USMCA Calculating the High-Wage Component of Material and Manufacturing Expenditures
Subpart B—Calculating the High-Wage Component of Material and Manufacturing Expenditures
Section 810.100 Scope and Purpose of This Subpart
The USMCA Implementation Act authorizes the Secretary, in conjunction with the Secretary of the Treasury, to verify whether covered vehicle production complies with the high-wage components of the LVC requirements set forth in the USMCA. See 19 U.S.C. 4532(e). The high-wage material and manufacturing expenditures component of the LVC requires producers to demonstrate that a minimum percentage of the cost of the vehicle is composed of vehicle assembly labor costs, and/or parts and materials expenditures, from a North American plant or facility with an average hourly base wage rate of at least US$16 per hour. The Department works in conjunction with CBP to verify producer compliance. Specifically, the Department is responsible for verifying whether workers engaged in direct production work at a plant or facility included in a producer’s material and manufacturing expenditures calculation earn an average hourly base wage rate of at least US$16 per hour. This subpart addresses calculation of this high-wage aspect. All other aspects of material and manufacturing expenditures, including determining the percentage of the cost of a covered vehicle that assembly labor or specific parts and components constitutes, are within the purview of CBP and/or other federal agencies and addressed by their regulations and other guidance.
Section 810.105 Calculating the Average Hourly Base Wage Rate
Subsection 810.105(a) sets forth the overarching rule that the average hourly base wage rate for a plant or facility is calculated by dividing the total base wages paid for all hours worked in direct production by the total number of hours worked in direct production. The USMCA does not define “average hourly base wage rate,” but instead defines “production wage rate” for a plant or facility as “the average hourly base wage rate, not including benefits, of employees directly involved in the production of the part or component used to calculate the LVC[.]” See Automotive Appendix, Article 7.3 n.77. Thus, the terms “production wage rate” and “average hourly base wage rate” are interchangeable for purposes of calculating a producer’s high-wage material and manufacturing expenditures for a plant or facility. The Department considers the term “average hourly base wage rate” more descriptive and useful for calculation purposes, and generally uses that term.
Subsection 810.105(b) describes the three components of the average hourly base wage rate calculation: The hourly base wage rate, hours worked in direct production, and total base wages.
The hourly base wage rate is the rate of compensation a worker is paid for each hour worked in direct production work. The hourly base wage rate refers to the base rate of pay for an individual worker, whereas the average hourly base wage rate refers to the average rate of pay for a group of workers in a plant or facility. In determining the hourly base wage rate for each worker, the producer must exclude all benefits, bonuses, premium payments, incentive pay, overtime premiums, and all other similar payments. “Similar payments” include, for example, profit-sharing bonuses, tooling allowances, collective bargaining agreement ratification bonuses, and performance bonuses. Excluding such payments from the average hourly base wage rate calculation adopts a bright-line rule that is consistent with both the plain meaning of the term “base” and with the USMCA’s language that the “production wage rate is the average hourly base wage rate, not including benefits[.]” See Automotive Appendix, Article 7, n.77. In contrast, including other types of payments in the base wage rate would undermine the treaty’s plain meaning and increase administrative complexity. The Department’s approach also strengthens the US$16 per hour standard, which increases the likelihood that producers will use American plants to meet the LVC requirements, and in turn promotes more high-wage jobs for U.S. auto industry workers.
Amounts deducted from a worker’s pay generally may be included in the hourly base wage rate to the extent they are for the benefit of the worker and are reasonable. WHD will look to the principles outlined in 29 CFR part 531 to determine whether a deduction is for the benefit of the employee and is reasonable, and therefore may be included in the hourly base wage rate. For example, reasonable amounts deducted for board and lodging may be included in a worker’s hourly base wage rate, see 29 CFR 531.3, as may amounts deducted for taxes assessed against the employee, see 29 CFR 531.38, and amounts deducted for payments to third persons pursuant to a court order, see 29 CFR 531.39. Conversely, amounts deducted for tools, equipment, or uniforms may not be included in a worker’s hourly base wage rate, see 29 CFR 531.32(c).
The second component of the average hourly base wage rate calculation is to determine the number of hours worked in direct production by each worker. This means all time a worker spends personally involved in the production of passenger vehicles, light trucks, heavy trucks, or parts used in the production of these vehicles at a plant or facility located in North America, or directly involved in the set-up, operation, or maintenance of equipment or tools used in the production of those vehicles or parts at that plant or facility. The total number of hours worked in direct production at a plant or facility, as referenced in subsection (a), is calculated by adding together hours in direct production (as calculated under subsections (b)(2)(i) and (b)(2)(ii)) for all workers who perform direct production work at that plant or facility.
Subsection (b)(2)(i) provides that, except for executive and management staff, certain engineers, and other workers described in § 810.130, if at least 85 percent of a worker’s total work hours are worked in direct production during the time period the producer uses to calculate the average hourly base wage rate, see § 810.105(d), the worker’s total work hours are considered hours worked in direct production, and are included in the average hourly base wage rate calculation. This is consistent with the Uniform Regulations, which provide that “[f]or direct production workers, the average base hourly wage rate of pay is calculated based on all their working hours[,]” and define Start Printed Page 39787“direct production worker” as “any worker whose primary responsibilities are direct production work, meaning at least 85 percent of the worker’s time is spent performing direct production work.” Uniform Regulations, Part VI, Sec. 12, ¶ 1. Subsection (i) is also consistent with the USMCA’s production wage rate definition, which emphasizes the wage rate of workers “directly involved in the production of the part or component used to calculate the LVC.” See Automotive Appendix, Article 7, n.77.
Subsection (b)(2)(ii) provides that, except for workers described in § 810.130 (for whom all hours worked are excluded), if less than 85 percent of a worker’s total work hours are worked in direct production, only the worker’s hours worked in direct production are included in the average hourly base wage rate calculation. This is similarly consistent with the Uniform Regulations provision that “[f]or other workers performing direct production work [who are not direct production workers], the average hourly rate is calculated based on the amount of hours performing direct production work.” Uniform Regulations, Part VI, Sec. 12, ¶ 1.
The 85 percent threshold described in § 810.105(b) should simplify compliance with the high-wage components of the LVC requirements by permitting producers to count all hours (and pay) for workers who spend most of their time performing direct production work. This bright-line approach minimizes compliance burdens and promotes administrative efficiency. Also, including in the average hourly base wage rate all direct production hours for any worker who performs direct production work (except for workers described in § 810.130), helps ensure that the average hourly base wage rate appropriately reflects wages paid for direct production work.
The third component of the average hourly base rate calculation is calculating “total base wages”—i.e., the cumulative base wages for all time that workers spend performing direct production work. This calculation involves two steps. First, multiply each worker’s hourly base wage rate by that worker’s number of hours worked in direct production at that rate. The hourly base wage rate is set forth in subsection (b)(1) and hours worked in direct production is set forth in subsection (b)(2). Second, total the values calculated in step one to obtain total base wages paid for all hours worked in direct production at the plant or facility. As previously discussed, all of a worker’s hours worked are considered hours worked in direct production (and are included in the average hourly base wage rate calculation) for workers who satisfy the 85 percent threshold in § 810.105(b)(2)(i), while for workers under § 810.105(b)(2)(ii), only hours worked in direct production are included. This calculation does not include any hours (whether in direct production or otherwise) for workers described in § 810.130 (e.g., executives, management, research and development workers, certain engineers, and other personnel).
Once the above calculations are performed (for the appropriate time period as set forth below), the average hourly base wage rate is calculated by dividing the total base wages by the total number of hours worked in direct production.
Neither the USMCA, its implementing legislation, nor the Uniform Regulations address how to calculate the hourly base wage rate “average.” The Department has chosen to calculate this average by dividing workers’ total base wages for direct production work by their total number of hours worked in direct production, rather than by calculating the hourly base wage rate for each worker, and then averaging those individual rates.[7] The Department believes that its chosen approach is more consistent with the Department counting hours worked in direct production toward the average hourly base wage rate. In contrast, the alternative approach is less consistent because it uses a single wage rate for each worker, including for workers who receive that rate in part for performing work that is not direct production work. The chosen approach may also strengthen the US$16 per hour standard because computing the average using the total number of hours worked in direct production may prevent an upward skewing of the average that could occur under the alternative method, under which highly paid workers working relatively few hours in direct production would have equal computational weight to lower-paid workers who work all or virtually all hours in direct production. Finally, as addressed in more detail in the discussion of § 810.120, by dividing by the total number of hours workers spend performing direct production work, the Department’s chosen approach allows employers to appropriately weight the wages of full- and part-time workers, without having to apply any special rules or computations for part-time workers. This uniform approach decreases administrative complexity and promotes efficiency.
Subsection 810.105(c) provides that a producer must include all hours worked in direct production at a plant or facility (other than by workers described in § 810.130), and the pay for such hours, when calculating the average hourly base wage rate for that plant or facility. This is consistent with the Article 7.3 of the Automotive Appendix, which provides that the average hourly base wage rate at a “vehicle assembly plant or facility” must be at least US$16 per hour for the parts or materials produced in that facility and, if the producer elects, labor costs in vehicle assembly at that facility count towards the high-wage material and manufacturing expenditures. Automotive Appendix, Article 7.3(a). Additionally, where a worker is paid by a third party (such as a temporary employment agency), only the wages received by the worker (and deductions that are for the worker’s benefit and are reasonable, as described in § 810.105(b)(1)(ii)) are included in the average hourly base wage rate calculation.
Subsection 810.105(d) provides the time period over which a producer can calculate the average hourly base wage rate. The time period options are taken from Article 7.5 of the Automotive Appendix, which permits calculating the LVC over any one of the following periods: (1) The previous fiscal year of the producer; (2) the previous calendar year; (3) the quarter or month to date in which the vehicle is produced or exported; (4) the producer’s fiscal year to date in which the vehicle is produced or exported; or (5) the calendar year to date in which the vehicle is produced or exported. In computing the average hourly base wage rate, the producer may use only base wages earned and hours worked in direct production (as set forth in subsection 810.105(b)(2)) during the selected time period. Thus, for example, if in 2022 a producer elects to calculate Start Printed Page 39788the average hourly base wage rate using the previous calendar year (under § 810.105(d)(2)), its calculations would encompass hourly base wage rates for hours worked in direct production from January 1, 2021 through December 31, 2021.
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