction in other areas of employee compensation. Thus, the administration s goal to increase wages paid to workers may not be realized. Moreover, newly classified nonexempt employees could lose benefits that were once provided under exempt status. Those may include, but are not limited to, paid time off, bonus or incentive-plan eligibility, additional life insurance and disability insurance, and any other employee perquisites where eligibility or benefit amount is determined by job level within the organization. By setting one uniform minimum salary level for the nation, the proposed rule unnecessarily disregards the very real regional differences in the level of income needed to achieve a middle-class standard of living. According to the relocation calculator of the FAS Relocation Network, an employee in San Francisco earning a salary of $50,440 would only need to earn $21,978 to have a comparable standard of living in Des Moines, Iowa, where the cost of living is estimated as 56.4% less expensive. 2 Realizing these regional differences, the federal government s own 2015 General Schedule (GA) Locality Pay Table accounts for these cost-of-living adjustments. For example, a government employee who has a GS-9, Grade Step 6 position will earn a salary of $49,464. However, when adjusted to meet the cost-of-living regional differences that same employee will 2 The Salary Comparison. 4 P age

5 earn a salary of $63,665 in Houston, $66,851 in San Francisco or $56,725 in Indianapolis. 3 Given that the federal government recognizes for its own workforce that jobs with the same level of responsibility and qualifications command dramatically different salary levels depending on region, the minimum salary level for the EAP exemptions should reflect these regional differences as well. In addition to the adverse impact on lower-paying regions of the country, there may be an inordinately heavy burden on certain sectors of the economy. These include, but are not limited to, food preparation and serving, hospitality (housekeeping and janitorial jobs) and retail. Our nation s free-market economy has set the competitive wages in these industries at a lower level, and consequently a much higher percentage of workers will be affected in these sectors. B. Automatically Updating the Standard Salary-Level Test Would Create an Unnecessary and Unworkable Administrative Burden for Employers Year After Year and Would Quickly Dissolve the Benefits and Status of Exempt Classification. WorldatWork opposes the proposal of annually increasing the salary threshold by either the 40 th percentile of full-time salaried earners or by the CPI-U index. The Department seeks to avoid having to go through a rule-making process every time the standard salary-level test needs to be updated. Instead, the Department proposes two alternative methods for updates. Both proposed methods are untenable in today s workforce. The 2015 WorldatWork survey indicated that adjusting the salary threshold on an annual basis would create an unnecessary administrative burden on employers each year, especially employers that have staggered fiscal years. Labor costs, which includes salary budgets, the cost of employee benefits and more, require advance budgeting. WorldatWork s focus group raised serious concerns that having an annual and unknown increase may result in yearly unplanned expenses, forcing employers to have budget overruns that could deplete their capital from other areas of the business, such as research and development, business equity for future growth or voluntary employer contribution to retirement plans. Additionally, our Compensation Advisory Council stated that annual increases will erode other forms of base pay increases such as performance-based merit plans, which are used by a vast majority of companies. 4 (Merit raises reward employees for a job well done and motivate them to continue operating at a high level of productivity.) If employers are required to adjust pay upward to affected employees every time the threshold increases, this will occur at the expense of merit raises. The only population of employees who may benefit are those who currently perform exempt duties but earn a salary defined just below the anticipated threshold; they may get a $2,000 to $5,000 one-time raise to maintain their exemption for an additional year. However, this same population of employees will be classified as nonexempt the following year because the salary 3 Salary Table 2015-GS. 4 WorldatWork Compensation Programs and Practices. Scottsdale, Ariz.: WorldatWork. 5 P age

6 increase will be too high to justify their exemption where more than likely, they will not be able to work overtime hours. C. The Fixed-Percentile Approach to Automatically Updating the Standard Salary-Level Is Not Sustainable and Will Increase Exponentially Over Time. The Department s first proposal for automatically updating the standard salary-level test is to use a fixed-percentile approach. This would mean an annual increase tied to the 40 th percentile of fulltime salaried employees. In the 2015 WorldatWork survey, 51% of respondents said they would not recommend an automatic update by any index for full-time salaried earners, while only 22% recommended the 40 th percentile of full-time salaried earners. WorldatWork believes that an annual increase tied to the 40 th percentile of full-time salaried earners is not sustainable and will increase exponentially over time. As employers convert lowerpaid exempt employees to nonexempt status, these employees will largely be paid on an hourly basis and no longer be included toward the calculation of earnings of salaried employees in the next year. In analyzing the implications that an annual increase of the 40 th percentile of full-time salaried earners would have on the workforce, a WorldatWork senior practice leader ran a simulation on Aug. 6 of 1 million salaries over five years. The dataset was constructed to mirror the estimated distribution of nonhourly pay as of second quarter , then aged to 2016 levels. An artificial cap of $300,000 (before aging) was used as the top salary level, as actuals are unknown. 6 Upon implementation of the salary level of $50,440 in 2016, and assuming that all employees below this level are converted to nonexempt and paid hourly, 39% of the current exempt population will be removed from the next year s nonhourly calculation of the 40 th percentile. In year two of implementation under our simulation, the 40 th percentile of full-time salaried earners would experience a 46% increase, jumping to $74,073. This cycle continues to repeat, with the 40 th percentile moving up each year in leaps and capturing more employees from the nonhourly dataset (in year two, 62% of the workforce would be nonexempt, which would match the level last seen in 1975). By year five, the 40 th percentile of full-time salaried earners would earn $233,217, which would capture approximately 91% of the workforce as nonexempt. 7 Even if there is some relief through employers raising pay to maintain exemption status or continuing to pay reclassified employees on a salary basis, the figures increase at an alarmingly high and unsustainable rate. 5 Labor Force Statistics from the Current Population Survey. 6 WorldatWork. Conducted Aug. 6, Impact of 40 th Percentile of Full-Time Salaried Earners. Vol. 1. Unpublished: WorldatWork. 7 WorldatWork. Conducted Aug. 6, Effect of 40 th Percentile Over Time. Vol. 1. Unpublished: WorldatWork. 6 P age

7 Please refer to the Movement of 40 th Percentile Over Time 8 and Effect of 40 th Percentile Over Time graphs in the appendix to view the complete results of the simulation. D. Automatically Updating the Standard Salary-Level Using the CPI-U Will Create Confusion and Uncertainty. The Department s second alternative proposal would tie the automatic increase by using the CPI-U. WorldatWork opposes automatically updating the standard salary level using the CPI-U. Commentary from our survey and from our Compensation Advisory Council stated that indexing the salary threshold to the CPI-U will create confusion and uncertainty. As the past 30 years have shown, the CPI-U index is not a reliable proxy for wage and salary growth in the economy. This variance is clearly demonstrated in the Comparison of Employment Cost Index and Consumer Price Index graph in the appendix, created using data from the U.S. Bureau of Labor Statistics. 9 If an organization has to make the tough decision to freeze base pay, some employees positions could be reclassified as nonexempt because their base pay has fallen below the threshold established by the regulation. Additionally, indices are more times than not announced retroactively, which would create additional burdens on employers to process pay retroactively in order to remain in compliance, a budgeting mechanism that is unworkable for most employers. Finally, commentary from our survey and from our Compensation Advisory Council stated that automatically updating the salary-level threshold, either by the 40 th percentile of full-time salaried earners or the CPI-U, should be done on a four- to five-year basis. This would reduce the administrative burden imposed on employers as well as adjust for any year-to-year minor aberrations in the index, either up or down. Additionally, this would satisfy the Department s goal of maintaining the salary level s effectiveness over time. Please refer to the Comparison of Employment Cost Index and Consumer Price Index graph in the appendix to view the variance over the past 30 years. E. Inclusion of Nondiscretionary Bonuses in the Salary-Level Requirement Would Better Reflect How Employers Use Nondiscretionary Bonuses If Payments Are Not Required to Be Made Monthly. The Department proposes that employers could include nondiscretionary bonuses in the salary level to count toward a portion of the standard salary-level test for the EAP exemptions. In the WorldatWork. Conducted Aug. 6, Movement of 40 th Percentile Over Time. Vol. 1. Unpublished: WorldatWork. 9 U.S. Bureau of Labor Statistics CPI Detailed Report: Data for December Washington. Retrieved from Bureau of Labor Statistics website: 75; U.S. Bureau of Labor Statistics Employment Cost Index: Historical Listing Volume V. Washington. Retrieved from Bureau of Labor Statistics website: 31; WorldatWork. Conducted Aug. 24, Comparison of Employment Cost Index and Consumer Price Index Vol. 1. Unpublished: WorldatWork. 10 Id. 7 P age

8 WorldatWork survey, 62% of respondents said their employers offer nondiscretionary incentive bonuses tied to productivity and/or profitability. While WorldatWork appreciates the intent to provide some relief to the salary level by including nondiscretionary bonuses in the salary-level requirement, commentary from our survey and focus group indicated that it would be an administrative challenge to employers. This is due to the fact that most nondiscretionary plans payouts are contingent on the organization meeting or exceeding preset financial or operational goals and objectives. Therefore it is not a given that any payment will be made, and if so how much will be paid out, until typically after the performance period is complete. WorldatWork advocates that in order to best reflect how nondiscriminatory bonuses are awarded by employers, the Department should abandon its suggestion that such payments be made at least monthly with no ability for employers to count annual payments toward the salary-level test. F. The Department s Suggested 60 Days Notice for Complying with Annual Salary Adjustments is Inadequate. Sixty days does not give employers acting in good faith sufficient time to conduct the compensation analysis, budget planning and strategic review necessary to fully comply with future annual salary updates. As noted in this comment letter, employers will be required to make difficult decisions regarding whether or not they intend to change an employee s status from exempt to nonexempt, or to increase an employee s salary to the new salary-test threshold to protect the exemption status. For larger companies with potentially thousands of effective employees, these decisions will take time, and employee communications will need to be developed, reviewed and implemented to best manage the transitions. As previously stated, implementing these rules will have an impact on workplace morale and flexibility options available to employees, and employers need to consider that as they work to comply with the final rules. To do this, employers need more than 60 days to implement a new salary level test. II. The Department Should Not Implement Any Changes to the Duties Test Without Publishing an Updated Notice of Proposed Rulemaking and Soliciting Feedback and Comments from the Public on Specific Regulatory Changes. The Department does not provide sufficient detail about the extent or nature of changes to the duties test for employers to evaluate and comment on the impact of such changes. Rather, it seeks comments for improving the current duties test without identifying or proposing actual changes. It merely suggests that changes might come in the final rule. Given the absence of specific proposals, WorldatWork strongly opposes any change to the duties test. If the Department wants to make changes to the duties test it must first publish another Notice of Proposed Rulemaking and open another public comment period. Issuance of a final rule containing changes to the duties test based only on comments received in response to the Department s proposal would violate the Administrative Procedure Act. In Smaller Refiner Lead Phase-Down Task Force v. U.S. Environmental Protection Agency, the U.S. Court of Appeals for the District of Columbia vacated the Environmental Protection Agency s change to 8 P age

9 regulatory definition under the Clean Air Act. 11 The court ruled, This purported notice, however, is too general to be adequate. Agency notice must describe the range of alternatives being considered with reasonable specificity. Otherwise, interested parties will not know what to comment on, and notice will not lead to better-informed agency decision making. 12 Any change to the duties test without another notice and comment period would also violate the Unfunded Mandates Reform Act of 1995 because the Department did not provide estimates of the costs and benefits from any specific changes to the duties test. Under Title II, Sec. 202: Requires Federal agencies, unless otherwise prohibited by law, to prepare written statements before promulgating any general notice of proposed rulemaking that is likely to result in promulgation of any rule that includes any Federal mandate that may result in State, local, or tribal government and private sector expenditures, in the aggregate, of $100 million or more in any one year, and before promulgating any final rule for which a general notice of proposed rulemaking was published. Requires such statement to: (1) identify the provision of Federal law under which the rule is being promulgated; and (2) contain specified estimates and analyses. 13 Furthermore, inclusion of changes to the duties test based on the Department s proposal would violate the Paperwork Reduction Act of 1995, because the Department cannot include an explanation of modifications made to the duties test regulations in response to comments unless the Department first alerts the public to the nature of the proposed rule changes. The Code of Federal Regulations states, When the final rule is published in the Federal Register, the agency shall explain how any collection of information contained in the final rule responds to any comments received from OMB or the public. The agency shall include an identification and explanation of any modifications made in the rule, or explain why it rejected the comments. 14 Nevertheless, the Department asks for feedback on potential changes to the duties test. WorldatWork does not believe the Department has the authority to introduce changes to the current duties test since there are no proposals listed in this NPRM. However, if the Department were to issue an NPRM with proposed changes to the duties test WorldatWork would be happy to comment in detail on any specific changes. Furthermore, WorldatWork believes that an NPRM on the duties test should provide more clarity on the EAP exemptions and provide more concrete examples and definitions. WorldatWork does not endorse implementing the California model of 50% Small Refiner Lead Phase-Down Task Force v. Environmental Protection Agency, 705 F.2d. 506, 227 U.S App. D.C. 201, 18 ERC 2033 (D.C. Cir. 1983), Court Opinion. 12 Ibid., Unfunded Mandates Reform Act of 1995, 2 U.S.C publ4/pdf/PLAW-104publ4.pdf C.F.R (f). 9 P age

10 In light of our significant concerns, WorldatWork strenuously opposes any changes to the duties test as a result of this proposal. Conclusion As we have clearly laid out, the one-size-fits-all approach has many flaws that would dramatically impact the ability of employers to develop compensation plans that will attract, motivate, retain and engage employees. WorldatWork has significant concerns about the proposed rule as written and hopes that the Department will consider the implications we outlined in this letter and revise the proposals accordingly as the final rule is crafted. WorldatWork appreciates the opportunity to provide comments to the Department on the proposed rule implementing the exemption from the minimum wage and overtime pay for executive, administrative, professional, outside sales and computer employees. More than 80% of Fortune 500 companies employ a WorldatWork member. These total rewards compensation experts are the professionals who will implement the overtime changes and manage organizations compensation budgets going forward. On behalf of WorldatWork s 70,000 members and subscribers, we look forward to working with the Department as it crafts the final rule. Please do not hesitate to contact me or Patrick Brady, WorldatWork Public Policy manager, at if you have any questions or need further information. Sincerely, Cara Woodson Welch, Esq. Vice President, External Affairs & Practice Leadership 10 P age

11 APPENDIX Movement of 40th Percentile Over Time $250,000 $233,217 $200,000 $150,000 $162,929 $126,159 $100,000 $98,780 $74,073 $50,000 $50,440 $0 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Source: WorldatWork 11 P age

12 1,000, , , , , , , , , ,000 Effect of 40th Percentile Over Time Estimate of 1 million employees currently exempt under salary test 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Assumptions: 1) All employees who are below threshold are paid hourly. 2) Employers do not adjust pay upward of affected employees to maintain the exemption. 3) Wages increase 2% annually. Exempt Non-exempt 0% Source: WorldatWork 12 P age

13 Comparison of Employment Cost Index and Consumer Price Index Percent Change ECI: BLS 12-month change in wages and salaries only as of December each year for all civilian workers, not seasonally adjusted CPI: CPI-U for all urban consumers Employment Cost Index CPI Source: WorldatWork, using data from the U.S. Bureau of Labor Statistics U.S. Bureau of Labor Statistics CPI Detailed Report: Data for December Washington. Retrieved from Bureau of Labor Statistics website: 75; U.S. Bureau of Labor Statistics Employment Cost Index: Historical Listing Volume V. Washington. Retrieved from Bureau of Labor Statistics website: 31; WorldatWork. Conducted Aug. 24, Comparison of Employment Cost Index and Consumer Price Index Vol. 1. Unpublished: WorldatWork. 13 P age