STATEMENT OF RONALD BIRD
Before the Subcommittee on Labor, Health and Human Services, Education and Related Agencies Committee on Appropriations U.S. Senate
January 20, 2004
I am Ronald Bird, Chief Economist for the Employment Policy Foundation (EPF). EPF is a research and educational foundation established in 1983 to provide policy makers and the public with the highest quality economic analysis and commentary on U.S. employment policies. On behalf of EPF, I appreciate this opportunity to provide information and analysis regarding the need for and impact of proposed revisions to the Department of Labor’s white collar regulations under the Fair Labor Standards Act (FLSA). The proposal in question is the first comprehensive attempt in fifty years to update the terms and definitions of these regulations (29 CFR Part 541) that define the criteria to be considered an “executive, administrative or professional” employee exempt from overtime. For the earnings thresholds that affect coverage status, it has been over 25 years since the last revision.
Background
The Fair Labor Standards Act generally requires that employers pay workers at mutually agreed hourly rates above the statutory minimum, keep records of weekly hours, and, in the event that hours exceed 40 during any week, pay a fifty percent overtime premium for the excess hours worked. The overtime provisions of the FLSA do not apply universally. The 1938 law recognized that the hourly pay approach did not fit the realities of work for certain executive, professional or administrative office jobs.
The law directed the Secretary of Labor to issue regulations to define the types of jobs and circumstances that would qualify for exemption from the hourly pay, 40 hour week, and overtime premium requirements. By giving the duty of defining specific details of terms and conditions for exemption to the Department of Labor, Congress recognized that circumstances meriting exemption were apt to change over time as the economy evolved. Delegating the task of setting and revising the thresholds and definitions to DOL suggests that the Congressional authors may have anticipated that adjustments would need to be made more frequently than would be convenient if Congress kept the responsibility to itself.
Since the 1930s, DOL’s FLSA regulations have required that exempt managers, professionals, and administrative office workers must be paid on a fixed weekly or annual salary basis regardless of hours worked. Since 1975, the rules have required that the salary be at least $8,060 per year ($155 per week) relative to the basic “long-test” duties list, and at least $13,000 per year ($250 per week) relative to the less stringent “short-test” list of duties. Comparison of Salary Basis and Hourly Basis of Pay
The salary basis test is an important element of the rule that has sometimes been overlooked in discussions of the current regulatory proposals. The proposed rule is not just about the simple question of whether or not someone is paid an overtime premium. The FLSA rules affect the basic principles by which wages are negotiated and calculated. The distinction between those covered by FLSA overtime premium rules and those exempt from those rules involves a fundamental difference in way in which compensation is negotiated and paid.
Rules for Exempt Employees. Because the FLSA rules require that exempt employees be paid a fixed salary that does not vary with weekly hours worked, any deviation from the fixed weekly wage standard by pay docking may void the exempt status of the employee. This means that the exempt employee has the assurance of a predictable paycheck regardless of fluctuations in the employer’s labor needs. The employer and employee are relieved of responsibilities to keep records of hours worked.
In addition, the sociological implications of the time-clock in the workplace are interesting. I recall how pleased my grandfather was the day his status changed to exempt: What seemed to matter most to him was not the small increase in pay or the altered title but the fact of not having to “punch the clock.” Exempt status carries with it a certain degree of autonomy in the workplace that many individuals value.
Being exempt also means that the employee knows that working hours may fluctuate from week to week, and the employee’s salary demand reflects the employee’s expectations about both the expected average hours and the degree of fluctuation. In a well-functioning, competitive labor market, salaries will adjust to reflect the reality of expected average hours of work and weekly variance in hours. The disadvantage to the employee arises when the actual hours of work exceed the employee’s expectation.
Sometimes discussions about FLSA status imply this disadvantage when it is said that the exempt worker is not “protected” from demands for extra hours or is not paid for the full amount of time committed to the job. However, this risk is tempered by the mobility of the employee in the labor market. Having education and skills that are in demand and being in a labor market where employment is growing and unemployment relatively low are important considerations that also protect employees from such risks. The main disadvantage is that the salaried employee may have to bear the transactions costs of re-negotiation with the current employer or of seeking other employment to redress the balance between his or her time preferences and wages.
Rules for Nonexempt Employees. For employees who are not exempt from the FLSA rules, the law establishes an entirely different scheme for wage negotiations and pay calculations. Wages must be based on a basic hourly wage rate (“straight-time” rate) that applies to any hours worked through 40 per week. The hourly wage rate rather than the sum of total earnings becomes the focus of labor market negotiation and transaction. Records have to be kept and clocks punched. Weekly hours over 40 are paid at one-and a-half times the basic rate. This arrangement has both advantages and disadvantages. The advantage is that the employee has less need to worry about fluctuations in required hours beyond the 40 limit. Unexpected work demands are either reduced or well compensated. The fifty percent overtime premium is designed to be large enough to ensure that most employees are compensated more than sufficiently for any extra hours required. The disadvantage to the employee is the down-side fluctuation in earnings when work is slack, and the possibility that the overtime premium may discourage employers from offering over 40 hours of work to any one employee – spreading the total amount of work over more individual employees.
It may be useful to remember that protecting employees from unexpected demands for extra work hours was not the main policy motive behind the FLSA in 1938. The main motive was to increase the total number of individuals employed by encouraging employers to constrain hours and share the total work hours among a wider number of labor market participants. That was an understandable policy goal in the context of the stagnant economy and high unemployment of the time.
The distinction between exempt employees and non-exempt employees is not a distinction between being paid fairly and being paid unfairly. It is misleading for anyone to imply that exempt employees are working unpaid hours as a general rule. The banishment of exploitation and oppression from the workplace was one of the great achievements of our nation in the 20th century, and there is no basis to fear their return in the 21st century. Both exempt and non-exempt workers are paid fairly. Indeed, some researchers have found evidence that they are paid equivalently – that the earnings of both categories average out to the same result over time in terms of total annual earnings and total hours worked after controlling for different characteristics of occupations, education and experience.
The Workplace Has Changed Dramatically
The proposed revisions to the white collar regulations are long overdue. The FLSA was enacted in 1938, and the regulatory structure of definitions and categories of duties implementing its pay classifications have remained essentially unchanged since 1954. The minimum salary thresholds for possible exempt status were last changed in 1975. The law has changed little, while the workplace it governs has changed enormously.
Today's American workplace is different in structure and more complex in its organization than the workplace of 1938. The workplace transformation of the past sixty five years reflects at least five dimensions of change that affect relevance and applicability of current FLSA regulations:
Industrial Structure. Before World War II, nearly one-in-three (33.6 percent) workers were employed in manufacturing. In contrast, today less than one-in-seven (13.6 percent) works in the manufacturing sector. The industries that have experienced relative job growth are characterized by workplace organizations in which job duties are not as narrowly defined as they were in manufacturing in the 1940s. The number of jobs where duties do not clearly fit the categories defined by the current FLSA rules has increased considerably. Even in manufacturing, technological and organizational advances that have raised productivity have also blurred the definitional lines of many job responsibilities, qualifications, and duties. The result of these changes in industrial structure and workplace organization has been to complicate significantly and increase the number of FLSA coverage/exemption status determination decisions that employers must make each year.
Occupational Structure. Managerial and professional jobs have increased more than any other category. In 1940, only about one-in-six workers (17.9 percent) were employed in managerial or professional occupations. Today, nearly one-in-three employees (30.1 percent) work in such a position. Under the FLSA, job title alone is not sufficient to determine coverage or exemption status. The outdated regulations make the process of determining FLSA status for workers in management and professional jobs the most complex and time consuming.
In 1940, nearly one-half (48.2 percent) of all employees worked in occupations related directly to manufacturing and production, including: laborers, craftspeople, construction workers, assembly-line workers and machine operators. Jobs related to manufacturing and manual production are now less than one-in-three of all occupations (28.5 percent). In 1938, determination of coverage status for workers in these types of occupations was fairly straight-forward – the job title and the job duties were closely aligned and readily associated with decision criteria of the FLSA rules. Today, the number of “easy classification” jobs are fewer, and even among production occupations, technological and organizational changes have often blurred the lines of distinction on which the current duties tests rely.
These changes in occupational structure mean that many more jobs today than in the past may quality for exemptions defined in the Fair Labor Standards Act. The increase in the number of potentially exempt jobs makes it much more important today that the regulations implementing the exemption concepts be clearer, and easier to apply. The larger number of decisions about exemption status that must be made in today’s workplace magnifies the cost burden of rules that are complex and cumbersome.
Education. Just as occupational and industrial structure have changed, educational attainment of the workforce has also changed dramatically. In 1940, it was not uncommon for the typical worker to be a high school dropout – over three-quarters (75.1 percent) of all adult workers had never finished high school.
Today, over 58 percent of the population age 16 and older has at least some post-secondary (college-level) education. Over 38 percent of workers now have a college-level degree. Only 11.9 percent have less than a high school diploma. Between 1998 and 2001, the number of jobs held by college graduates has increased 5.8 million while employment of persons with no more than a high school diploma has declined by 1.7 million
The increase in employment of college graduates reflects the changing structure of the workplace and increasing need for workers who can think critically and analytically, and who can manage and coordinate their work activities through complex automated information, process control and communication systems. Increased educational attainment is also associated with increased diversity of job duties and the breakdown of traditional organizational hierarchies in the workplace. These education-related changes have blurred the definition of professional work as currently defined in the FLSA regulations and made the process of determining status of employees under the regulations more complex.
Earnings. Changing occupational structure and rising educational attainment have resulted in a workforce that is significantly better paid than 65 years ago. Today, the average full-time, year-round worker earns $44,579 and 15.7 percent of full-time, year-round workers earn over $65,000. The trend is towards greater numbers of high earning workers. Since 1992, the number of full-time, year-round workers earning over $65,000 in real 2002 dollar equivalent doubled from 7.4 million to 14.9 million. The number of full-time, year-round workers making less than $65,000 increased 18.7 percent. Growth of jobs paying $65,000 or more accounted for 37.5 percent of total employment growth for full-time, year-round workers over the past decade.
Higher earnings have made it more important that status determinations under Part 541 be accurate. The confusion and complexity associated with the current rules mean that both employees and employers have more at stake, and both will benefit by revised rules that make the status determination process simpler, easier to understand, and less prone to error or disagreement. The possible loss of overtime pay to employees who are wrongly classified as exempt is an apparent concern, despite statistical evidence that classification has little or no impact of average weekly earnings.
Workplace Dynamics. Beyond the changes in workplace structure, education and earnings, the American workplace has become more dynamic in terms of employment growth and turnover. Technological change, global competition and changing social norms have resulted in a workplace in which new jobs are created and old jobs eliminated at a faster rate than ever before. In 1938, most workers expected to stay with a single employer for his or her working life. Today, average job tenure is under five years and declining.
The typical worker entering the workforce today can expect to change jobs seven times over a working life. Both new jobs created by economic growth and replacement job openings created by job-shift turnover and retirement result in decisions that employers must make about FLSA coverage/exemption status. According to data from the Bureau of Labor Statistic’s Job Openings and Turnover Survey, private sector employers made 45.6 million hiring decisions in 2002, despite a total employment level that was essentially unchanged. The 45.6 million hiring actions reflects replacement of employees who lost jobs, changed jobs or retired. This 42.2 percent turnover rate indicates the flux of job creation, i.e., the job elimination and job switching that constantly characterizes our dynamic labor market.
Each of these hiring actions involves some degree of decision-making regarding FLSA coverage/exemption status of the job. For replacement positions, the decision may be limited to a review of the existing determination to confirm whether it is still appropriate. For newly created positions, the decision making process to determine FLSA coverage/exemption status is more lengthy. Net job growth (1.6 million annually) is a minimal estimate of new job positions created. Because of changing job duties, expansion and contraction of employment within industries, and offsetting job eliminations and creations, the number of new positions that require more intensive effort for determination of coverage/exemption status may include a sizable number of the 45.6 million hiring actions per year previously identified as “replacement” hires.
Increased Regulatory Burden Now and in the Future. Each of the categories of change discussed above reflects on-going and accelerating forces affecting the American workplace. These changes have already increased the regulatory burden under the existing Part 541 rules to a significant degree. The higher regulatory burden has already raised costs and eroded competitive advantages. The effect the regulatory burden has been especially hard for manufacturing and other production workers who have seen their jobs lost to foreign competition. The increased burden of the regulation has harmed some of the very workers that the original law was designed to protect.
However, the need for revisions to Part 541 does not rest solely on the history of workplace change and increased burden. The changes described here are on-going and accelerating. The impacts seen thus far may be dwarfed by the adverse impacts that will accumulate in the future if action to modernize the rules is delayed. The greatest justification for changing the existing rules is avoidance of adverse economic impacts that will result in the future if nothing is done now.
The complexity and ambiguity of the existing rule is evidenced by the amount of disagreement and litigation it generates. For the past two years, FLSA issues – many related to this rule – have been the leading employment-related civil action in federal courts.
The DOL proposal is a revision that is long overdue. It has been on the regulatory agenda for 25 years. Inflation, along with rising real wages, has rendered the long-test for exemption – applicable to employees making between $155 and $250 per week – almost moot. In 2001, 78.7 percent of employees who earned between the current minimum threshold of $155 per week and the proposed new salary test threshold of $425 also earned over $250 per week. For those 5.4 million full-time and part-time employees, determination of their exemption status was based on an attenuated list of duties under the “short test.”
The proposal would ensure that everyone who earns less than $425 is classified as non-exempt. They would be guaranteed the protections of the FLSA, including having a basic hourly wage rate defined, having their working hours tracked and recorded, and being paid a fifty percent hourly wage rate premium in the event that they work over 40 hours during a given week. The Impact of the Proposed Revision on Exemption Status
Recent discussions about the proposed revision have focused largely on the questions of how many people gain exempt status and how many might lose exempt status. In fact, many policy makers have expressed dismay over the wide fluctuations in estimates of how employees will be affected. The reason for these fluctuations is that solid empirical research and reliable survey data that identifies actual classification status of individuals is scarce and incomplete.
• The available data tells us with fair accuracy how much people earn per week. So, we know how many people earn amounts below and above the relevant salary thresholds - $155, $250 and $425.
• We also know with fair accuracy the actual hours that people believe they worked in each monthly survey reference week and how many hours they think they usually work in a typical week. So, we can identify people who work part-time (under 35 hours per week), full-time (over 35 hours per week).
• We can identify the number who work over 40 hours per week and consequently would be entitled to overtime premium pay if classified as non-exempt.
• We know whether people say they are paid on an hourly basis or a salaried basis. So we can presume by the salary test that people paid hourly are non-exempt and currently get overtime premium pay, but we do not know whether they are currently exempt solely because of their pay method or also because of their duties.
• We even know to a reasonable degree of specificity the number of people whose occupations fall under various job titles, but we do not know enough about their duties to say with certainty who is actually exempt under the current rules and who is not. Because duties tests remain a major element of the proposed new rules, the same problem applies to attempts to estimate the number who would be exempt under the proposed rule.
The limitations of the data have led to attempts to associate duties that relate to classification status with job titles for which we have employee counts. Some researchers have conducted assessments of samples of written job descriptions and interviews of employees to duties associated with occupations. In other cases, wage and hour enforcement officers have made broad estimates of the percentage of people with currently exempt duties in each occupation based on their field experience. These estimates are useful, but they are not precise, some were based on information or experience that is now outdated, they are not based on statistically valid random samples of the universe of employees. The estimates of exempt proportions of jobs under selected occupation titles are a pragmatic effort to overcome the limitations of available data, but such estimates are inherently subjective and speculative.
The Impact of Revised Salary Thresholds. Because employee salaries are more readily known than job duties, we can be most certain that raising the salary threshold for exemption will increase the number of workers who are absolutely eligible for overtime regardless of what their duties are today and regardless of how their duties may evolve in the future so long as their pay stays below the threshold. Currently 36.4 million employees earn between $155 and $425 per week. These include 29.5 million who are paid hourly and 6.9 million who are paid on a salary basis.
All of the employees who are paid on an hourly basis are non-exempt by definition because they are not paid on a salary basis. The extent to which their duties reinforce non-exempt status is not known with certainty.
Some of the salaried employees may be non-exempt under current rules also and would be entitled to overtime premium pay in the event that they worked over 40 hours. Because exempt status depends on duties, we do not know the number for certain, but DOL used existing subjective estimates of exemption probabilities based on past assessment studies to estimate that 1.3 million salaried workers who now usually work full-time are likely exempt today and would definitely become non-exempt under the proposed revision.
The Employment Policy Foundation examined the DOL estimate and concluded that it was a very conservative estimate of the number of individuals who would be converted to non-exempt status by the proposed increase in the salary threshold. EPF found that 5.1 million salaried employees currently work full-time (35 hours or more in a typical survey week) and, therefore, may work over 40 hours at least some weeks during the year. Even if many of these workers are presently non-exempt by duties (DOL estimated that 75 percent were non-exempt), they all benefit to some degree by having their status more surely defined by the increased salary threshold. In addition, there may be some among the hourly pay group who currently have duties that would make them eligible for exemption except for their hourly pay basis.
It is important to recognize that everyone who is eligible by duties for exempt status is not automatically paid on a salary basis. For example, I used to work for a government contractor firm. My job duties as an economist and education qualified me for exemption as a professional, and my weekly earnings were in excess of the minimum thresholds. Nevertheless, my employer and I agreed to an hourly pay arrangement. My earnings fluctuated from week to week depending on my recorded hours, and I was paid an overtime premium when I worked over 40 hours. Needless to say, I frequently wanted to work over 40 hours a week but the boss was less frequently willing to let me work as many extra hours as I would have liked.
The point is that I was an hourly worker, and non-exempt because of the pay status, but my employer could have treated me as exempt based on duties. That did not happen because it was in both of our interests to keep things on the hourly basis. For me, it meant occasional extra income, and for my employer it meant less risk of losing me to a competitor because I was happy with the arrangement. In today’s labor market, many employees have more bargaining power than was typical 50 years ago. An employer who would change an employee’s status to shave a few cents off the payroll would do so at his peril and risk losing a valuable worker to a competitor.
Impact on Employees Who Earn Over $425 Per Week. Some have argued that changes in certain definitions of exempt duties will cause employees who now are entitled to overtime to be reclassified as non-exempt. Estimates of the number affected have been published based on subjective evaluations of how changes in wording of duties definitions would change the percentage of exempt people under each occupation title. At their foundation, however, these estimates are purely speculative and subjective. Five lawyers representing one perspective on the issue will come up with very different subjective conclusions than five lawyers representing another perspective, and all of them will come up with different conclusions than five lawyers selected at random.
Indeed, the idea that you need lawyers to figure out the meaning of the exemption criteria is the heart of the problem with the current rules. This complexity is the reason DOL is trying to simplify the rules and make them relevant to contemporary language and contemporary ways of organizing work. Employees and employers should be able to read the rules, and each know and both readily agree on the right answer to the exemption eligibility question.
Consider one example: The proposed rule replaces the requirement that an employee exercise “discretion and independent judgment” with a new “position of responsibility” requirement for exemption as an administrative employee. The current language is as follows: In general, the exercise of discretion and independent judgment involves the comparison and the evaluation of possible courses of conduct and acting or making a decision after the various possibilities have been considered.” (§541.207(a)) and “The term does apply to the kinds of decisions normally made by persons who formulate or participate in the formulation of policy within their spheres of responsibility or who exercise authority within a wide range to commit their employer in substantial respects financially or otherwise.”(§541.207(d)(2))
The proposed new language requires that an exempt employee perform: Work of substantial importance [that] includes activities such as ...making or recommending decisions that have a significant impact on general business operations or finances; analyzing and recommending changes to operating practices; planning long or short-term business objectives; analyzing data, drawing conclusions and recommending changes; handling complaints, arbitrating disputes or resolving grievances; representing the company during important contract negotiations; and work of similar impact on general business operations or finances. Work of substantial importance thus is not limited to employees who participate in the formulation of management policies or in the operation of the business as a whole. It includes the work of employees who carry out major assignments in conducting the operations of the business, or whose work affects general business operations to a significant degree, even though their assignments are tasks related to the operation of a particular segment of the business.” (proposed § 203(b))
This change has been cited to support claims that thousands of employees would be reclassified as exempt and lose earnings that they now receive. The reality is that such claims are only a wild guess. There is no objective data about job duties at sufficient specificity to determine whether the proposed change in wording will change the result for anyone. To the extent that anyone might become exempt who is not exempt now, it is also reasonable to consider that some who are now exempt might become non-exempt. Also, one should consider whether any rational employer would reclassify an employee and cut effective pay in a job market where most people are not trapped and where many of us have more options and opportunities than we did 50 years ago. Unilateral reclassification is likely to increase turnover, and turnover cost is a much more critical concern for today’s human resource managers than overtime payroll cost.
DOL Did Not Provide Guidance to Evade the Law
Amid the recent controversies about duties definitions, several press articles reported in error that the Department of Labor’s economic analysis of the proposed rule was guidance to employers on how to avoid their obligation to pay overtime.
EPF examined the complex questions involved in estimating the economic impact of the proposed regulation. When an agency proposes new or revised regulations, the government is required to publish an extensive analysis of the likely economic impacts of the proposal. The impact analysis requirements mandate that the government describe in detail all of the assumptions and contingencies that go into its estimates and consider all possible ramifications of the proposed change.
Press reports described the DOL analysis of alternatives for calculating the cost of converting from salary to hour wages as guidance for circumventing the payment of overtime. If DOL had intended to provide guidance to employers, it is unlikely that they would have hidden it 40 pages inside a technical document and the preamble to the proposed regulations that only economists and policy analysts are apt to read.
Press articles described the DOL analysis of alternatives for calculating the cost of converting from salary to hour wages as guidance for circumventing the payment of overtime. In fact, three of the four alternatives discussed result in higher wages than the employees in question are currently earning. The only alternative that might hurt an individual employee is the one that reflects the original Roosevelt administration intention for the FLSA – cutting hours to 40 per week and sharing available work among other employees. The compensating wage adjustment alternative examined in the DOL regulatory analysis is a logical extension of the reduced hours scenario based on the idea that employees might choose to negotiate terms that would enable them to maintain their desired working hours and earning objectives despite the intention of the FLSA to discourage employers from offering extra work opportunity. The complex policy analysis problem that DOL examined in its preliminary regulatory impact analysis document arises from the fact that currently exempt salaried employees do not have a clearly defined hourly pay rate to use in the computation of the cost of converting them from exempt to non-exempt status when the salary threshold is raised. Their base hourly rate is unclear because their hours vary from week to week while their pay is fixed. This problem introduces a major uncertainty into the regulatory impact analysis.
The following hypothetical example illustrates the four scenarios that are covered by the DOL analysis. In this example, assume that Jane is currently an exempt manager who is paid $400 per week, and this week she worked 40 hours, but last week she worked 32 hours and the week before that she worked 50 hours. Over the entire year she averages 41 hours per week. There are four different ways to logically calculate how the proposed change of Jane’s status from exempt to non-exempt would affect her potential earnings and her employer’s payroll costs.
1. Calculate Jane’s pay based on a “straight-time” rate of $10 per hour (her $400 per week salary divided by a 40 hours per week standard). This approach assumes that Jane is currently not being paid anything for the 41st hour worked during the average week – i.e., she agreed to a $400 salary based on the expectation of a 40 hour (or less) weekly work requirement and regrets her employment choice. On this basis, Jane would get $15 for the average weekly hour of overtime, raising her weekly earnings to $415. Her annual earnings would go up by $780, if her employer continues scheduling an average of 41 hours of work per week.
2. Calculate Jane’s wages based on an hourly rate of $9.76 per hour ($400 per week divided by the average 41 hours per week of work) This alternative assumes that Jane expects to work 41 hour a week on average and accepted a $400 weekly salary on that basis. In this case her $400 weekly pay already includes a “straight-time” equivalent payment for the 41st hour at the base rate, but switching Jane to non-exempt status would trigger a 50 percent wage premium for the hour of overtime during the average week. Her average weekly earnings would increase by $4.88 per week or $254 per year.
3. Avoid the whole issue by raising Jane’s salary to $425 per week, which will maintain her FLSA exempt status under the proposed rule. This approach will save Jane and her employer from the paperwork of keeping time records and ensure Jane a predicable weekly paycheck, regardless of fluctuations in actual hours. This approach would raise her annual earnings by $1,300 to $22,100.
4. Limit Jane’s hours to 40 per week, and hire additional workers to cover the extra hours needed. This is the approach that was envisioned by President Roosevelt and the authors of the FLSA in 1938 – a shortened work week that would create jobs for more individuals. Based on Jane’s average hourly equivalent wage rate of $9.76 per hour, Jane’s annual earnings would decrease by $390 as her annual working time was decreased by 52 hours. Someone else (a new employee or a part-time employee assigned additional hours) would pick up 52 hours more employment and an extra $390 per year in earnings. The net impact on employers would be zero – the payroll total would be unchanged. The fourth alternative deserves special attention, because it suggests that the proposed change could lower Jane’s earnings. Because the hours worked would be reduced also, it might be argued that Jane would be no worse off. The impact depends on how Jane values extra time off from work versus extra income.
If Jane valued extra income more highly than time off, she might take a second job to supplement her income. Currently about five percent of the work-force holds a second job – ‘moonlighting’ for extra income because their primary jobs do not offer them enough hours to meet their weekly earnings desires. The fact that the typical second job pays a lower hourly rate than the primary job, suggests that these individuals would be willing to work more hours on their primary jobs if the opportunity were available. Alternatively, if Jane wanted extra income instead of extra hours off, she also might bargain with her employer to let her continue earning an average of $400 per week by continuing to work 41 hours per week on average, subsequent to implementation of the proposed FLSA rule change. This unchanged average weekly wage solution makes sense from the perspective that Jane is currently choosing 41 hours a week of work (on average) for a salary package of $400. Her continuing employment choice reveals she is satisfied with getting $400 for a work week that averages 41 hours. If she and her employer agree to an equivalent “straight-time” hourly wage rate of $9.64, then she can earn the same $400 per week and be equally satisfied after the new rule goes into effect by being paid for 40 hours at $9.64 per hour and one average weekly overtime hour at $14.46 (rounding results in six cents extra). This alternative assumes that Jane cares only about the total amount that she is paid and not about how the amount is calculated. It saves Jane the trouble of finding and scheduling a second job to achieve her earning goal.
The “straight-time” rate in this example is slightly less than the $9.76 average hourly rate that results from simple division of Jane’s $400 weekly salary by 41 average hours. Recent economic research supports the theory that this sort of adjustment has occurred in the past in response to existing FLSA overtime rules. Trejo (1991) compared persons covered by FLSA overtime rules in the 1970s and those who were not. He found that for similar persons who worked the same hours, their weekly earnings were nearly identical regardless of whether their wage computation included an overtime premium. In other words, for workers who are concerned only with the total earnings and expected total hours of work, then a change in FLSA classification status has no economic impact on the overall outcome of competitive labor markets. The proposal would not change payroll costs, total hours of work or employee earnings.
Our examination of the DOL impact analysis found that the alternatives discussed are the opposite of guidance. They are carefully considered examinations of how the marketplace may operate as people make free choices to adjust to a changed policy framework. The alternatives represent a good-faith effort by DOL to consider the full range of possibilities. This thoroughness is the hallmark of good regulatory impact analysis.
Thank you for the opportunity to present my views. I will be glad to answer any questions that you may have.
