I am pleased to appear before you today to discuss the Department of Labor’s proposed revision of the Fair Labor Standards Act’s “white collar” regulations, which provide the criteria for determining who is excluded from the Act’s minimum wage and overtime requirements as an executive, administrative, or professional employee.
Congress included this exemption from the Act’s monetary requirements in the original Fair Labor Standards Act of 1938, in Section 13(a)(1). The regulations that we are revising appear in Title 29 of the Code of Federal Regulations, Part 541. As provided in the Act itself, employees working in a bona fide executive, administrative or professional capacity are not entitled to receive the minimum wage or overtime pay otherwise required by the Fair Labor Standards Act.
The statute itself does not define the terms executive, administrative or professional. Rather, the statute delegates to the Secretary of Labor the administrative discretion, and the duty, to define and delimit these terms “from time to time by regulations.”
The existing regulations require three basic tests for each exemption: (1) a minimum salary level, now set at $155 per week for executive and administrative employees and $170 per week for professionals under the basic “long” duties tests for exemption, whereas a higher salary level of $250 per week triggers a shorter duties test in each category; (2) a salary basis test, requiring payment of a fixed, predetermined salary amount that is not subject to reduction because of variations in the quality or quantity of work performed; and (3) a duties test, specifying the particular types of job duties that qualify for each exemption.
The criteria in the existing regulations defining who is exempt have not been changed in decades. The job duties tests were last revised in 1949. The salary basis test was set in 1954. The minimum salary levels were last updated in 1975, over 28 years ago. Under those salary rates that are still in effect today, an employee earning only $8,060 a year may qualify as an exempt “executive.” By comparison, an employee paid the current minimum wage of $5.15 an hour and working 40 hours per week earns about $10,700 a year.
The Congress recently asked the U.S. General Accounting Office (GAO) to review these “white collar” exemption regulations under the Fair Labor Standards Act. In a report issued by the GAO in September 1999, GAO chronicled the background and history to the exemptions, estimated the number of workers who might be included within the scope of the exemptions, identified the major concerns of employers and employees regarding the exemptions, and suggested possible solutions to the issues of concern raised by the affected interests. In its September 1999 report, the GAO said “We recommend that the Secretary of Labor comprehensively review the regulations for the white-collar exemptions and make necessary changes to better meet the needs of both employers and employees in the modern work place. Some key areas of review are (1) the salary levels used to trigger the regulatory tests, and (2) the categories of employees covered by the exemptions.”
For the past year and a half, the Department has been working on proposed reforms to update and clarify these exemptions, published as a regulatory proposal in the Federal Register on March 31st this year (61 FR 15560). Last spring, we invited both business associations and worker advocates to meet with the Department so we could listen to their views and concerns about the existing regulations. We invited nearly 80 different stakeholder groups, including those who commented on previous proposed rules on this issue, including 16 employee unions, and heard from over 40 of them. We also reviewed comments that were filed with the Department during rulemaking efforts in the 1980s, and studied the entire regulatory history from 1938 to the present.
The existing regulations are complex. Complex rules are difficult to apply and particularly difficult to enforce. In many instances, even lawyers and experienced Department of Labor investigators have had difficulty interpreting and applying the current regulations. When rules are not clear, the confusion becomes a breeding ground for litigation. In 2001, for the first time ever, private collective actions filed in federal court for violations of the Fair Labor Standards Act outnumbered discrimination class actions. This lack of clarity benefits no one and is particularly harmful to employees. Many misclassified employees may be forced to wait years to receive overtime pay that they need today as the legal process winds its way through the court system. Other misclassified employees, who never bring a lawsuit or complain to the Department, may never receive the wages they are due under federal law.
Under the leadership of Secretary of Labor Elaine Chao, the Department of Labor has issued a proposed rule to modernize and simplify the regulations. Reforms are needed to make the regulations easier to apply and enforce. Reforms are also necessary to strengthen overtime protections for low-wage workers. Bringing the rules into the 21st century and clarifying outdated regulatory language will help employees better understand their rights and ensure they receive their overtime pay when due. Employers will be better able to understand their obligations and comply with the law. Reducing administrative and litigation costs will free up resources that may be devoted to stimulating economic growth. And clearer rules will better equip the Department of Labor to vigorously enforce the law.
I would like to spend a few moments discussing our proposal and how we believe it will impact workers, but let me first discuss the workers who will not be impacted. First, because these exemptions are limited to certain defined classes of “white collar” workers, only those employees who perform office or non-manual work meeting the specified duties tests can be classified as exempt from receiving overtime pay. This rule does not impact employees who perform routine or manual work. Thus, for example, the proposal will not impact construction workers, carpenters, electricians, mechanics, plumbers, teamsters, cooks, secretaries and similar workers because none of these workers would qualify as “white collar” workers meeting the duties tests contained in the regulations. In addition, the Department has not proposed any changes to the current regulation regarding overtime pay for nurses or medical technicians and the proposal would have virtually no impact on police officers or firefighters. Finally, this rule does not affect obligations under existing collective bargaining agreements so if such an agreement provides that certain categories of workers will receive overtime premium pay, employers must continue to abide by those agreements without regard to these regulations.
Our proposal would increase the minimum salary level required for exemption as a “white collar” employee to $425 per week, or $22,100 per year. This is a $270 a week increase, and the largest increase since the Congress passed the Fair Labor Standards Act in 1938. (The largest prior increase was $50 per week.) With this change, all employees earning less than $22,100 a year would be automatically entitled to the overtime protections of the Fair Labor Standards Act. Under the current rules, even a worker earning minimum wage would not be automatically entitled to overtime protections. We estimate that this change will result in 1.3 million additional workers, eligible for overtime pay for the first time, sharing up to $895 million in additional wages every year.
As in the current regulations, the Department’s proposal also includes a streamlined test for higher compensated “white collar” employees. To qualify for exemption under this aspect of the proposed rule, an employee must: (1) be guaranteed total annual compensation of at least $65,000, regardless of the quality or quantity of worked performed; (2) perform office or non-manual work, and (3) meet at least one or more of the exempt duties or responsibilities specified for an executive, administrative, or professional employee. This is the same concept found in the current rules for the “Special Proviso for High Salaried Executives” known as the “short test.”
The Department’s proposal will also update, simplify and clarify the duties tests. The current regulations provide two sets of duties tests for each of the three exemption categories – that is, there is both a short duties test and a long duties test for each of the executive, administrative and professional exemptions. The current long duties tests only apply to employees earning between $8,000 and $13,000 a year, and thus, has been basically inoperative for a decade. Thus, our proposal would rely on the existing “primary duty” approach found in the current short tests. To be exempt, an employee must receive the required minimum salary amount and have a primary duty of performing the duties specified for an executive, administrative or professional employee.
For the executive exemption, the proposal would maintain the two requirements from the current short test and add a third requirement from the current long test. Thus, under the proposal, an exempt executive must (1) have a primary duty of managing the entire enterprise or a customarily recognized department or subdivision thereof, (2) direct the work of two or more other workers, and (3) have authority to hire or fire other employees or have recommendations as to hiring and firing be given particular weight. By adding this third requirement from the inoperative long test, the proposal would make it more difficult to qualify as an exempt executive. In other words, fewer workers would qualify as exempt executives under the proposal than qualify for the exemption today.
The Department has not proposed substantial changes for the professional exemption. The current duties test for professional employees requires a primary duty of “work requiring knowledge of an advance type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study.” The proposal would add a phrase clarifying that the required advanced knowledge can also be gained through an equivalent combination of intellectual study and work experience. But, this is not a change from the current rule. As explained in the current regulations at section 541.301, and in case law, the term “customarily” restricts the exemption to those professions where an advanced, specialized degree is a standard prerequisite for entry into the profession, but also makes the exemption available for “the occasional lawyer who has not gone to law school, or the occasional chemist who is not a possessor of a degree in chemistry.” The proposed change merely clarifies that the chemist without a chemistry degree cannot qualify for exemption unless he possesses knowledge and skills equivalent to a chemist with the advanced degree, and that such equivalent knowledge may be gained through combinations of military training, community college or technical school courses or specialized on-the-job training.
The major change to the duties test for the administrative exemption is the proposal to replace the “discretion and independent judgment” requirement, which has been a source of much confusion and litigation, with a new standard that exempt administrative employees must hold a “position of responsibility with the employer.” To meet this requirement, an employee must either customarily and regularly perform work of substantial importance or perform work requiring a high level of skill or training. This change seeks to clarify the standards for determining eligibility for administrative workers. In our proposal the Department specifically sought comment about replacing the “discretion and independent judgment” test. Under both the current rule and the proposal, the exemption applies only to those employees who meet the administrative employee primary duty test of performing office or non-manual work related to management policies or general business operations.
Under the Department’s proposal, all employees who earn less than $22,100 per year would be automatically entitled to the overtime protections of the law. Outside economists estimate that this change would guarantee overtime pay to an additional 1.3 million low-wage workers. Overtime protections will be strengthened for another 10.7 million hourly workers who currently perform both exempt and non-exempt duties and are paid overtime; the proposed changes to the duties tests will make entitlement to overtime pay more certain for these employees. Thus, under our proposal, overtime protections will be guaranteed or strengthened for 12 million workers. Our economists have estimated that there are about 640,000 hourly workers earning an average of $50,000 a year, all with college degrees, that employers might be able to reclassify as exempt. Of the 1.3 million additional workers who will be guaranteed overtime protection under our proposal, all earn under $22,100 per year; almost 55 percent are women; over 40 percent are minorities, and almost 25 percent are Hispanic; and almost 70 percent have only a high school education or less. Thus, consistent with the original purposes behind the enactment of the Fair Labor Standards Act in 1938, our regulatory proposal focuses additional overtime protections on some of our country’s most vulnerable low-wage workers.
The Department’s Notice of Proposed Rulemaking invited public comments for 90 days. During that comment period, which closed on June 30, we received almost 80,000 submissions, some of which are duplicates (for example, multiple copies of identical comments were received by e-mail, facsimile, and regular mail or delivery/courier service). We are continuing to sort through these comments to identify such duplications among the many comments received. The Department will review all comments received and give careful consideration to all of the views that have been submitted. I would be happy to answer any questions any Members of the Subcommittee may have, but note for the record that the Department is in the midst of rulemaking and will carefully consider the full record before deciding on the next step.
This concludes my prepared statement in this matter.
