STATEMENT OF TAMMY D. MCCUTCHEN ADMINISTRATOR, WAGE AND HOUR DIVISION EMPLOYMENT STANDARDS ADMINISTRATION U.S. DEPARTMENT OF LABOR BEFORE THE SUBCOMMITTEE ON LABOR, HEALTH AND HUMAN SERVICES, AND EDUCATION COMMITTEE ON APPROPRIATIONS U.S. SENATE
May 4, 2004
Chairman Specter and Members of the Subcommittee: I am pleased to appear before you today to discuss the Department of Labor’s final rule addressing the Fair Labor Standards Act’s “white-collar” exemptions. This rule sets forth the criteria for determining who is exempted from the Act’s minimum wage and overtime requirements as an executive, administrative, or professional employee. The new regulations appear in Title 29 of the Code of Federal Regulations, at Part 541. As you know, the Department’s proposed rule was published in March 2003, and the final rule was published on April 23. The Department is very proud of the final rule. Overtime pay is important to American workers and their families, and this updated rule represents a great benefit to them. Under the new regulations, workers earning less than $23,660 per year – or $455 per week – are guaranteed overtime protection. This will strengthen overtime rights for 6.7 million American workers, including 1.3 million low-wage, salaried “white-collar” workers who were not entitled to overtime pay under the old regulations, and who will gain up to $375 million in additional earnings every year under this final rule. We have also strengthened overtime protections for licensed practical nurses, police officers, fire fighters, paramedics, and similar public safety employees.
The new rule exempts only “white-collar” jobs from overtime protection. The Department has updated the rule to clarify that “blue-collar” workers – such as construction workers, cashiers, manual laborers, employees on a factory line or workers compensated under a collective bargaining agreement, will not be affected by the new regulation.
Under section 13(a)(1) of the Fair Labor Standards Act (FLSA), certain executive, administrative and professional employees are exempt from the overtime requirements. The new rules will end much of the confusion about these exemptions that has led to an explosion of class action litigation and failed sufficiently to protect workers’ rights.
The Department has issued a final rule that is responsible and responsive to the public. We worked hard to get it right. Let me emphasize Mr. Chairman, that this final rule is significantly different from the proposed rule. For the past year, we listened to thousands of comments – from workers and employers – and have designed new regulations that are clear, straightforward and fair. We also listened closely to Congress, whose comments have been a tremendous benefit to the Department. The Department extends its gratitude to Congress for identifying issues in the proposed rule that needed more explicit clarification. The final rule successfully addresses the concerns that have been raised and is much stronger as a result. Under the rulemaking process, we have made significant changes from the proposal and we believe the final product is better in every way, and a significant improvement over the old, confusing regulations that have not been updated for decades.
Unfortunately, much of the recent press coverage and public debate over this rule has been misleading and inaccurate. I thank you, Mr. Chairman for the opportunity to discuss precisely what this new rule means for American workers. By returning clarity and common sense to the regulations, we help workers better understand their overtime rights, make it easier for employers to comply with the law, and strengthen the Labor Department’s enforcement of overtime protections. With this update, more workers will receive overtime pay, and they will get it in real time – when they earn it – not years later after enduring lengthy battles in federal court. The framework of the old rule was based upon the American workplace of a half-century ago. The old rule, therefore, reflected the structure of the workplace, the type of jobs, the education level of the workforce, and the workplace dynamics of an industrial economy that has long since changed. With each passing decade of inattention, the overtime regulations became increasingly out of step with the realities of the workplace and provided less and less guidance to workers and employers.
When Congress passed the Fair Labor Standards Act in 1938, it chose not to provide definitions for many of the terms used, including who is an “executive, administrative or professional” employee. Rather, in Section 13(a)(1) of the Act, Congress expressly granted to the Secretary of Labor the authority and responsibility to “define and delimit” these terms “from time to time by regulations.”
The Department, therefore, has the duty to update these regulations. Unfortunately, despite every administration since President Carter placing Part 541 reform on its regulatory agenda, until now, the DOL has been unable to meet its charge from Congress.
Suggested changes to the Part 541 regulations have been the subject of extensive public commentary for two decades. Significantly, in a 1999 report to Congress and at a May 2000 hearing before a subcommittee of this Committee, the U.S. General Accounting Office (GAO) chronicled the background and history of the exemptions, estimated the number of workers who might be included within the scope of the exemptions, and identified the major concerns of workers and employers. The GAO concluded that “given the economic changes in the 60 years since the passage of the FLSA, it is increasingly important to readjust these tests to meet the needs of the modern work place,” and recommended 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.”
There is no question this rule needed to be updated. The minimum salary level was last increased in 1975, almost 30 years ago, and was only $155 per week. The job duty requirements in the regulations had not been updated since 1949 – almost 55 years ago. The salary basis test was set in 1954 – a half century ago.
From the beginning of this rulemaking, the Department has been consistent in what it wanted to achieve with this update. The primary goal remains to protect low-wage workers. Under the old rule, only employees earning less than $8,060 per year were guaranteed overtime pay – that is equivalent to less than minimum wage earnings. The regulations also needed to be reformed to ensure that all workers receive overtime pay without having to wait years for federal court litigation to play out. Even lawyers find it difficult to determine who is entitled to overtime pay under the old rules, and very few employees understand their rights. Reforming the “white-collar” regulations is also a catalyst for compliance with the law, because employers are more likely to comply with clearer rules that reflect the work place of the 21st Century. Finally, this update benefits both employees and employers by reducing wasteful litigation. Federal class actions for overtime pay have tripled since 1997, and now outnumber discrimination class action lawsuits. Often in these protracted lawsuits, workers receive only a few thousand dollars each, while the lawyers may walk away with millions of dollars. We simply cannot allow this legal morass to continue unabated.
Under section 13(a)(1) of the FLSA and its implementing regulations, employees cannot be classified as exempt from the minimum wage and overtime requirements unless they are guaranteed a minimum salary and perform certain required job duties. The old rule required three basic tests for each exemption: (1) a minimum salary level, set at $155 per week per week for executive and administrative employees and $170 per week for professionals under the basic “long” duties test for exemption, whereas a higher salary level of $250 per week triggered a shorter duties test in each category; (2) a salary basis test, requiring payment of a fixed, predetermined salary amount per week 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 new regulations expand the number of workers guaranteed overtime protection by nearly tripling the $155 per week, or $8,060 per year, salary threshold. The final rule increases the minimum salary level required for exemption as a “white-collar” employee to $455 per week. This is a $300 per week increase from the old rule, and the largest increase since Congress passed the Fair Labor Standards Act in 1938. This is also a $30 per week increase from the proposed rule, and means that overtime protection is guaranteed for all workers earning less than $23,660 per year.
This dramatic increase in the salary level also means that the final rule strengthens overtime protections for 6.7 million salaried workers earning from $155 to $455 per week. 5.4 million salaried workers, who today are at risk of being denied overtime, are now guaranteed overtime protection. 1.3 million salaried workers, who are not entitled to overtime today, will gain up to $375 million per year in additional earnings. The final rule identifies the occupations these 1.3 million workers are in and the estimated number of currently exempt workers who will likely gain compensation under the final rule. They are predominately married women with less than a college degree and live in the South.
The Department’s final rule also includes a streamlined test for highly-compensated “white-collar” employees. To qualify for exemption under this section of the final rule, an employee must: (1) receive total annual compensation of at least $100,000, an increase of $35,000 over the proposed rule; (2) perform office or non-manual work as part of their primary duty; and (3) customarily and regularly perform any one or more of the exempt duties or responsibilities of an executive, administrative, or professional employee. The final rule also strengthens this exemption by clarifying that employees must receive a portion (at least $455 per week) of their compensation on a salary basis. Given the final rule’s significant increase in this test’s salary level, only 107,000 employees who earn at least $100,000 per year, and perform office or nonmanual work, and “customarily and regularly” perform exempt duties could be classified as exempt. However, the Department believes even this result is unlikely given the incentives for employers to retain high-skilled workers and minimize turnover costs.
The final rule simplifies and clarifies the duties tests for each of the exemptions so that the regulations are easy for employees and employers to understand and for the Department to enforce. The old rule provided two sets of duties test for each of the exemption categories. There was both a “short” duties test and a “long” duties test for each of the executive, administrative and professional exemptions. The long tests applied to employees earning between $8,060 and $13,000 per year. Given these low levels, the long tests essentially have been inoperative for many years. Accordingly, the final rule replaces the long duties tests with guaranteed overtime protection for workers earning less than $23,660 per year and retains the short test requirements for workers earning above that level, especially emphasizing the existing “primary duty” approach found in the current short tests. Significantly, as discussed below, the final rule has retained the “discretion” and “judgment” concepts from the current short tests, ensuring that the final rule’s standard duties test are now equally or more protective than the current short duties tests. As a result, few if any workers earning between $23,660 and $100,000 are likely to lose the right to overtime pay.
In recent months, there has been a tremendous amount of misinformation about the likely impact of the Department’s new rule on employees such as blue-collar workers, police officers, nurses and veterans. The Department never had any intention of taking overtime rights away from such employees, and the final rule makes this clear beyond a shadow of a doubt. Section 541.3(a) of the final rule provides that manual laborers or other “blue-collar” workers are not exempt under the regulations and are entitled to overtime pay no matter how highly paid they might be. This includes, for example, non-management production-line employees and non-management employees in maintenance, construction and similar occupations such as carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen, construction workers and laborers.
Similarly, to make certain the intentions of the Department are clear, Section 541.3(b) of the final rule provides that police officers, fire fighters, paramedics, emergency medical technicians and similar public safety employees who perform work such as preventing, controlling or extinguishing fires of any type; rescuing fire, crime or accident victims; preventing or detecting crimes; conducting investigations or inspections for violations of law; performing surveillance; interviewing witnesses; interrogating and fingerprinting suspects; preparing investigative reports; and similar work are entitled to overtime pay.
Section 541.301(e)(2) states that licensed practical nurses and other similar health care employees are generally entitled to overtime pay, since possession of a specialized advanced academic degree is not a standard prerequisite for entry into such occupations. The current law regarding registered nurses is unchanged. Further, the Department never intended to allow the professional exemption for any employee based on veteran status. The final rule has been modified to avoid any such misinterpretation. In response to the public commentary evidencing further confusion, the Department has also emphasized the right to overtime protection for technicians and other skilled employees, as Section 541.301 clarifies that there is no change to the educational requirements for the professional exemption. As a result, employees in occupations that customarily may be performed with a “general” academic degree, or through an apprenticeship, or with training in routine mental or manual processes, such as cooks, are entitled to overtime pay. As was the case under the previous rule, those working under union contracts are protected. Section 541.4 provides that neither the FLSA nor the final regulations relieves employers from their obligations under union collective bargaining agreements. Under the final rule, the executive exemption adds a third requirement to the current short test that makes it more difficult to qualify as an exempt executive. In other words, fewer workers qualify as exempt executives than qualify under the old regulations. Under the final rule, an exempt executive must (1) have the primary duty of managing the entire enterprise or a customarily recognized department or subdivision thereof, (2) customarily and regularly direct the work of two or more other workers, and (3) have authority to hire or fire other employees or have recommendations as to the hiring and firing or other change of status be given particular weight. This third requirement is from the old long duties test, and its addition makes the exemption more difficult to meet. The final rule also deletes the special exemption in the proposed rule for “sole charge” executives, and strengthens the business owner exemption by requiring the 20-percent equity interest in the enterprise to be a “bona fide” interest, as well as requiring the employee to be “actively engaged” in the management of the enterprise.
In response to numerous comments, the final rule’s administrative exemption has been significantly modified from the proposed rule. The revised test in the final rule requires that (1) the employee have the primary duty of the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers, and (2) the primary duty must include the exercise of discretion and independent judgment with respect to matters of significance. The proposal’s language regarding “position of responsibility” and “high level of skill or training” was dropped as potentially ambiguous, resulting in a final test that is easy to apply and is as protective as the current short test. Moreover, the final rule is more protective because it strengthens the “discretion and independent judgment” standard by adding the requirement, currently in the interpretive section of the old regulation, that the discretion be exercised “with respect to matters of significance.”
Similarly, the “discretion and judgment” concept has been retained in the final rule’s test for exemption as a learned professional. The final rule in this area requires an employee to have the primary duty of “the performance of work requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction.” To emphasize that the educational requirements of this exemption have not been changed from the old rule, the final regulation breaks down the three elements of this test: (1) the employee must perform work requiring advanced knowledge; (2) the advanced knowledge must be in a field of science or learning; and (3) the advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction. The phrase “work requiring advanced knowledge” is explicitly defined as “work which is predominantly intellectual in character, and which includes work requiring the consistent exercise of discretion and judgment, as distinguished from performance of routine mental, manual, mechanical or physical work.” Similarly, the final rule’s test for a creative professional exemption remains as protective as it was under the old rule.
Mr. Chairman, workers win under this final rule. We have guaranteed and strengthened overtime protection for more American workers than ever before. We have strengthened overtime rights for 6.7 million workers, including 1.3 million low-wage, white-collar workers who likely will see an increase in their paychecks. In the course of issuing these regulations, a great deal of misinformation has surrounded their impact. They have been unfairly characterized as taking away overtime pay from millions of Americans when the exact opposite is true. That is why we took the extra step of spelling out in the regulations who is not affected by the new rules. We want police officers, fire fighters, paramedics, emergency medical technicians, public safety employees and licensed practical nurses to know that the new regulations will better protect their overtime rights, not harm them. In fact, the new rule strengthens their claim to overtime. In addition, blue-collar workers, technicians, cooks and veterans who currently receive overtime pay will continue to receive overtime pay. The final rule will not affect union workers covered by collective bargaining agreements.
With these new regulations, workers will clearly know their rights and employers will know their responsibilities. The new rule also enables the Department of Labor to enforce vigorously our nation’s overtime laws and regulations, and will reduce needless and costly litigation. We at the Department of Labor are very proud of the updated rule, Mr. Chairman. America’s workers deserved action. They now have a strengthened overtime standard that will serve them well for the 21st Century.
Thank you, Mr. Chairman and Members of the Subcommittee. I would be happy to answer any questions you may have.
Footnotes
1. During the course of public debate on the Department’s proposed rule, an excellent summary of the changes in the structure of the American workplace and implications for Part 541 reform was submitted to a January 20, 2004 Senate subcommittee hearing at which the Secretary of Labor and Wage and Hour Administrator testified. See Hearing on Proposed Rule on Overtime Pay: Before the Subcomm. On Labor, Health and Human Services, Education of the Senate Appropriations Comm., 108th Cong., 2nd Sess. (2004) (written statement of Ronald Bird, Chief Economist for the Employment Policy Foundation). Among other insights, the Bird testimony notes that: before World War II, nearly one-in-three (33.6 percent) workers were employed in manufacturing; in 1940, only one-in-six (17.9 percent) were employed in managerial or professional occupations; nearly one-half (48.2 percent) of all employees worked in occupations related directly to manufacturing and production; more than three-quarters (75.1 percent) of all adult workers had never finished high school; and most workers expected to say with a single employer during the course of their working life. In contrast, today less than one-in-seven (13.6 percent) works in the manufacturing sector; nearly one-in-three (30.1 percent) work in managerial or professional occupations; less than one-in-three (28.5 percent) work in occupations related directly to manufacturing and production; more than 58 percent of the population age 16 and older have at least some post-secondary (college-level) education, while 38 percent have a college-level degree and only 11.9 percent have less than a high school diploma; and average job tenure is under five years and declining.
2. Fair Labor Standards Act: White-Collar Exemptions in the Modern Work Place (GAO/HEHS-99-164, September 30, 1999).
3. See Final Rule, Table A-4 of Appendix A.
