White-Collar Exemption NPRM Understates Impact on Small Businesses

Click here for An Overview of the DOL's White-Collar Exemption Notice of Proposed Rulemaking.

The Department of Labor’s Notice of Proposed Rulemaking (NPRM) regarding the white-collar exemption to the Fair Labor Standards Act (FLSA) includes an initial regulatory flexibility analysis that is required for all regulations that will have a material impact on small businesses.  In that analysis, the Department concludes that 1.3 million workers employed by between 179,700 and 1.3 million small businesses will be impacted by the substantial increase in the white-collar exemption salary threshold in the NPRM.  However, that analysis almost certainly understates the impact on small businesses.

The Department states, “No data are available to determine whether small businesses (or small businesses in specific industries) are more or less likely than non-small businesses to employ exempt EAP workers or affected EAP workers.”  As a result, they conclude “the best assumption available is to assign the same rates to all small and non-small businesses.”  Footnote 449 of the NPRM acknowledges that “a strand of literature” indicates that small businesses tend to pay lower wages than larger businesses, which in turn would imply that workers at small businesses would be more likely to be affected.  But, because “the literature does not make clear what the appropriate alternative rate for small businesses should be,” the Department continues with the assumption that the two rates are equal. 

The pay differential between larger businesses and small businesses has been studied for decades by labor economists.  Although the pay differential between small and large businesses has declined over the past several decades, recent studies show that workers in small businesses earn significantly less, on average, than workers in the same occupation in larger businesses.[1]

Lower average pay in small businesses matters because the NPRM increases the minimum amount an employee must earn to be classified as exempt (assuming the employee also passes the duties test).  Among employees who are currently exempt under the white-collar exemption but who earn less than the proposed higher threshold, the share employed by small businesses is likely greater than their share of overall employment.  By assuming no difference in the rate at which small and non-small businesses employ affected EAP workers, the NPRM understates the number of affected workers at small businesses and therefore understates the impact of the proposed regulation on small businesses.

[1] In “The Disappearing Large-Firm Wage Premium” by Bloom, et. al., AEA Papers and Proceedings 2018, 108: 317-323 the authors find that: (i) large firms have paid a significantly higher wage than small firms for more than a century, (ii) over the last 30 years the large-firm wage premium has started to decline, and (iii) the decline is due to a reduction in wage premiums at very large firms.