RULES AND REGULATIONS
Title 34—LABOR AND INDUSTRY
DEPARTMENT OF LABOR AND INDUSTRY
[ 34 PA. CODE CH. 231 ]
Minimum Wage
[50 Pa.B. 5459]
[Saturday, October 3, 2020]The Department of Labor and Industry (Department) amends Chapter 231 (relating to minimum wage). The amendments are submitted in accordance with sections 5(a)(5) and 9 of The Minimum Wage Act of 1968 (act), (43 P.S. §§ 333.105(a)(5) and 333.109), for the purpose of carrying out the act and to safeguard the minimum wage rates established thereby.
Statutory Authority
This final-form rulemaking is issued under the authority provided in section 5(a) of the act, which requires the Secretary of Labor and Industry (Secretary) to define the terms ''bona fide executive'', ''administrative'' and ''professionals'', and section 9 of the act, which requires the Secretary to enforce the act and to
make and, from time to time, revise regulations, with the assistance of the [Minimum Wage Advisory Board], when requested by the secretary, which shall be deemed appropriate to carry out the purposes of this act and to safeguard the minimum wage rates thereby established. Such regulations may include, but are not limited to, regulations defining and governing bona fide executive, administrative, or professional employes and outside salespersons, learners and apprentices, their number, proportion, length of learning period, and other working conditions; handicapped workers; part-time pay; overtime standards; bonuses; allowances for board, lodging, apparel, or other facilities or services customarily furnished by employers to employes; allowances for gratuities; or allowances for such other special conditions or circumstances which may be incidental to a particular employer-employe relationship.The act provides three exemptions from the minimum wage and overtime provisions of the act for individuals employed in the following capacities: executive, administrative and professional (EAP). Section 5(a)(5) of the act authorizes the Secretary to define and delimit these exemptions by regulation.
Purpose
This final-form rulemaking amends the Department's existing minimum wage regulations in §§ 231.1, 231.71—231.74 and 231.82—231.84.
This final-form rulemaking provides a long overdue update of the definitions of the EAP employees who are exempt from the overtime and minimum wage provisions of the act and modernizes the obsolete salary threshold for those workers. This final-form rulemaking is consistent with the stated purpose of section 1 of the act (43 P.S. § 333.101): to protect employees from unreasonably low wages not fairly commensurate with the value of the services rendered. To the extent permissible and appropriate under Pennsylvania law, it more closely aligns with Federal law, which provides more consistency for employers and lessens the burden of compliance with different Federal and State standards. The amendments to the duties test for the EAP exemptions make the applicable test easier to understand and therefore will increase compliance. This final-form rulemaking will result in less misclassification of workers, thus reducing litigation over an employee's status.
The update to the salary thresholds will protect employees in this Commonwealth from being arbitrarily designated as exempt and required to work excessive overtime hours without additional compensation. The current Federal salary threshold of $23,660 over which an EAP employee does not have to be paid overtime is artificially low due to the passage of 15 years since the salary thresholds were updated and the lack of adjustment for inflation or the current economy. Although the Federal threshold was scheduled to be increased on January 1, 2020, that threshold is based upon the earnings of the lowest-paid salaried employees in the nation and is not reflective of this Commonwealth's economy. This final-form rulemaking uses a methodology that takes into account the economic realities in the Commonwealth, uses more relevant, Pennsylvania-specific data, and also utilizes that same methodology to adjust the salary threshold at regular intervals where the data supports an adjustment. It thus replaces infrequent, dramatic changes caused by sporadic rulemaking with more predictable and modest changes by maintaining the salary level at a fixed percentage of earnings to help ensure that the test continues to reflect actual wage conditions consistent with the duties of exempt employees, providing a gradual threshold adjustment between comprehensive rulemaking.
This final-form rulemaking also gradually phases in the higher salary threshold, first adopting the new Federal threshold and then incrementally adjusting to the Pennsylvania-appropriate threshold. This will allow time for employers to plan and adjust operations to determine how best to implement this final-form rulemaking based on the individual needs of the business. This final-form rulemaking need not have a detrimental impact on employers. As more fully explained herein, employers will have a range of options to choose from in implementing the new duties test and updated thresholds for their EAP employees, enabling employers to make these changes cost neutral for their operation.
Ensuring that workers are fairly compensated and paid a living wage will have an overall positive economic impact for this Commonwealth. In addition, increased competitiveness of employers in this Commonwealth to attract skilled labor, positive economic impact due to increased spending by affected workers and discretionary time returned to employees are all benefits to the Commonwealth.
This final-form rulemaking is in the public interest, is within the Department's statutory authority and is consistent with the legislative intent expressed in the act. It takes into account the concerns of the various stakeholders and will have a positive economic impact on this Commonwealth without overly onerous requirements on businesses and it is all accomplished with a clear, feasible and reasonable regulatory scheme and provisions.
Background
The EAP exemptions (otherwise known as the ''white-collar exemptions'') signal the General Assembly's intention to exclude bona fide EAP employees from the act's protections. The act does not define these terms. Rather, the General Assembly specifically gave authority to the Department to define each of these exemptions through regulation.
In addition to the act, the requirement to pay employees a minimum wage and overtime is found in the Fair Labor Standards Act of 1938 (FLSA) (29 U.S.C.A. §§ 201—219). Section 13(a)(1) of the FLSA (29 U.S.C.A. § 213(a)(1)) also contains similar EAP exemptions from its minimum wage and overtime requirements. The United States Department of Labor (USDOL) also issued regulations defining these exemptions at 29 CFR 541.100—541.304.
Under both the Federal and Commonwealth regulations, there is a three-prong test that an employee must meet to be exempt from minimum wage and overtime requirements. First, the employee cannot be paid on an hourly basis; second, the employee must receive a salary at a threshold set by regulation; and third, the employee must perform specific duties set by regulations.
However, there are two significant differences between Commonwealth regulations implementing the act and USDOL's regulations implementing the FLSA, which creates a dual regulatory scheme. First, the salary thresholds for the act's EAP exemptions are much lower than the salary thresholds for the FLSA's EAP exemptions. Second, the duties test to qualify for the act's EAP exemptions is different than the duties test to qualify for the FLSA's EAP exemptions.
The lower salary threshold has essentially rendered the act inconsequential to protect employees from misclassification, because it is exceeded by the Federal threshold for virtually all employees. The FLSA applies to all employers with gross sales of at least $500,000 or who engage in interstate commerce. The term ''interstate commerce'' has been defined very broadly and, in fact, includes nearly every employer in this Commonwealth. In addition, the current Commonwealth regulations contain an outdated duties test and salary threshold to determine whether an EAP employee is exempt from payment of overtime for hours worked in excess of 40 per week. The current duties test for executive employees are set forth in § 231.82 (relating to executive); for administrative employees in § 231.83 (relating to administrative); and for professional employees in § 231.84 (relating to professional). The current salary thresholds range from $155 per week to $250 per week, well below the hourly minimum wage.
The Commonwealth's regulations have not been updated since 1977, which results in three issues.
First, many individuals are being improperly classified as exempt because the salary thresholds found in the Commonwealth's current regulations are not reflective of the current salaries of individuals who are EAP or professionals. The salary thresholds established in the recently superseded USDOL regulations defining the FLSA were established in 2004 and were also not reflective of the current salaries of employees serving in executive, administrative or professional capacities. Only recently, on September 27, 2019, the USDOL issued a final rule raising the FLSA's salary thresholds for exempt EAP employees to $684 per week effective January 1, 2020. See Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, 84 FR 51230 (September 27, 2019).
However, the data USDOL used to support the Federal salary threshold was based upon workers in the lowest-wage region of the country (that is, the South). Those wages are not reflective of wages paid to workers in this Commonwealth. Thus, a regulatory change is necessary to ensure that individuals who are not EAP or professionals are not improperly exempted from minimum wages and overtime under the act.
Second, the Commonwealth's regulations for the EAP exemptions contain two separate tests for employees to be exempt: the short test and the long test. Under the short test, an employee is exempt if that employee performs one specific duty listed in the regulation governing the exemption and is compensated at or above the higher salary threshold listed in that regulation. Under the long test, an employee is exempt if that employee performs all the duties found in the regulation governing the exemption and is compensated at or above the lower salary threshold listed in that regulation. This differs from the FLSA's regulations defining the EAP exemptions, which contain one standard duties test and one salary threshold for each exemption.
Third, the duties to qualify for each exemption have become outdated and need to be clarified to prevent the improper classification of employees and to be more consistent the duties for the EAP exemptions found in the FLSA's regulations defining the EAP exemptions.
The Department agrees with many commentators that making the act's regulations consistent with the FLSA's regulations with regard to duties would make compliance easier for employers who would no longer have to make separate evaluations of an employee's duties to determine whether they are exempt under both the act and the FLSA. As such, the Department has made an effort to harmonize its regulations with the Federal regulations to the extent permissible and appropriate under the act.
Compliance with Executive Order 1996-1, Regulatory Review and Promulgation
The Governor's Middle-Class Task Force held six meetings between September 29, 2017, and November 20, 2017. These meetings included workers and students, along with representatives of businesses, labor unions, workforce development programs, institutions of higher education and other post-secondary training. On several occasions, workers expressed concern about the inability to join the ranks of the middle class or maintain their middle-class status because of low or stagnant wages.
On January 10, 2018, the Department solicited input on a draft of the proposed rulemaking from the Minimum Wage Advisory Board (Board). The Department presented its intention to revise the regulations to the Board at an open meeting and gave the Board members the ability to comment. The Board is appointed by the Secretary under section 6 of the act (43 P.S. § 333.106) to assist the Secretary to carry out the duties prescribed by the act. The Board consists of three representatives of an established, recognized association of employers (including the PA Chamber of Business and Industry (PA Chamber)) and three representatives from the general public.
In its presentation, the Department informed the Board that it was clarifying the duties tests in the regulations including replacing the short and long tests with a standard duties test. In addition, the Department notified the members that it was raising the salary threshold to qualify for the executive, administrative and professional exemptions. The Board members were provided the opportunity to comment on the Department's intention to update the regulations. Some Board members expressed approval of the intention to update the regulations, and some members expressed concerns about such a large increase in the salary threshold. Department staff considered this feedback, and introduced a phase-in approach to raising the salary threshold over a 3-year period.
The proposed rulemaking was published at 48 Pa.B. 3731 (June 23, 2018) with a 30-day public comment period. The Department extended the public comment period for an additional 30 days, with a notice published at 48 Pa.B. 4258 (July 21, 2018). The public comment period closed on August 22, 2018.
During the public comment period, the Department received 917 unique comments from 898 commenters, including comments from the legislature. In total, the Department received 1,101 comments, some of which were submitted more than once by the same commentator. The Department also received comments from the Independent Regulatory Review Commission (IRRC).
In response to comments related to the Department's outreach efforts, the Department hosted ten roundtable meetings throughout this Commonwealth to consult with the regulated community and obtain feedback on the proposed rulemaking. The Department, together with the Pennsylvania Chamber of Commerce and the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), held five sessions with businesses in this Commonwealth and local chambers of commerce, and five sessions with local labor organizations between May 20, 2019, and June 6, 2019. The agendas for these roundtable meetings provided that the goals were to educate stakeholders on the exemptions and the Department's application, and to engage stakeholders and elicit feedback. The Department specifically asked the stakeholders to discuss the impacts of the proposed rulemaking and provide recommendations for changes.
On May 20, 2019, the Department held a roundtable in Harrisburg, PA including the following participants: Keystone Research Center, Service Employees International Union (SEIU), Communications Workers of America, SEIU Healthcare and AFL-CIO.
On May 21, 2019, the Department held a roundtable in Harrisburg, PA, including the following participants: Harrisburg Regional Chamber of Commerce, the Pennsylvania Chamber of Commerce, Pennsylvania Association of Community Bankers, Army Heritage Foundation, Ned Smith Nature Center, HACC, Perfectly Pennsylvania, RETTEW, Capital Blue Cross, Greater Reading Chamber Alliance, York County Economic Alliance, Hampton Inn, Insurance Agents and Brokers, Hershey Entertainment and Resorts, Dickinson College and Pennsylvania Consortium for Liberal Arts.
On May 22, 2019, the Department held a roundtable in Erie, PA for local businesses, including the following participants: Country Fair Stores, Family House, Inc., Community Health Net, Knox McLaughlin, Erie Federal Credit Union, Community Resources for Independence, Achievement Center, North Country Brewing Company and Mercyhurst.
On May 22, 2019, the Department held another roundtable in Erie, PA for local labor organizations, including the following participants: AFL-CIO Northwest, IBEW 56, UE Local 506 (Wabtech) and UE Local 618 (Wabtech).
On May 28, 2019, the Department held a roundtable in Malvern, PA, including the following participants: Abel Brothers Towing & Automotive, Inc., East Goshen Township, Aqua, Miller's Insurance Agency, Inc., CCCBI, Endo International, Chester County Economic Development Council, Sojourn Philly, Desmond Hotel & Conference Center, Community Action Partnership, Cozen O'Connor, Exton Regional Chamber of Commerce, Post & Schell, Chester County Economic Development Council, Wawa, Inc., Gawthrop Greenwood, PC, Germantown Cricket Club, National Bank of Ethopia and West Chester University.
On May 29, 2019, the Department held a roundtable in Plymouth Meeting, PA including the following participants: Philadelphia AFL-CIO, Pathways PA, Community Legal Services, Outten & Golden, Stephan Zouras, R., Winebrake and Santillo, Berger Montague and UFCW.
On June 2, 2019, the Department held a roundtable in Pittsburgh, PA, including the following participants: USW and Mon Valley Unemployed Committee.
On June 5, 2019, the Department held another roundtable in Pittsburgh, PA, including the following participants: Allie Kiski Chamber of Commerce, Sodini & Company, African American Chamber of Commerce of Western Pennsylvania, Keep It Simple Training, Eat'N Park, SMC Business Controls, North Side/North Shore Chamber of Commerce, Priory Hospitality, HR-FamilyLinks, Duquesne,Robert Morris, Community Care Connect, MHY Family Services, Community Human Services, Standard Bank, Littler Mendelsohn and Family House.
On June 6, 2019, the Department held a roundtable in Scranton, PA for local businesses, including the following participants: Greater Scranton Chamber, Ufberg Law, Advocacy Alliance, Fidelity Bank, Commonwealth Health/Moses Taylor Hospital, Girl Scouts in the Heart of PA, Allied Services, SLHDA, UFCW Federal Credit Union, Institute for HR & Services, Needle Law, Greater Scranton Chamber and Ben Franklin Technology Partners. Also, on June 6, 2019, the Department held another roundtable for local labor organization in Scranton, Pennsylvania including the following participants: AFSCME and Labor Law Compliance.
In these roundtable sessions, businesses in this Commonwealth and local chambers of commerce commented that the proposed rulemaking's departure from the Federal rule creates confusion, especially for employers in multiple states, and that it is challenging for employers to know whether they are in compliance with Federal and State law. Businesses in this Commonwealth expressed concern about the proposed rulemaking's use of data from the Northeast census region to develop the exempt salary thresholds, arguing that Pennsylvania is the lowest wage-earning state within that region. Employers suggested that the proposed rulemaking required employers to terminate positions, cease funding health insurance and move salaried positions to hourly positions. Employers also suggested that employees will lose the flexibility in their schedules to meet ''crunch times'' when overtime is needed and to offset times when work is less plentiful.
Businesses in this Commonwealth commented that the increase from year 1 to year 3 is a big increase and recommended raising the wage at a slower rate. Lastly, the local chambers of commerce expressed a concern about the Commonwealth's ability to compete in the other states with lower salary thresholds. They recommend that the Department adopt a rulemaking that adopts the Federal rules and adds the exceptions.
Nonprofit organizations commented that they are not able to absorb this increase in costs or to budget for overtime. They noted that events and programs are often scheduled in the evening and that employees at nonprofit organizations do not have standard working hours. Nonprofit organizations also expressed concerns about increasing costs and not knowing whether there will be an increase in government contracts that help fund their operations. They recommended that employees be exempt from overtime if they average 40 hours over a 2-week pay period.
The local labor organizations commented that the proposed rulemaking would properly compensate workers and is an integral part of raising the minimum wage. They also commented that the existing law places managerial expectations on employees at small businesses that are not actually managers. The local labor organizations recommended more public outreach on this rulemaking, noting that many employees are not aware that they are entitled to overtime and that the law contains exemptions for overtime.
The local labor organizations supported the proposed rulemaking and commented that social workers, case managers and secretaries may now be eligible for overtime and that these changes are an integral part of raising the minimum wage. They also commented that the incremental increases made this proposed rulemaking easier for the employer. These local labor organizations believed it was appropriate to use data from the Northeast census region which includes Pennsylvania. They also recommend a pay schedule for other than salaried workers, and asked the Department to consider that an employee may be employed by two employers under the same umbrella organization and, for that reason, not collect overtime.
The Department considered the comments from the local businesses, local chambers of commerce and the local labor organizations in the development of this final-form rulemaking. In particular, the Department considered how nonprofit organizations will be affected, especially those reimbursed at a formula rate by State and Federal government. As a result of these comments, the Department is considering outlining best practices for employers to allow employers to consider options to implement this final-form rulemaking. In addition, the Department will engage in outreach activities and establish educational sessions to ensure that stakeholders are informed of the EAP exemptions' new duties tests and salary threshold and the differences between State and Federal requirements. Once this final-form rulemaking is approved, the Department will hold educational sessions for all stakeholders in Harrisburg, Scranton, Pittsburgh, Altoona, Philadelphia and Erie. The Department will work with the Regional Chambers and associations to distribute fact sheets and offer assistance. The Department will ensure that those organizations have the Bureau's toll-free number and the e-mail address of a resource account created specifically for this issue so that questions will be answered timely and consistently.
Summary of Comments and Responses on the Proposed Rulemaking
The proposed rulemaking was published at 48 Pa.B. 3731. Public comments on the proposed rulemaking were accepted through August 23, 2018. The Department received comments from 898 commentators during the public comment period and IRRC. The comments were considered and are addressed in the comment and response document that accompanies this final-form rulemaking. A summary of major comments and responses is set forth as follows. The remaining comments are addressed in the comment and response document attached to this final-form rulemaking.
IRRC Comments
1. Efforts to reach consensus
IRRC commented that the proposed rulemaking had not achieved consensus and that the Department should engage in dialogue with individuals and representatives of those programs and employment sectors that were part of the initial Governor's Middle-Class Task Force meeting. In response, the Department engaged in an extensive public outreach campaign.
The Middle-Class Task Force held six sessions between September 29, 2017, and November 20, 2017 and engaged 74 participants who served as representatives of regional chambers, businesses, educational institutions, nonprofit groups, labor organizations and the general public. In response to IRRC's direction to engage in stakeholder outreach and engage in dialogue with representatives of the Governor's Middle-Class Task Force meetings, the Department held ten stakeholder roundtable sessions across the State between May 20, 2019, and June 6, 2019, as detailed previously. Five regional chambers hosted the business stakeholder roundtables and five labor organizations hosted the labor stakeholder roundtables. The Department invited and met with participants spanning each sector at the roundtable meetings to provide education on the current application of the EAP exemptions, explain the Department's proposed rulemaking, and listen to attendees' feedback on how the proposed rulemaking would impact their lives, businesses or organizations. The business roundtables were attended by members of the business community, educational institutions, nonprofit groups and lawyers who represent employers. The labor roundtables were attended by labor organizations, members of the general public, and attorneys who represent employees.
The purpose of the roundtables and the extensive review of comments that the Department undertook was intended to find areas of agreement between vastly opposed interests. Although it is not possible to achieve total consensus, the Department has carefully evaluated the concerns of all affected groups.
There is no dispute that the current Pennsylvania salary threshold is obsolete and needs to be updated. Although it will be superseded by a new Federal threshold to become effective on January 1, 2020, the Federal threshold of $23,660 has been in place since 2004 and was likewise obsolete. The long-term failure to adjust the salary threshold dilutes the purpose of the regulation; namely, that the duties test and salary threshold differentiate between exempt individuals performing actual, EAP duties, while lower paid white-collar workers are extended overtime protections. Such a failure demands an appropriate increase in the salary threshold.
The Department also heeded the commentators who urged the Department to await publication of the Federal rule and to more closely align with the Federal standards. As discussed at length herein, the Department has taken substantial steps to more closely align with the Federal standards, to the extent consistent with its statutory authority. As described herein, there are some Federal exemptions that the act simply does not empower the Department to adopt.
The Department has also revised its methodology, as is discussed in detail herein, based on comments regarding the use of salary and wage data information for the Northeast region of the country. Instead, it has developed its salary threshold figures for this final-form rulemaking strictly from Pennsylvania data, so that it accurately reflects economic realities in the Commonwealth.
2. Legislative comments
In its comment, IRRC specifically identified two legislative concerns: whether the legislative process should be used instead of the regulatory process; and whether the Department should wait for the Federal government to issue its overtime rule. IRRC also encouraged the Department to work with the standing committees and State lawmakers to address their issues as this final-form rulemaking was developed.
The Department received the following legislative comments that also suggested use of the legislative process over the regulatory process: The Honorable Senators Lisa Baker, Kim Ward, The Honorable Representative Robert Kauffman, and members of the House Labor and Industry Committee (The Honorable Representatives Ryan Mackenzie, Jesse Topper, Jim Cox, Cris Dush, Sheryl Delozier, Mark Gillen, Seth Grove, Dawn Keefer, Fred Keller, Kate Klunk, David Maloney, John McGinnis, Steven Mentzer, Eric Nelson and Jack Rader). The Department also received comments expressing a similar concern from Michael Lawson and from Gail Landis, on behalf of the Greater Reading Chamber of Commerce.
The Department also received comments supporting the Department's use of the regulatory process to increase salary thresholds and revise definitions from the following legislators: The Honorable Representative John Galloway, The Honorable Senator Christine Tartaglione and members of the House Labor and Industry Committee (The Honorable Representatives John Galloway, Leanne Krueger, Morgan Cephas, Daniel Deasy, Maria Donatucci, Jeanne McNeill, Dan Miller, Gerald Mullery, Ed Neilson, Adam Ravenstahl, and Pam Snyder).
Under section 5(a)(5) of the act, the Secretary is authorized to define and delimit employment in a bona fide ''executive, administrative or professional capacity.'' While the Department acknowledges the legislature's ability to address such issues through the legislative process, as the law exists at this time, the Department's use of the regulatory process to increase salary thresholds, revise definitions and update the duties tests for EPA employees is squarely within the Department's statutory authority.
In response to IRRC's concern and numerous other comments asking the Department to wait for the publication of the final USDOL rulemaking, the Department postponed publication of its final-form rulemaking package until the USDOL rulemaking was published. The USDOL promulgated its final rule on September 27, 2019, at 84 FR 51230, establishing a new salary threshold for employees performing in EAP capacities effective on January 1, 2020. In USDOL's final rulemaking, USDOL updated its current salary threshold to qualify for the EAP exemptions from $455 per week to $684 per week for all employees except for employees who are not employed by the Federal government and who work in the Northern Mariana Islands, Guam, Puerto Rico, the United States Virgin Islands or American Samoa. The USDOL's final rule also updated the salary threshold for employees who are highly compensated employees, work in educational establishments and computer employees. In its final rule, the USDOL clarified that a weekly salary rate may be translated into an equivalent amount for periods longer than a week, and amended its rule to allow ten percent of the salary amount to be satisfied by the payment of nondiscretionary bonuses, incentives and commissions paid annually or more frequently instead of quarterly or more frequently.
The Department has more closely aligned this final-form rulemaking with the Federal regulations, including the new Federal rule effective on January 1, 2020. A detailed explanation of the Federal rule and the Department's efforts to align with that rule appears herein, in response IRRC's fifth comment.
The Department engaged with the legislature after the proposed regulatory package was submitted to IRRC. First, in July 2018, the Department met with staff of the Department's legislative oversight committees, which are Labor and Industry Committees of the House of Representatives and the Senate. The meeting offered an overview of and an opportunity to answer questions about the Department's proposed regulations to modernize overtime regulations. Of particular note, majority committee staff from both the House and Senate expressed concerns about the new salary threshold and questioned why exemptions and technical language were not being updated to align more with Federal regulations.
In September 2018, the House Labor and Industry Committee held a public hearing regarding the Department's proposed regulations. The Secretary of Labor and Industry and the Deputy Secretary for Safety and Labor Management Relations, who oversee the program area that administers and enforces Pennsylvania's labor laws, participated in this public hearing by offering oral and written testimony and answering questions asked by committee members. The public hearing offered a valuable opportunity to hear from a range of stakeholder groups. A significant takeaway from this public hearing was that many employers and individuals indicated a fundamental misunderstanding of eligibility and applicability of current overtime exemptions for workers. For example, some employers believe any salaried employee is automatically exempt from overtime.
Lastly, the Department received the written comments referenced previously from legislators and standing committees during the regulatory review process, which have been taken into consideration and are addressed herein.
3. The Regulation is in the public interest
IRRC commented that the Department should provide more detailed information for each section of this final-form regulation in the preamble and should explain why the amendments are required. The Department has done so herein on pages 38—44 of the preamble, under ''Summary of Amendments.''
In enacting the act, the General Assembly established the public policy direction underpinning the Department's exercise of its authority under the act:
Employes are employed in some occupations in the Commonwealth of Pennsylvania for wages unreasonably low and not fairly commensurate with the value of the services rendered. Such a condition is contrary to public interest and public policy commands its regulation. Employes employed in such occupations are not as a class on a level of equality in bargaining with their employers in regard to minimum fair wage standards, and ''freedom of contract'' as applied to their relations with their employers is illusory. Judged by any reasonable standard, wages in such occupations are often found to bear no relation to the fair value of the services rendered. In the absence of effective minimum fair wage rates for employes, the depression of wages by some employers constitutes a serious form of unfair competition against other employers, reduces the purchasing power of the workers and threatens the stability of the economy. The evils of unreasonable and unfair wages as they affect some employes employed in the Commonwealth of Pennsylvania are such as to render imperative the exercise of the police power of the Commonwealth for the protection of industry and of the employes employed therein and of the public interest of the community at large.43 P.S. § 333.101 (emphasis added). The legislature has determined that the protection of workers from unreasonably low wages is in the public interest.
This final-form rulemaking is in the public interest because the Commonwealth's current regulation is obsolete and no longer is relevant to provide guidance to employers to properly classify employees as exempt and to protect employees from employers who improperly misclassify them as exempt. The regulation is obsolete for two reasons. First, the duties test in the current regulations is out of date and no longer aligns with the USDOL duties test as it once did. The two different duties tests prescribed by Federal and State law make it difficult for employers to accurately determine which employees are exempt from receiving overtime. Second, the salary threshold in the Department's current regulation has failed to keep pace with current wages and thus applies to very few of the salaried employees it was intended to protect. The Department's final-form rulemaking is intended to update these regulations for easier comprehension and compliance by this Commonwealth's business community, and to provide protections to certain white-collar employees consistent with the express intent of the act.
The duties and salary threshold tests in the act have not been updated since 1977. At that time, the duties and salary threshold aligned with the USDOL rules. Since 1977, the USDOL has updated the Federal regulations twice, in 2004 and in 2019, and have significantly changed both the duties and salary threshold tests for the FLSA's salary exemptions. Although the Federal salary threshold will be updated on January 1, 2020, that threshold was calculated based on salary data for the Southern region of the United States—a region with the lowest wages Nationally. The Department will initially align with the Federal threshold and take a graduated approach to achieving a threshold that is representative of the Commonwealth's economy.
Updating Pennsylvania's duties test and the salary threshold is essential to meet the intent of the overtime exemption regulation. As the Department discovered during its stakeholder outreach, both employers and employees often misunderstand this regulation. There is confusion around Pennsylvania's antiquated use of both a short and long test for EAP exemptions. Further, most individuals understand only the salary threshold portion of the regulation, and mistakenly assume that if they make over $23,660 (USDOL's current threshold until the updated USDOL regulation takes effect on January 1, 2020), they are ineligible for overtime. However, under both the Department's regulation and USDOL's regulation, the individual must make over the salary threshold and meet the duties test. The increase in the salary threshold will better align the average salaries paid for employees who perform EAP duties with those duties; aligning Pennsylvania's duties test with the Federal duties test will assist employers with compliance.
Even opponents of the proposed rulemaking acknowledge that the existing regulation is outdated and the salary thresholds are obsolete. The methodology used by the Department to arrive at a fair and realistic salary threshold and the alignment of the duties test with the Federal regulation is in the public interest.
4. Economic or fiscal impacts of the regulation; protection of the public health, safety and welfare
IRRC commented that the Department should explain the reasonableness of the proposed salary thresholds in light of the fact that the National average for salary increases has been about 3% and that, even with the 3-year phase in, the Department's proposed salary increase is significant. IRRC summarized a number of the public comments, which are addressed more fully in the attached comment and response document that accompanies this final-form rulemaking. IRRC's comment expressed concern with the cost of compliance for nonprofit and educational institutions, as well as local governments. It asked the Department to consult with the regulated community to ''gain a thorough understanding of the fiscal impacts of this proposal.''
As set forth in detail herein, the Department consulted at length with the regulated community in an effort to understand concerns and to appreciate the impact of the regulation on both businesses and employees. As a result of that outreach, the Department has revised its methodology to take into account concerns with the geographic reach of the data set selected. As previously outlined, the revised salary threshold in the final-form rulemaking is based on Pennsylvania Occupation Employment Statistics data. This data better reflects economic realities in Pennsylvania and has, in fact, resulted in a salary threshold that is more than $2,000 lower than the salary level the Department proposed last year.
Business response to the salary threshold will vary depending on the characteristics of the business's operations, current staffing structure and current scheduling practices. Each affected employer must consider the regulation, including both the duties test and the salary threshold, and consider if they will adjust operations to make the regulation cost neutral, or if they wish to maintain several options for operations, including requiring employees to work beyond 40 hours per week, and therefore respond to the regulation in a way that may increase payroll costs. To adjust for this final-form rulemaking, employers may pursue one or a combination of options: pay nonexempt employees overtime; limit nonexempt employee hours to 40 hours a week to avoid overtime costs; allow for some overtime but reduce base pay or benefits; or raise nonexempt employee salaries above the threshold.
The Department estimates the total direct cost to the regulated community in this Commonwealth to comply with this regulation to be an average of $78.42 per employer per year across the current and next 5 fiscal years:
FY 2019-2020 Total Employer Cost: $6,961,025
FY 2020-2021 Total Employer Cost: $14,315,133— $14,734,347
FY 2021-2022 Total Employer Cost: $21,954,959— $23,508,359
FY 2022-2023 Total Employer Cost: $28,058,135—$30,394,558
FY 2023-2024 Total Employer Cost: $28,636,918—$31,041,393
FY 2024-2025 Total Employer Cost: $28,636,918—$31,041,393
This takes into consideration that all employers in the State will review the new regulation and that some will recognize that they are exempt from the regulation due to being certain municipal, public or limited types of nonprofit employers. It also considers that, given that the salary threshold will be phased in to $45,500 over 2 years, the number of newly nonexempt workers in the first year will be lower than the number of newly nonexempt workers upon full implementation.
In addition to the fiscal and economic impact on the business community, there will be a fiscal and economic impact for affected workers and for communities in this Commonwealth. Approximately 82,000 EAP workers Statewide will benefit from these updated regulations by January 1, 2022. Depending on how their employer reacts to these regulations, these individuals and their families could benefit from increased income or improved quality of work/family balance, or both.
FY 2020-2021: $3,565,467—$3,984,681 in increased worker wages
FY 2021-2022: $13,211,856—$14,765,256 in increased worker wages
FY 2022-2023: $19,871,561—$22,207,985 in increased worker wages
FY 2023-2024: $20,450,344—$22,854,819 in increased worker wages
FY 2024-2025: $20,450,344—$22,854,819 in increased worker wages
These additional wages to workers create ''induced spending'' in the community; this is consumer spending on retail establishments, restaurants and other goods and services. Estimated induced spending is as follows:
FY 2020-2021 Economic Impact: $1,957,441—$2,187,590 in induced spending
FY 2021-2022 Economic Impact: $7,253,309—$8,106,125 in induced spending
FY 2022-2023 Economic Impact: $10,909,487—$12,192,184 in induced spending
FY 2023-2024 Economic Impact: $11,227,239—$12,547,296 in induced spending
FY 2024-2025 Economic Impact: $11,227,239—$12,547,296 in induced spending
Finally, additional wages and induced spending creates an increase in tax revenue for State and local governments. Estimated additional tax revenues are as follows:
FY 2020-2021: $181,839—$203,219 in State and local tax revenues
FY 2021-2022: $673,805—$753,028 in State and local tax revenues
FY 2022-2023: $1,013,450—$1,132,607 in State and local tax revenues
FY 2023-2024: $1,042,968—$1,165,596 in State and local tax revenues
FY 2024-2025: $1,042,968—$1,165,596 in State and local tax revenues
5. Clarity, feasibility and reasonableness; possible conflict with or duplication of statutes or existing regulations
IRRC commented that the proposed rulemaking did not fully align with Federal regulations. IRRC pointed out that exemptions exist in Federal regulations for highly compensated employees, outside sales, certain computer employees, business owners and employees of educational establishments and reiterated the concern that omission of these provisions will contribute to inconsistencies and complicate compliance.
As an initial matter, ''the FLSA does not supersede state law; Pennsylvania may enact and impose more generous overtime provisions than those contained under the FLSA which are more beneficial to employees.'' Bayada Nurses, Inc. v. Com., Dep't of Labor & Indus., 8 A.3d 866, 883 (2010). In Bayada, the Pennsylvania Supreme Court noted that other courts confronting related issues have held that the FLSA does not prohibit state regulation of wages and overtime if the state's standards are more beneficial to workers. Id. at 883 (citing Pettis Moving Co., Inc. v. Roberts, 784 F.2d 439, 441 (2d Cir. 1986) (''Section 218(a) of the FLSA explicitly permits states to set more stringent overtime provisions than the FLSA.'')). See also Knepper v. Rite Aid Corp., 675 F.3d 249, 262 (3d Cir. 2012) (FLSA's saving clause evinces a clear intent to preserve rather than supplant state law and undermines any suggestion that Congress intended to occupy the field of wage and hour regulation).
Thus while the FLSA's purpose is to establish a National floor under which wage protections cannot drop, the FLSA does not supersede a state's minimum wage laws, require that states adopt minimum wage and overtime standards at levels established in the FLSA, nor prohibit a state's provision of more stringent protections.
Computer employee exemption
The Department cannot create a computer exemption because that exemption does not exist in the act. While the FLSA specifically exempts ''any employee who is a computer systems analyst, computer programmer, software engineer, or other similarly skilled worker'' and defines the relevant duties and compensation rate, see 29 U.S.C.A. § 213(a)(17), this exemption does not exist anywhere in the act. The Department cannot add an entirely different category of exempt employee through regulation where the legislature has not so provided. See, e.g. Nationwide Mut. Ins. Co. v. Foster, 580 A.2d 436, 442 (Pa. Cmwlth. 1990) (agencies cannot add substantive terms to statutes which do not exist in the statute).
Other exemptions
The Department's current regulations implementing the act contain an exemption for outside sales but do not contain exemptions for highly compensated employees, business owners and employees of educational establishments. Moreover, the Department's proposed rulemaking did not address updating or creating these exemptions and, due to that lack of notice, the Department received no comments from labor organizations regarding whether the outside sales exemption should be updated, or a new exemption created. As such, it would be more appropriate to address these issues in a future rulemaking where the Department can conduct outreach and receive input from all interested parties.
Other commentators recommended that the Department mirror Federal law and adopt an 8/80 rule for the health care industry. For the Department to adopt this rule, the Department would need to amend § 231.42 (relating to workweek), which implements the act and defines the term ''workweek'' as a period of 7 consecutive work days. This amendment also would be better addressed in a future rulemaking to provide all interested parties an opportunity to review and comment on any proposed changes.
Other commentators noted the absence of a concurrent duties test and key definitions such as primary duty and salary basis. While the Department has more closely aligned its regulations with Federal regulations, the Department has not adopted all Federal definitions. However, the Department does look to Federal law for guidance for interpreting its regulations. The Department will continue to review Federal regulations and may address any additional inconsistencies in future rulemakings.
Federal overtime rule
IRRC observed that many commentators, including members of the legislature, noted that the USDOL was in the process of promulgating a Federal overtime rule. Specifically, that comment was submitted by the Honorable Representative Robert Kauffman, the Honorable Senator Kim Ward, members of the House State Government Committee (The Honorable Representatives Daryl Metcalfe, Matt Dowling, Cris Dush, Seth Grove, Kristin Hill, Jerry Knowles, Brett Miller, Brad Roae, Frank Ryan, Rick Saccone, Tommy Sankey, Craig Staats, Justin Walsh, Judy Ward, and Jeff Wheeland), members of the House Labor and Industry Committee (Honorable Representatives Ryan Mackenzie, Jesse Topper, Jim Cox, Cris Dush, Sheryl Delozier, Mark Gillen, Seth Grove, Dawn Keefer, Fred Keller, Kate Klunk, David Maloney, John McGinnis, Steven Mentzer, Eric Nelson and Jack Rader), suggesting that the Department should await the USDOL rulemaking process. There were also a number of public comments to that effect, which are addressed more fully in the attached comment and response document that accompanies this final-form rulemaking.
In fact, the Department heeded the suggestion that it await the final USDOL rulemaking. The USDOL promulgated its final rule on September 27, 2019, at 84 FR 51230, establishing a new salary threshold for employees performing in EAP capacities effective on January 1, 2020. In USDOL's final rulemaking, USDOL updated its current salary threshold to qualify for the EAP exemptions from $455 per week to $684 per week for all employees except for employees who are not employed by the Federal government and who work in United States territories. The USDOL's final rule also updated the salary threshold for employees who are highly compensated employees, work in educational establishments and computer employees. In its final rule, the USDOL clarified that a weekly salary rate may be translated into an equivalent amount for periods longer than a week, and amended its rule to allow 10% of the salary amount to be satisfied by the payment of nondiscretionary bonuses, incentives and commissions paid annually or more frequently instead of quarterly or more frequently.
After reviewing the USDOL's final rulemaking, in its final regulations, the Department adjusted its initial salary threshold to $684 per week and amended the language allowing the payment of quarterly bonuses to allow the payment of yearly bonuses. The Department's final regulations will also let employers decide whether to use a calendar year, fiscal year or anniversary of hire year for calculating and paying bonuses.
Applicability
IRRC commented on the concerns of public employers. IRRC noted the comments from public employers, which are addressed more fully in the attached comment and response document that accompanies this final-form rulemaking, that public employers would incur compliance costs. As explained as follows, the Department's overtime regulations have been and continue to be inapplicable to public employers, including State-affiliated entities, counties, municipalities and public-school systems. This final-form rulemaking does nothing to change that status. Instead, the FLSA, which expressly includes state-related entities within its definition of covered employers, establishes the rules applicable to public employers.
Section 3(g) of the act (43 P.S. § 333.103(g)) defines the term ''employer'' as ''any individual, partnership, association, corporation, business trust, or any person or group of persons acting, directly or indirectly, in the interest of an employer in relation to any employe.'' The term specifically omits public employers. The omission of public employers from the act's definition of ''employer'' indicates the intent of the General Assembly to exclude public employers from coverage under the act. Neither courts nor agencies can add requirements to a statute by interpretation. See, e.g., Kegerise v. Delgrande, 183 A.3d 997, 1005 (Pa. 2018) (courts ''must not add, by interpretation, a requirement not included by the legislature''); Shapiro v. State Bd. of Accountancy, 856 A.2d 864, 877 (Pa. Cmwlth. 2004) (court may not insert a word the legislature failed to supply into a statute). In construing the Wage Payment and Collection Law (43 P.S. §§ 260.1—260.13), the Commonwealth Court held that it ''must give effect to the legislature's intent as it was expressed in the language of the statute and cannot supply an omission in a statute where it appears that the matter has been intentionally omitted. Municipal corporations such as the Borough are not included within the definition of ''employer,'' and we, as an appellate court, cannot expand the definition of ''employer'' to include them.'' Huffman v. Borough of Millvale, 591 A.2d 1137, 1138-39 (Pa. Cmwlth. 1991). Likewise, an agency cannot supply a term that appears to have been intentionally omitted from a statute through an interpretative rule. See, e.g., Nationwide Mut. Ins. Co. v. Foster, 580 A.2d 436, 442 (Pa. Cmwlth. 1990) (agencies cannot add terms to statutes which do not exist in the statute).
Although no Pennsylvania court has specifically addressed whether the act applies to public employers, in 1976 the Attorney General opined that the act does not apply to public employees. Office of Attorney General, Official Opinion No. 76-29, Applicability of Minimum Wage Act to Public Employes, 1 Pa. D.&C. 33 (Pa. A.G.), 1976 WL 401515 (October 18, 1976). The Attorney General traced the parallel development of the definition of ''employer'' in the act and the FLSA. The Attorney General noted that the FLSA was amended on April 8, 1974, P.L. 93-259, 88 Stat. 62 to specifically include public agencies within the definition of ''employer'' in 29 U.S.C.A. § 203(d), and to remove the exemption previously afforded the States and their political subdivisions. Since 1974, the FLSA has defined ''employer'' as ''any person acting directly or indirectly in the interest of an employer in relation to an employee and includes a public agency,'' 29 U.S.C.A. § 203(d), and provided a definition of ''employee'' applicable to individuals employed by a public agency which generally includes ''any individual employed by a State, political subdivision of a State, or an interstate governmental agency.'' 29 U.S.C.A. § 203(e)(2)(C).
The General Assembly has amended the act five times since the FLSA was amended to include public entities within the definition of ''employer'' in 1974, but has not altered the definition of ''employer'' to include public entities. The General Assembly's clear intention by its omission was not to extend coverage under the act to public employers. Accordingly, because the General Assembly has chosen not to include the Commonwealth or any of its political subdivisions in the act's definition of employer, the Department has properly interpreted the act to exclude them. This exemption is longstanding and it appears, from the relatively small number of comments, that most public employers understood that the proposed rulemaking would not apply to them.
IRRC suggested that the Department explicitly identify the types of employers which are exempt from the requirements of the act and, thus, the Department's regulations implementing the act.
The following employers are exempt from the act under section 5(a)(4) by virtue of their omission from the text of the act: Commonwealth agencies, counties, cities, boroughs, townships, state-related schools, Penn State University, public schools, conservation districts and port authorities. Additionally, there is a specific exemption in the act for weekly, semiweekly or daily newspapers with a circulation of less than 4,000, the major part of which circulation is within the county where published or counties contiguous thereto. There is also a specific exemption in the act under section 5(a)(9) for public amusement or recreational establishments, organized camps, or religious or nonprofit educational conference centers, if they do not operate for more than 7 months in any calendar year, or if during the preceding calendar year, their average receipts for any 6 months of such year were not more than 33 1/3% of its average receipts for the other 6 months of the year. The Department is also constitutionally precluded from enforcing the act against Federal entities. ''Of course, under fundamental tenets of our Republic the Commonwealth of Pennsylvania has no power to make the Federal government subject to any of its laws and regulations.'' Hughes v. WCAB (Salem Transp. Co., Inc.), 513 A.2d 576, 578 (Pa. Cmwlth. 1986).
6. Reasonableness of requirements, implementation procedures and timetables for compliance by the public and private sectors
IRRC next commented that the Department should explain how the implementation schedule provides sufficient time for compliance and for employers to make necessary adjustments to business practices, as well as a communication strategy. IRRC noted a comment from the Honorable Representative John Galloway that suggested that the Department consider delaying the initial implementation for a period of time to allow notification to employers.
Because the Department waited for the publication of the Federal regulation, and aligned the threshold for the first year with the Federal threshold which becomes effective on January 1, 2020, this final-form rulemaking has little impact until January 1, 2021. The regulated community is already on notice of the increased Federal threshold and will have a year before the first of two graduated steps to bring the exempt salary threshold to the level warranted by Pennsylvania-specific data becomes effective.
The Department will engage in outreach activities and establish educational sessions to ensure that stakeholders are informed of the EAP exemptions' new duties tests and salary threshold and provide clarity on the differences between State and Federal requirements. Following approval of this final-form rulemaking, the Department plans to hold educational sessions for all stakeholders in Harrisburg, Scranton, Pittsburgh, Altoona, Philadelphia and Erie. In addition, the Department will work with the State and Regional Chambers and associations to distribute fact sheets and offer assistance. The Department will ensure that those organizations have the Bureau's toll-free number and the e-mail address of a resource account created specifically for this issue so that questions will be answered timely and consistently.
7. Whether regulation is supported by acceptable data; reasonableness of requirements, implementation procedures and timetables for compliance; statutory authority; whether the regulation represents a policy decision of such a substantial nature that it requires legislative review
Salary threshold phase-in
Many commenters expressed concern about the salary threshold's large increase from phase in through final amount, thereby potentially creating many newly nonexempt workers. IRRC pointed to commenters' statements that the average salary increases each year at 3%. However, the Department notes that the salary threshold has not increased for 15 years and on the State level for 42 years. The increase from the phase in amount to final amount is intended to compensate for the lack of appropriate updates to the salary threshold for many years.
Further, the Department's proposed increase aligns with or is less than salary threshold increases in previous State and Federal rulemakings. The Department has heeded the comments of the employer community that it cannot accommodate sharp increases to the salary threshold, and will therefore establish a Pennsylvania-specific salary threshold over 3 years and implement an automatic review and escalation mechanism every 3 years to avoid sharply increasing the salary threshold in the future.
Year Weekly Salary Threshold % Increase from Previous Threshold 1975
(previous rulemaking in 1970)Short Test: $250
Long-Test for Exec & Admin: $155
Long-Test for Prof: $170
Short Test: 25% increase
Long Test, E&A: 24% increase
Long Test, Prof: 21% increase
2004 USDOL $455 ($23,660 annually) 82% increase from Long Test
192% increase from Executive/Administrative Test
168% increase from Short Test2020 USDOL $684 ($35,568 annually) 50% from 2004 2021 PAL&I $780 ($40,560 annually) 14% from 2020 USDOL 2022 PAL&I $875 ($45,500 annually) 12% from PAL&I 2021 Since the proposed rulemaking was published, the Federal government has issued a rule establishing a new salary threshold for EAP employees. The Department has aligned the State threshold for the first year with the Federal threshold that will become effective on January 1, 2020. Therefore, there is no impact to employers from the Pennsylvania-specific salary threshold until January 1, 2021, when the incremental increase in the threshold would diverge from the Federal threshold. Therefore, employers will have time to prepare and adjust, and the Department will undertake a communication and educational campaign, described previously, to ensure that employers are aware of the changes and their obligations under this regulation.
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