Testimony of Craig Becker Associate General Counsel AFL-CIO May 4, 2004
Thank you for the opportunity to appear before you today to discuss this important subject. I have experience in this area both as a litigator and as an academic. I have represented employees in many industries in actions brought under the Fair Labor Standards Act (FLSA). In addition, I have taught labor and employment law, including the FLSA, at the University of California at Los Angeles and the University of Chicago Schools of Law and published several articles about the FLSA.
The new regulations, in both obvious and subtle ways, expand the scope of the four primary exemptions to the basic protections of the FLSA. They depart from several fundamental principles that have undergirded the construction of the statutory exemptions for decades. Time and space permit me to provide you with only a few illustrative examples.
Elimination of clear tolerance levels
The old regulations governing the executive, administrative, professional and outside sales exemptions contained a clear and explicit percentage limit on the amount of time employees could spend on nonexempt work and still be classified as exempt executive, administrative, professional or outside sales employees. Exempt employees could not devote more than 20% of their time (or in the case or retail or service employees, 40% of their time) in any workweek to nonexempt duties. 29 C.F.R. ' 541.1(e), 541.2(d), 541.3(d), 541.5(b), 541.5(b). Congress considered these limitations on the amount of time that exempt employees could devote to nonexempt duties when it extended the FLSA to retail and service establishments in 1961 and modified them only by setting the tolerance level for executive and administrative employees in those industries at 40%. 29 U.S.C. ' 213(a)(1). While this clear rule had fallen into disuse, except as applied to outside salesmen, because for the other exemptions it was attached to the so-called long-test that was only applied to employees earning amounts that had become so low that the test was no longer widely used, the Department has now raised the salary level but also discarded the clear and sensible tolerance levels. In their place is a vague definition of "primary duty," ' 541.700, that requires application of a wide variety of factors and ultimately a subjective judgment about what the employee's "principal, main, major or most important duty" is. This vague and ultimately subjective test will lead many employers to misclassify employees as exempt based on the employers' own notion of what is "most important," thereby contracting coverage and increasing litigation.
Dilution of salary basis test
For over 50 years, the regulations have required employers to prove not only that employees perform the duties of an executive, administrative or professional employee, but also that the employees were paid above a minimum salary and paid that salary on a Asalary basis.@ The salary basis requirement embodied the empirical finding that bona fide executive, administrative and professional employees did not punch a clock, but rather had a degree of control over their own working hours. This autonomy compensated for the loss of overtime pay because long hours were less oppressive to an employee who was free to take a break during the day to attend to personal business or for other purposes. The new regulations ostensibly retain the salary basis requirement but undermine the meaning of the term "salary basis."
The old regulations provided that additional compensation along with a salary was not inconsistent with payment on a salary basis. However, the examples given did not include additional compensation paid on an hourly basis. In addition, the regulations provided, AThe test of payment on a salary basis will not be met, however, if the salary is divided into two parts for the purpose of circumventing the requirement of payment 'on a salary basis'. For example, a salary of $200 in each week in which any work is performed, and an additional $50 which is made subject to deductions which, are not permitted.@ 29 C.F.R. ' 541.118(b).
The new regulations expressly provide that "[a]n exempt employee's salary may be computed on an hourly, a daily or a shift basis, consistent with the exemption and the salary basis requirement, if the employment arrangement also includes a guarantee of at least the minimum weekly required amount paid on a salary basis regardless of the number of hours, days or shifts worked and a reasonable relationship exists between the guaranteed amount and the amount actually earned. The reasonable relationship test will be met if the weekly guarantee is roughly equivalent to the employee's usual earnings at the assigned hourly, daily or shift rate for the employee's normal workweek." ' 541.604(b). The new regulations further provide an example of a reasonable relationship: "Thus, for example, an exempt employee guaranteed compensation of at least $500 for any week in which the employee performs any work, and who normally works four or five shifts each week, may be paid $150 per shift without violating the salary basis requirement.@ Id. If the employee in the example works only three shifts, she will be paid only $500 instead of the $750 she earns when she works five shifts but she may continue to be treated as exempt. Thus, a reasonable relationship is defined to allow at least a $250 per week variation based on hours worked, a permissible variation of at least 50% of the employee's minimum weekly compensation. The old regulations provided that employees were not paid on a salary basis if they could be suspended for less than one day for disciplinary reasons other than Ainfractions of safety rules of major significance." 29 C.F.R. ' 541.118(a)(5). The new regulations add to this limited exception deductions for "unpaid disciplinary suspension of a full day or more imposed in good faith for infractions of workplace conduct rules." ' 541.602(b)(5). In Brock v. The Claridge Hotel and Casino, 846 F.2d 180 (3d Cir. 1988), cert. denied, 488 U.S. 925 (1988), the Court of Appeals held that low-level casino managers who were paid on an hourly basis with a minimum salary guaranteed were not paid on a salary basis. The Court reasoned, "Paying an employee by the hour affords that employee little of the latitude the salary requirement recognizes. Thus, a basic tension exists between the purpose behind a salary requirement and any form of hourly compensation." Id. at 184. The Court also found, at the Secretary's urging, that such a method of compensation, in effect, allows for the docking of employees' pay for absences of less than one day which is inconsistent with salaried status. Id. at 185. To argue that an employee who is paid by the hour is paid on a salary basis "contravenes the common meaning of the term . . . , the purpose behind a salary requirement . . ., and the Labor Department's empirical findings on the attributes of bona fide [exempt] status." Id. at 186. The Court found such a construction also "conflicts with the Secretary's interpretation of those regulations." Id.
These two changes to the definition of what it means to be paid on a salary basis will thus permit employers to classify many employees as exempt who previously failed the salary basis test. One area where this will be true is nursing. While registered nurses meet the duties test for the professional exemption, they have until now consistently failed the salary test because their employers exercised close control over their time, not permitting them to come and go as they chose and docking them if they miss part of a day. Klein v. Rush-Presbyterian-St. Luke's Medical Center, 990 F.2d 279 (7th Cir. 1993), for example, involved a registered nurse who was held to be nonexempt because the employer did not pay her on a salary basis. The Court noted, "the regulations have determined that a salaried employee is paid the same regardless of the number of hours worked. . . . An exempt employee's pay cannot be reduced for absences of less than a day." Id. at 284. In Klein, the Court held the RN was not paid on a salary basis because she had her compensatory time docked if she missed part of a day and she was suspended for reasons other than major safety violations. This case would come out differently under the new regulations.
Another example is Elwell v. University Hospitals Home Care Services, 276 F.3d 832 (6th Cir. 2002), which also involved a nurse. The nurse was also held to be nonexempt on the grounds that she was not paid on a salary basis. "Because the undisputed facts show that Elwell's compensation arrangement was based at least in part on the number of hours she worked, we conclude that the district court correctly awarded summary judgment to the plaintiff as to University's claim that she was an exempt professional." Id. at 839. This case would also come out differently under the new regulations.
The new regulations will allow employers to pay employees such as these RNs for hours worked in excess of 40 in a workweek at straight, as opposed to overtime, rates or to "pay" them in compensatory time off. This is expressly provided for in the new regulations which indicate that "the exemption is not lost if an exempt employee who is guaranteed at least $455 each week paid on a salary basis also receives additional compensation based on hours worked beyond the normal workweek" and that "[s]uch additional compensation may be paid on any basis . . . and many include paid time off." '541.604(a). Thus, under the new regulations employers will be able to both closely control employees' time, requiring them to punch a clock, and at the same time deny them overtime compensation. This will lead to the exemption of a large number of employees who previously failed the salary basis test.
Widening of window of correction
The old regulations allowed employers to correct only inadvertent deductions from pay in order to preserve the exempt status of employees. The old regulations provided, "where a deduction not permitted by these interpretations is inadvertent . . . the exemption will not be considered to have been lost if the employer reimburses the employee for such deductions and promises to comply in the future." 29 C.F.R. ' 541.118(a)(6).
The new regulations provide that the exemption is not lost unless the employer "did not intend to pay employees on a salary basis." ' 541.603(a). It further provides, "An actual practice of making improper deductions demonstrates that the employer did not intend to pay employees on a salary basis." ' 541.603(a). Proving a practice of making deductions requires more than proving deductions were intentionally made. ' 541.603(a). Intentional improper deductions will not cause a loss of exempt status if they are "isolated." ' 541.603(c). Moreover, even if the employer has a practice of making improper deductions, the exemption is only lost during the time period of the deductions and for those employees in the same class, working for the same manager. ' 541.603(b). Finally, a complete safe-harbor is created for employers who simply communicate a policy (which need not be in writing) forbidding improper deductions that includes a complaint mechanism, reimburse employees subject to improper deductions and promise to comply in the future. ' 541.603(d). This will insulate the employer unless the employer "willfully violates the policy by continuing to make improper deductions after receiving employee complaints." ' 541.603(d). The Department makes clear that the final rule is a departure from its prior position. Preamble at 233.
Departure from workweek analysis
Consistent with Congress' creation of a standard 40 hour workweek, the Department has long used the workweek as the unit of analysis under the Act. Thus, for example, the minimum salaries under the old short and long tests were established on a workweek basis. See, e.g., 29 U.S.C. ' 541.1(f). The new regulations depart from this analysis in creating a highly paid employee category. They provide that an employees whose "total annual compensation is at least $100,000 is exempt if he or she "customarily and regularly performs any one or more of the exempt duties." ' 541.601(a). Moreover, they permit employers to retroactively adjust employees' salary after the end of the year. Under the new rules, an employer that fails to pay an employee the required amount by the end of the year can make up the difference by the end of the next pay period. ' 541.601(b)(2). Thus, an employer can wait until the end of the year, compare its potential overtime liability to the salary deficit and decide to avoid the former by paying the latter. The employee, meanwhile, cannot determine if he or she must be paid in accordance with the Act's requirements until the end of the first pay period of the new year.
Exemption of low level managers and assistants who spend large amounts of time performing rank-and-file duties
The old regulations contained a section governing "working foremen," i.e., employees who have some management functions, but also perform rank-and-file work. 29 C.F.R. ' 541.115. Its express intent was to "distinguish between the bona fide executive and the 'working' foreman or 'working' supervisor who regularly performs 'production' work or other work which is unrelated or only remotely related to this supervisory activities." 29 C.F.R. ' 541.115(a). The old regulations provided that a working foreman who spent more than 20% of his time performing the same work as his subordinates or other nonmanagerial work was not exempt. 29 C.F.R. ' 541.115(b).
The new regulations eliminate this provision. In fact, the new regulations expressly provide, "Concurrent performance of exempt and nonexempt work does not disqualify an employee from the executive exemption." ' 541.106(a). The new regulations add, "For example, an assistant manager in a retail establishment may perform work such as serving customers, cooking food, stocking shelves and cleaning the establishment, but performance of such nonexempt work does not preclude the exemption." ' 541.106(b). The new regulations thus permit the exemption of employees who spend most of their time, even all of their time, on ordinary work -- cooking, stocking, cleaning -- so long as they also have management functions that can be designated their "primary duty."
Prior decisions about such employees, such as assistant managers in fast food restaurants, consistently held that they failed the old long-test because they performed too much nonexempt work. See Donovan v. Burger King Corp., 675 F.2d 516 (2d Cir. 1982); Marshall v. Erin Food Services, Inc., 672 F.2d 229 (1st Cir. 1982); Donovan v. Burger King Corp., 672 F.2d 221 (1st Cir. 1982). By wholly eliminating the long test and the working supervisors provisions and providing that exempt employees can perform exempt and nonexempt duties at the same time, the new regulations strip low-level managers at the bottom of the salary range who perform substantial amounts of ordinary rank-and-file work of the Act's protection.
Widening of exemption for 20% owners
The old regulations contained an exception to the tolerance limits on performance of nonexempt work for an employee who owns at least a 20% interest in the enterprise. 29 C.F.R. ' 541.1(e). All of the other requirements for exemption still had to be met by such an employee. The new regulations simply define a 20% owner as exempt if he or she "is actively engaged in [the enterprise's] management." ' 541.101.
Narrowing the definition of not "directly related to management"
Both the old and new regulations require that the work of administrative employees be "directly related to the management or general business operations of the employer or the employer's customers." New ' 541.200. However, the old regulations' interpretations defined the term "directly related to management policies or general business operations" not to include "'production' or, in a retail or service establishment, 'sales' work." 29 C.F.R. ' 541.205(a). The new regulations contain a narrow exclusion. They provide that the term "related to the management or general business operations" does not include "working on a manufacturing production line or selling a product." ' 541.201(a).
Creation of expressly exempt classifications
The old legislative regulations did not expressly exempt any named classifications of employees. The regulations were divided into legislative regulations having the force of law and interpretive regulations having only persuasive force. In the old interpretive regulations, the Department gave some examples of how the legislative regulations would apply to certain classifications, for example, registered nurses. 29 C.F.R ' 541.301(e)(1). But these examples did not have the force of law.
The new regulations eliminate the interpretive sections and include numerous express designations of specific classes of employees as exempt in the legislative sections. This departs from the long-established proposition that job titles alone are not determinative of exempt status. Indeed, the new regulations continue to state that "[a] job title alone is insufficient to establish the exempt status of an employee" and that "[t]he exempt status of any particular employee must be determined on the basis of whether the employee's salary and duties meet the requirements of the regulations." ' 541.2. But the novel, express designation of a specified classification as exempt in the legislative regulations is a marked departure from this principle.
Creation of exemption for team leaders
Under the heading, "Administrative exemption examples," the new regulations include, "[a]n employee who leads a team of other employees assigned to complete a major project for the employer (such as purchasing, selling or closing all or part of the business, negotiating a real estate transaction or a collective bargaining agreement, or designing and implementing productivity improvements) . . . even if the employee does not have direct supervisory responsibility over the other employees on the team." ' 541.203(c). This is a broad new category of exempt employees. Given the increasing organization of work into teams and the incentive this provision will give employers to so organize work, it potentially sweeps large numbers of employees in numerous industries outside the protections of the Act.
There was no parallel provision in the old regulations. The old regulations long test for administrative employees did include an employee "[w]ho executes under only general supervision special assignments and tasks." 29 U.S.C. ' 541.3(c)(3). But a "special project" is far different from a "major project" because a special project is a project outside the ordinary work of the employer while a major project is simply an important project. Thus, the small category of previously exempt special project employees were those who worked on extraordinary projects as staff (as opposed to line) employees (29 U.S.C. ' 541.201(a)(2)) outside the ordinary routine of the employer's business. The newly exempt team leaders can work on major project on a continuous basis as an integral part of the employer's business. In addition, special project employees under the old regulations also had to have as his or her primary duty the "performance of office or non-manual work directly related to management policies or general business operations," had to "customarily and regularly exercise discretion and independent judgment," and could not devote more than 20% of his or her time to nonexempt work. 29 C.F.R. ' 541.2(a)-(d). The new regulation expressly eliminated the 20% tolerance level which is critically important because most project and team leaders also perform the ordinary duties of the other members of the team in substantial quantities. By stating that team leaders "generally meet the duties requirements," the new regulations encourage employers and courts to assume that all elements of the exemption are met for employees so designated.
Creation of categorical exemption of financial services employees
New ' 541.203 provides that "[e]mployees in the financial services industry generally meet the duties requirements for the administrative exemption. This exempts a vast range of employees with the only exception being those "whose primary duty is selling financial products." The classification of all employees in an industry as exempt is a radical departure from prior practice under which it was universally held (as discussed above) that exemption depended on the actual duties performed by individual employees.
The Department justifies this blanket industry exemption by reference to a handful of cases, all but one arising out of insurance companies and with the one exception arising out of a management consulting firm and not the financial services industry. Preamble at 95-102. Moreover, the case law is not as uniform as the Department suggests because in Casas v. Conseco Finance Corp., 2002 U.S.Dist. LEXIS 5775 (D.Minn. 2002), the Court ruled that almost 3,000 "loan originators" employed by Conseco did not fall into the administrative exemption because they were line rather than staff employees. The Court found that the employees' primary duties were "to produce the very product that Conseco exists to produce: design, create and sell loans." Id. at *21. The Department is not correct when it suggests this decision was based solely on a finding that the employees' primary duty was sales. Preamble at 98. The new regulation would reverse this decision and all others based on similar reasoning unless the primary duty of the employees at issue is the selling of financial products.
Creation of exemption for insurance claims adjustors
The new regulations expressly provide that insurance claims adjusters "generally meet the duties requirements for the administrative exemption." ' 541.203(a). Prior case law has held some claims adjustors nonexempt. See, e.g., Bell v. Farmers Ins. Exchange, 115 Cal.App.4th 715, 9 Cal.Rptr.3d 544 (2004) (decided under state law but following federal precedent). As recently as February 26, 2004, multidistrict litigation involving claims representatives employed by Farmers Insurance Exchange resulted in a holding that several categories of such representatives are nonexempt. In re Farmers Ins. Exchange Claims Representatives' Overtime Pay Litigation, MDL Docket No. 33-1439 (D.Or. Feb. 16, 2004).
Creation of exemption for chefs The new regulations provide that chefs with a four-year degree in culinary arts are exempt learned professionals. ' 541.301(e)(6). This is a significant expansion of the types of employees who can be classified as learned professionals for several reasons. First, the old regulation defined as professionals only those who worked in a field requiring knowledge "in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study." 29 C.F.R. ' 541.3(a)(1). Most chefs do not acquire their knowledge through such a prolonged course of study, yet the new regulation nevertheless exempts the minority of chefs who do. Second, cooking has never before been classified as a "field of science or learning." Third, cooking is manual labor. Thus, the new exemption of chefs is a significant expansion of the learned professional exemption. The new exemptions for athletic trainers and funeral directors, discussed below, share several of these novel characteristics.
Creation of exemption of athletic trainers
The new regulations provide for the first time that athletic trainers are exempt learned professionals. The Department acknowledges in its preamble to the final regulations that "[i]n the past, the Department has taken the position that athletic trainers are not exempt learned professionals." Preamble at 135.
Creation of exemption of funeral directors
The new regulations also provide for the first time that funeral directors are exempt learned professionals. The Department also acknowledges that "[i]n the past, the Department has taken the position that licensed funeral directors and embalmers are not exempt learned professionals." Preamble at 138. In fact, as recently as 2000, the Department filed an amicus brief arguing this position. Preamble at 138.
Loosening of standards for exemption of teachers
The old regulations short test required that teachers be paid on a salary basis and perform work requiring the consistent exercise of discretion. 29 U.S.C. ' 541.3(e). The old regulations long test required that teachers be paid on a salary basis, perform work requiring the consistent exercise of discretion, and perform work that is predominantly intellectual and varied. 29 U.S.C. ' 541.3(a) (3). The final regulations eliminate all these requirements. ' 541.303.
Expansion of expressly excluded classes of professionals
The old regulations interpretations listed a number of occupations as falling into the category of learned professions. The new legislative regulations expand the list of exempt occupations to include dental hygienists and physicians assistants as well as the specific classification discussed above. ' 541.301(e).
Removal of presumption against exemption of journalists The Department contends in the preamble to the final regulations that the regulations were "intended to reflect current federal case law regarding the status of journalists as creative professionals. Preamble at 145. The Department quotes the conclusion in one such case that it is the Aminority of reporters 'whose work depends primarily on invention, imagination, or talent.'" 146 (quoting Reich v. Newspapers of New England, Inc., 44 F.3d 1060, 1075 (1st Cir. 1995)).
The old regulations were consistent with this case law. They provided, "[o]bviously the majority of reporters do work which depends primarily on intelligence, diligence, and accuracy. It is the minority whose work depends primarily on invention, imagination, or talent." 29 C.F.R.' 541.302(d). "The reporting of news, the rewriting of stories received from various sources, or the routine editorial work of a newspaper is not predominantly original and creative in character . . . and must be considered as nonexempt work." 29 C.F.R. ' 541/302(f)(2). The new regulations, in contrast, to not contain any of this language. ' 541.302(d). They provide:
Journalists may satisfy the duties requirements for the creative professional exemption if their primary duty is work requiring invention, imagination, originality or talent, as opposed to work which depends primarily on intelligence, diligence and accuracy. Employees of newspapers, magazines, television and other media are not exempt creative professionals if they only collect, organize and record information that is routine or already public, or if they do not contribute a unique interpretation or analysis to a news product. Thus, for example, newspaper reports who merely rewrite press releases or who write standard recounts of public information by gathering facts on routine community events are not exempt creative professionals. Reporters also do not qualify as exempt creative professionals if their work product is subject to substantial control by the employer. However, journalists may qualify as exempt creative professionals if their primary duty is performing on the air in radio, television or other electronic media; conducting investigative interviews; analyzing or interpreting public events; writing editorials, opinion columns or other commentary; or acting as a narrator or commentator. ' 541.302. The removal of the express presumption that journalists are non-exempt and other changes in the language of the regulation will obviously encourage employers improperly to treat journalists as exempt and argue that they satisfy the standard articulated in the new regulation.
Widening of the computer professional exemption
The old regulations made clear that the exemption of computer professionals applied only to those at the highest levels of the profession. They applied only to employees performing "[w]ork that requires theoretical and practical application of highly-specialized knowledge in computer systems analysis, programming, and software engineering." 29 C.F.R. ' 541.3(a)(4). The old regulations interpreted this provision to apply "only to highly-skilled employees who have achieved a level of proficiency in [these areas]." 29 C.F.R. ' 541.303(c). The new regulations eliminate the prefatory language and its interpretation, thus exempting all employees working in these computer fields. ' 541.400(b).
Widening of the outside sales exemption
The old outside sales exemption contained a 20% limit on the amount of non-outside sales work an exempt employee could perform. 29 C.F.R. ' 541.5(b). The new regulation eliminates this tolerance level. ' 541.500. In light of this change, the Department's contention that the "primary duty test is relatively simple, understandable and eliminates much of the confusion and uncertainty that are present under the existing rule" is difficult to comprehend. Preamble at 160. The 20% tolerance level was a bright line rule. Elimination of the 20% tolerance level will both render more employees who perform some outside sales work exempt and create additional litigation concerning when employees have outside sales as their primary duty.
Conclusion
In each of these respects and in others too numerous to describe comprehensively here, the new regulations widen the exemptions and thereby make it more difficult to achieve Congress' objective of creating national wage and hour standards.
Footnotes
1. The Department cites this decision and this decision alone after stating that "[c]ourts also have upheld the reasonable relationship requirement." Preamble at 245 (citations to the Preamble to the new regulations are to the typescript version submitted to the Federal Register. This version appears on the Department's web site at http://www.dol.gov/esa/regs/compliance/whd/fairpay/preamble.pdf.) In fact, the Court expressly did not do so. 846 F.2d at 185 n. 6.
2. Or in excess of the alternative standard permitted in hospitals and similar institutions by 29 U.S.C. ' 207(j).
