Public Comment 55019

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Smith Summerset & Associates LLC
Wage Hour Consultants
189 E. Big Beaver, Suite 203
Troy, MI 48083
248-918-4448
[email protected]

May 1, 2019
Melissa Smith, Director
Division of Regulations, Legislation, and Interpretation
Wage and Hour Division
U.S. Department of Labor
Room S-3502
200 Constitution Ave., NW
Washington, DC 20210
Subject:

Comments on 29 CRF Part 541 NPRM
RIN 1235-AA20

Smith Summerset & Associates LLC (hereinafter Smith Summerset) provides expert
consulting services to assist employers in achieving and maintaining compliance with
Wage and Hour laws and regulations. Each of our associates has more than 40 years
experience -- the majority of that time employed as career managers within the WHD.
Our knowledge of the practical realities of Wage Hour issues is second to none.
Smith Summerset opposes the proposed changes to 29 CFR Part 541, Section
541.602(a)(3), which would allow employers to count nondiscretionary bonuses and
incentive payments, including commissions, to satisfy up to 10 percent of the standard
salary level test. We oppose the proposed changes in general and we oppose them in
detail. We particularly oppose the allowance of up to a 52-week period to make final
payment sufficient to achieve the required standard salary level. We also take note that a
massive increase in expensive unexpected litigation would likely ensue if the proposal is
adopted.
These comments will use the following acronym and phrases:
• "BIC" for nondiscretionary bonuses, incentives and commissions,
• "BIC provision" for the proposed § 541.602(a)(3).
• "BIC settlement perioe for the period used by the employer in implementing the
proposed BIC provisions.
First general objection:
The proposed § 541.602(a)(3) is unfair and contrary to the purpose and objective of
the Fair Labor Standards Act .

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The purpose of the Fair Labor Standards Act (FLSA) stated in FLSA Section 202 is "to
correct and as rapidly as practicable to eliminate ... labor conditions detrimental to the
maintenance of the minimum standard of living necessary for health, efficiency, and
general well-being of workers." The FLSA is therefore intended to benefit the interests
of employees, particularly low wage employees.
The proposed BIC provision in no way benefits employees. The direct opposite is true -all benefit flows to employers. More precisely, all benefit flows to those employers who
choose to pay an employee the bare minimum, lowest possible salary needed to support
the employer's claim of 541 exempt status for the employee. The BIC provision is
simply a loophole that would allow delayed payment of as much as 10% of the minimum
salary for up to 52 weeks.
Many employers will simply adopt a "longevity bonus" system under which 10% of the
standard salary remains unpaid each week, not to be paid until the end of the 52 week
BIC settlement period. At the proposed standard salary level of $679 that equals $67.90
per week or $3,530.80 total per year, unpaid for as long as 52 weeks after the work is
performed. A great many of the employers who will adopt this approach will have never
previously used any BIC system whatsoever. They will adopt it solely to take advantage
of the BIC provision.
These are significant amounts of money -- hard-earned wages for hours already worked.
Many hundreds of thousands of employees would be affected. These employees are not
high wage earners. They are low-level staff who live paycheck to paycheck. They
depend on prompt payment of their wages in order to pay their bills and support their
families. To allow delayed payments of such large amounts to relatively low wage
workers for as long as 52 weeks after the work was performed is entirely unfair and
contrary to sprit if not the letter of the FLSA.
Second general objection.
The underlying rational for the inclusion of the BIC provisions is specious superficially plausible, but actually wrong.
The only rationale for proposed BIC provisions articulated in the 2019 NPRM and in the
preamble to the 2016 Final Rule as follows:
1. Business interests expressed support for such inclusion.
2. "Such payments can be an important part of exempt employees compensatioel
and "such compensation might be curtailed if the standard salary level was
increased and employers had to shift compensation from bonuses to salary to
satisfy the new standard salary level."2

1 2019
2

NPRM
2016 Final Rule

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3. Inclusion of the BIC provision would modernize the regulations.
Point 1 is entirely understandable. The proposed change is the nose of the camel under
the edge of the longstanding salary basis tent. It would effectively change the concept of
a salary being a predetermined amount received every week to one of a salary being a
predetermined amount most of which is received every week -- the rest need not be
received until as much as 1 year after later. The proposed change is an unjustified
departure from core FLSA principles. In practical application it lowers the standard
salary level by 10%.
Point 2 is verbal sleight of hand. In the first place, while it is true that "such payments
can be an important part of exempt employees compensatioe, this statement primarily
applies to more highly paid employees — those in higher levels of the 541 spectrum,
including Highly Paid Employees addressed separately in the regulations. BIC payments
are not an important pay component for the relatively lowly paid employees who would
be affected by the proposed BIC provisions. Employees affected by the proposed BIC
provisions are exactly those employees most in need of the certainty and regularity of a
salary, even if only a low salary. There is no justifiable reason to lessen the value of their
low salaries still further by allowing delayed payment of 10%.
In the second place, omitting the BIC provisions from the regulations would in no way
inhibit or curtail payment of bonuses, incentives or commissions as claimed. An
employer affected by the proposed standard salary level increase who already makes BIC
payments to the affected employee could (and almost certainly would) address the issue
in its entirety by a simple one-time accounting change by which the employer would reallocate some portion of previous BIC payments to the employee's weekly salary
sufficient to at least equal the standard salary level. The employer's total payroll expense
would not change at all. The dollar amounts would simply move from one accounting
category to another. Nor would the employee's total compensation package change. The
employee's salary would increase to at least the standard salary level but their BIC
compensation would decrease by an equivalent amount. Such one-time accounting
changes would be easily implemented by any employer wishing to do so. Such one-time
changes would be widely implemented across the low wage industries primarily affected
by this issue. The changes would be simple one-time readjustments of BIC calculation
protocols used by that employer. They would in no way inhibit or curtail the payment of
bonuses, incentive or commissions in a general sense.
Point 3, asserting that the change would modernize the regulations, is misleading and
unrealistic. "Modernize is not specifically defined or even described in the NPRM. The
term apparently refers to "an attempt to align the regulations better with modern pay
practices".3 Or perhaps the term "modernize envisions some imagined simplification
which would assumedly make the regulations easier to understand or implement.
Aligning the regulations with modern pay practices must not be viewed as a legitimate
goal within the context of these regulations. Many modern pay practices, particularly
3

2019 NPRM Executive Summary

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with the advent of complicated and difficult to understand computer applications, violate
the law or otherwise harm workers. Modern pay practices often pay workers less than
FLSA minimum wage. Modern pay practices often violate FLSA overtime provisions.
Modern pay practices often improperly treat employees as 1099 independent contractors,
imposing both short-term and long-term financial harm on the employees and on future
U.S. society in general. Modern pay practices often perpetuate discriminatory wage
differentials based on unlawful criteria. "Modernizine the regulations to better comport
with "modern pay practices" should not be viewed as a legitimate FLSA goal. It is
disingenuous to equate modernization with justification within the context of the
proposed BIC provisions. It is no different than claiming internet rules should be
"modernizee to better allow phishing fraud or Trojan horse virus attacks because such
practices comport with "modern internet practices".
The proposed changes would complicate the regulations, not simply them. The proposed
changes would make the regulations more difficult for all parties to understand, not less
difficult. The bright line test of the minimum salary requirement would be dimmed. The
relatively low wage employees affected by the BIC provisions4, in particular, would be
especially ignorant of how their pay was calculated, when to expect payment, and their
rights under the law. Employers choosing to utilize the BIC provision would be forced to
keep new and previously needed records fully documenting their BIC settlement periods
and precisely detailing the BIC earnings and all payments including all "catch-up"
payments for each affected employee. All such records would need to be kept in active
status for all affected employees including those no longer employed until such time as
all "catch-up" payments were calculated, paid and fully documented. Employers would
also need to take special care to insure that all persons involved — both affected
employees and their supervisors — fully understood the system in order to minimize the
flood of litigation likely to ensue.
Particular complexities would arise every time an affected employee is terminated (other
than employees terminated exactly at the end of BIC settlement period). When would
"catch-up" pay be due to the terminated employee? Must "catch-up" pay to terminated
employees be paid by the next pay period after termination? Or could the employer wait
until the end of the BIC settlement period before paying "catch-up" — perhaps as long as
51 weeks in the future? If the employer can wait until the end of the BIC settlement
period, why wouldn't every employee who is owed "catch-up" immediately file a private
lawsuit (on the day after their termination) for unpaid overtime pay, since, by definition,
if "catch-up" pay is owed then the standard salary test was not met and therefore the
employee was not 541 exempt?
Third general objection.
A flood of expensive and unexpected litigation would ensue.

4

Many likely paid below the minimum State minimum wage level in their State.

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If "catch-up" pay under the BIC provision is owed to an employee then by definition the
employee was not 541 exempt because the standard salary test was not met for that
employee.
It is therefore clear that if an employer fails to timely pay required "catch-up" pay for any
reason then back wages will be owed to the affected employee for all overtime hours
worked during the settlement period. This is plain fact and certain law. The terms of the
541 exemption will not have been met because the employee did not receive the
minimum required salary. No other conclusion is possible.
The reasons for failure to pay "catch-ur pay will not matter. It might range from simple
administrative oversight to outright intentional wage theft. But the end result will be the
same in terms of back wage liability ... back wages will be owed. The dollar amounts
will surprisingly be very large. Back wages will not equal the unpaid "catch-up" wages;
they would equal the total unpaid overtime premium for all overtime hours worked
during the BIC settlement period ... a surprising and unexpected liability to those
unsophisticated employers who might stumble into the violation simply by reason of
administrative oversight.
Specific objections:
The proposed yearly (52 week) period for BIC catch-up payments is far too long. If
the BIC proposal is adopted at all (which we do not support) then the period for BIC
catch-up payments should be no more than quarterly (13 weeks).

Allowing a yearly (52 week) BIC settlement period effectively lowers the proposed
minimum salary test for as long as one year after the work is performed. Many thousands
or hundreds of thousands of employees would be adversely affected. These are not
highly paid employees. They are lower middle class workers who are paid the lowest
possible salary necessary to achieve a 541 exempt status claimed by their employers.
They live paycheck to paycheck and depend upon prompt payment of their wages in
order to pay their bills and maintain a modest lifestyle. To allow payment of a portion of
their modest wages to be delayed long after the work is performed is misguided public
policy.
If the BIC proposal is adopted at all (which we do not support) then the period for BIC
catch-up payments should be no more than quarterly (13 weeks). We do not support or
recommend even a 13 quarterly (13 week) settlement period -- it is just the lesser of two
evils. All of the objections noted herein also apply to a quarterly (13 week) settlement
period, but it is only 25% as bad as the yearly (52 week) proposal in this NPRM.5
5

Smith Summerset did not comment during formulation of the 2016 Final Rule, though we did not support
the BIC provisions it contained. We still do not support them. We do take note that substantial differences
exist between the 2016 rule and the current proposal: The standard salary level in the 2016 final rule was
$913 per week and the resulting sub-standard salary for BIC recipients was 90% of $913 or $821.70 per
week. The sub-standard salary level for BIC recipients in this 2019 NPRM is only 90% of $679 or $611.10
per week. So the BIC provision in the 2016 final rule, though objectionable, still paid $210.60 more per
week into the pockets of affected low wage level employees than the 2019 NPRM would pay. So the BIC

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Particular complexities would arise ever time an affected employee is terminated.
They would increase in severity with the length of BIC settlement period.

The proposed regulations would allow payment of catch-up wages no later than the next
pay period after the end of the 52 week BIC settlement period. So an affected employee
who is still employed by the employer must be paid "catch-ur wages within one week.
But the regulations make no mention of, and seemingly take no consideration of,
employees who are terminated prior to the end of the BIC settlement period. This is
especially important in view of the high turn-over rates historically encountered at the
low salary levels involved in this issue.
Numerous questions and problems will arise.
• Must "catch-up" wages to terminated employees be paid by the next pay period
following their termination? Or could the employer wait until the end of the BIC
settlement period — perhaps as long as 52 weeks in the future — before paying
"catch-up" wages?
• Regardless of the answer to the question above, what is the required amount of
"catch-ur wages owed o terminated employees who don't work the full BIC
settlement period? Is it equal to a pro-rata portion of the 52-week amount due
corresponding to the fraction of BIC settlement period worked by the employee?
The current language of proposed § 541.602(a)(3) only identifies "52 weeks times
the weekly salary amount" as the first calculation in computing the "catch-up"
wage amount owed. It makes no provision for employees who may not work the
full 52 weeks.
• If "catch-up" wages to terminated employees need not be paid until the end of the
52-week settlement period, why would not every terminated employee who is
owed "catch-ur wish to immediately (on the day after their termination) file a
private lawsuit for overtime back wages, liquidated damages, and attorney fees?
Because if "catch-ur wages are owed to the former employee for the period
involved, then by definition the standard salary test was not met in that period and
therefore the former employee was not 541 exempt.
• If "catch-up" wages to terminated employees can be delayed until the end of the
52-week BIC settlement period, then what responsibility will the employer have
to locate terminated employees and deliver "catch-ur wages to them? May
thousands of such former employees will have moved repeatedly or to far distant
locations since their termination but before the end of the settlement period.

provision under the 2016 Final Rule was at least more palatable than under the current NPRM because of
the significantly higher underlying standard salary level.

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We appreciate the opportunity to comment on the NPRM. We hope our comments will
be taken fully into account.
Sincerely

R
James R. Smith
Managing Member

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