[Senate Hearing 108-542]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-542

                       FINAL RULE ON OVERTIME PAY

=======================================================================

                                HEARING

                                before a

                          SUBCOMMITTEE OF THE

            COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                            SPECIAL HEARING

                      MAY 4, 2004--WASHINGTON, DC

                               __________

         Printed for the use of the Committee on Appropriations


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 senate


                               __________

                    U.S. GOVERNMENT PRINTING OFFICE
94-676                      WASHINGTON : DC
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092250 Mail: Stop SSOP, Washington, DC 20402ï¿½090001

                      COMMITTEE ON APPROPRIATIONS

                     TED STEVENS, Alaska, Chairman
THAD COCHRAN, Mississippi            ROBERT C. BYRD, West Virginia
ARLEN SPECTER, Pennsylvania          DANIEL K. INOUYE, Hawaii
PETE V. DOMENICI, New Mexico         ERNEST F. HOLLINGS, South Carolina
CHRISTOPHER S. BOND, Missouri        PATRICK J. LEAHY, Vermont
MITCH McCONNELL, Kentucky            TOM HARKIN, Iowa
CONRAD BURNS, Montana                BARBARA A. MIKULSKI, Maryland
RICHARD C. SHELBY, Alabama           HARRY REID, Nevada
JUDD GREGG, New Hampshire            HERB KOHL, Wisconsin
ROBERT F. BENNETT, Utah              PATTY MURRAY, Washington
BEN NIGHTHORSE CAMPBELL, Colorado    BYRON L. DORGAN, North Dakota
LARRY CRAIG, Idaho                   DIANNE FEINSTEIN, California
KAY BAILEY HUTCHISON, Texas          RICHARD J. DURBIN, Illinois
MIKE DeWINE, Ohio                    TIM JOHNSON, South Dakota
SAM BROWNBACK, Kansas                MARY L. LANDRIEU, Louisiana
                    James W. Morhard, Staff Director
                 Lisa Sutherland, Deputy Staff Director
              Terrence E. Sauvain, Minority Staff Director
                                 ------                                

 Subcommittee on Departments of Labor, Health and Human Services, and 
                    Education, and Related Agencies

                 ARLEN SPECTER, Pennsylvania, Chairman
THAD COCHRAN, Mississippi            TOM HARKIN, Iowa
JUDD GREGG, New Hampshire            ERNEST F. HOLLINGS, South Carolina
LARRY CRAIG, Idaho                   DANIEL K. INOUYE, Hawaii
KAY BAILEY HUTCHISON, Texas          HARRY REID, Nevada
TED STEVENS, Alaska                  HERB KOHL, Wisconsin
MIKE DeWINE, Ohio                    PATTY MURRAY, Washington
RICHARD C. SHELBY, Alabama           MARY L. LANDRIEU, Louisiana
                                     ROBERT C. BYRD, West Virginia (Ex 
                                         officio)
                           Professional Staff
                            Bettilou Taylor
                              Jim Sourwine
                              Mark Laisch
                         Sudip Shrikant Parikh
                             Candice Rogers
                        Ellen Murray (Minority)
                         Erik Fatemi (Minority)
                      Adrienne Hallett (Minority)

                         Administrative Support
                             Carole Geagley


                            C O N T E N T S

                              ----------                              
                                                                   Page

Opening statement of Senator Arlen Specter.......................     1
Opening statement of Senator Tom Harkin..........................     2
Statement of Tammy D. McCutchen, Administrator, Wage and Hour 
  Division, Employment Standards Administration, Department of 
  Labor..........................................................     3
    Prepared statement...........................................     5
Statement of Craig Becker, associate general counsel, AFL-CIO....    16
    Prepared statement...........................................    18
Statement of David S. Fortney, partner, Fortney & Scott, LLC.....    25
    Prepared statement...........................................    26
Statement of Ross E. Eisenbrey, vice president, Economic Policy 
  Institute......................................................    34
    Prepared statement...........................................    36
Statement of Dr. Ronald Bird, Ph.D., chief economist, Employment 
  Policy Foundation..............................................    41
    Prepared statement...........................................    42
Prepared statement of Senator Patty Murray.......................    57
Prepared statement of the American Nurses Association............    60

 
                       FINAL RULE ON OVERTIME PAY

                              ----------                              


                          TUESDAY, MAY 4, 2004

                           U.S. Senate,    
    Subcommittee on Labor, Health and Human
     Services, and Education, and Related Agencies,
                               Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 9:30 a.m., in room SD-192, Dirksen 
Senate Office Building, Hon. Arlen Specter (chairman) 
presiding.
    Present: Senators Specter, Craig, Harkin, and Murray.

               OPENING STATEMENT OF SENATOR ARLEN SPECTER

    Senator Specter. Good morning, ladies and gentlemen. The 
hour of 9:30 having arrived, we will now proceed with the 
hearing of the appropriations Subcommittee on Labor, Health, 
Human Services, and Education.
    The subject of our hearing is the final rule on overtime 
pay. This subcommittee has held two hearings on the proposed 
regulation, on July 31 of last year and January 20 of this 
year, on the proposed regulation which was issued on March 31, 
2003. There have been substantial revisions in the regulation, 
and my distinguished colleague and ranking member, Senator 
Harkin, who has just joined us, was on the floor yesterday 
discussing the new regulation in some detail. It is anticipated 
that there will be a vote on the amendment offered by the 
Senator from Iowa on this subject. We thought it would be 
useful to have this hearing to explore the applicability of the 
regulation in some detail.
    The existing regulation has not been revised for a very 
long time, substantially unchanged since 1975, and is said to 
be subject to a great many vagaries. Our inquiry will focus on 
the contrast between the current regulation and the final 
proposed regulation to see what differences there are 
illustrative of administrative employees where the definition 
is ``customarily and regularly exercises discretion and 
independent judgment,'' contrasted with the current final 
regulation on administrative employees, ``primary duty includes 
the exercise of discretion and independent judgment with 
respect to matters of significance.'' We are interested to know 
what effect that will have by way of clarification. On the 
surface, it looks like the definition is very similar, 
referring to the exercise of discretion and independent 
judgment.
    Similarly illustrative on professional employees with the 
current regulation specifying ``primary duty of performing work 
requiring knowledge of an advanced type in a field of science 
or learning customarily acquired by a prolonged course of 
specialized intellectual instruction and study,'' contrasted 
with the final regulation on professional employees, ``primary 
duty of performing work and requiring knowledge of an advanced 
type in a field of science or learning customarily acquired by 
a prolonged course of specialized instruction.'' With the 
addendum, ``customarily'' can mean the employee has obtained 
the knowledge through a combination of work experience and 
intellectual instruction. Here again, the inquiry goes to what 
improvements will be on clarification to avoid the complexities 
of litigation, which is the primary objective of the new 
regulation.
    That is a very brief opening on some matters of special 
concern, but I now want to yield to my distinguished colleague, 
Senator Harkin. We are operating under a time constraint, as 
usual, with other commitments beginning at about 10:45. So I 
think we will have adequate time for the panels, but we will 
ask people to observe the time limitations, leaving the maximum 
amount of time for dialogue, questions, and answers.
    Senator Harkin.

                OPENING STATEMENT OF SENATOR TOM HARKIN

    Senator Harkin. Thank you very much, Mr. Chairman, for 
holding this very important hearing regarding the final rules 
issued last week by the Department of Labor on overtime 
eligibility.
    Again, make no mistake, the rule, while an improvement over 
the proposed rule, will still I think strip many workers of 
their right to fair overtime compensation. At the outset, it 
seems like we are now using as a yardstick of measurement on 
this new rule what the proposed rule was. So if this is a 
little bit better than the proposed rule, it must be okay. I 
submit, however, we should use as the yardstick of measurement 
who is getting overtime now and how much overtime they are 
getting now compared to what the final rule says. As I said 
last week, the proposed rule was profoundly terrible, and this 
rule is just plain terrible. So if that is an advancement, that 
is an advancement.
    Since the passage of the Fair Labor Standards Act in 1938, 
the 40-hour work week has been pretty sacrosanct, supported by 
Presidents and Congresses of both parties. I would also point 
out that since 1938, the Fair Labor Standards Act has been 
amended many, many times, 12-14 times. I cannot get a correct 
count on it. It has been changed and amended. But in almost 
every circumstance that I can determine, it has been done 
through a congressional process where the Congress would hold 
hearings on the appropriate committees. We called in 
management, called in labor, called in all affected parties to 
see what needed to be done to upgrade and modify the rules and 
then act accordingly.
    This, to my information, is the first time that any 
administration has promulgated rules in the fashion in which 
they did, in other words, just put them out there, no public 
hearings. You get all the comments back and then you issue a 
final rule without the Congress having had any real input 
whatsoever. I think this in itself is the wrong way to proceed.
    If employers can more easily deny overtime pay, they are 
simply going to push their employees to work longer without 
compensation. Statistics show that without overtime rights 
people are twice as likely to work more than 40 hours a week 
and three times as likely to work more than 50 hours a week.
    The final rules issued last week I believe will deny time-
and-a-half overtime pay to possibly millions of workers earning 
as little as $23,660. Now, part of my questioning to Ms. 
McCutchen will be on that line. The administration claims that 
no workers earning less than $100,000 will lose overtime under 
this final rule. That I wish to discuss with Ms. McCutchen to 
find out if that is so or not.
    I do want to discuss also this concept of a team leader 
which is not in present rules or regulations, that a team 
leader who leads a team of other workers can be denied overtime 
pay even if they do not have any direct supervisory role. What 
is a team leader? It is not defined. We do not know. An 
employer decides whether you are a team leader or not, just 
whatever they want. So I believe this loophole alone--well, not 
me, but MIT Professor of Management Tom Kochen estimates that 
this one loophole alone could strip overtime rights from up to 
2.3 million workers making $23,660 or more annually. So the 
stakes are very high.
    I had one very poignant communication with a worker in 
Seattle who said that she depends on overtime for helping her 
out. She is a single mother. She said, remember, when I get 
home from work, my second shift starts. I have got kids to 
feed, clothes to wash, housework to do, et cetera. She put it I 
think very poignantly when she said my time with my family is 
premium time. It is the best part of my day or my week. If I am 
going to be asked to give up my premium time with my family, I 
ought to get premium pay for it, which is overtime. And I think 
that really succinctly captures it.
    So, Mr. Chairman, I really want to hear Ms. McCutchen and I 
hope we will have a good exchange of questions so we can figure 
out just who is covered and who is not. Thank you very much, 
Mr. Chairman.

STATEMENT OF TAMMY D. MC CUTCHEN, ADMINISTRATOR, WAGE 
            AND HOUR DIVISION, EMPLOYMENT STANDARDS 
            ADMINISTRATION, DEPARTMENT OF LABOR

    Senator Specter. Thank you very much, Senator Harkin.
    We turn now to our lead witness, Ms. Tammy McCutchen, 
Administrator of the Wage and Hour Division of the Employment 
Standards Administration, bachelor's degree in English 
literature from Northwestern and a law degree from Northwestern 
University School of Law. Thank you very much for joining us, 
Ms. McCutchen, and we look forward to your testimony.
    Ms. McCutchen. Thank you, Mr. Chairman and members of the 
subcommittee, for the opportunity to discuss the Department's 
final white collar regulations.
    The final regulations published in the Federal Register on 
April 23 strengthen and restore the overtime protections of the 
Fair Labor Standards Act. The final rules guarantee overtime 
protection for every worker earning less than $23,660 per year 
where the current regulations only provide a guarantee for 
employees earning less than $8,060 a year. The final rules 
provide equal or greater protection to workers between $23,660 
and $100,000 per year.
    The final rules ensure that employees can better understand 
their rights, that employers can better understand their legal 
obligations, and that Wage and Hour investigators have the 
tools they need to more vigorously enforce the law.
    In addition, because the final rule provides clarity and 
certainty, employees will not have to wait through years of 
Federal court litigation to recover the overtime pay they have 
earned. Federal overtime class actions have tripled since 1997 
and now outnumber Federal employment discrimination class 
actions.
    The Department published draft rules in March 2003 and for 
the last 13 months, we have been carefully considering the 
public comments and public debate regarding the draft rules. We 
believe the final regulations are responsive to the public 
concerns, including concerns raised by members of this 
subcommittee.
    First, blue collar workers. A new section provides that 
blue collar workers such as longshoremen, carpenters, 
electricians, and factory workers are entitled to overtime 
protection.
    Second, first responders. A new section provides that 
police officers, fire fighters, EMT's, and other first 
responders are entitled to overtime protection.
    Third, union members. A new section states that nothing in 
the final regulations relieves employers of their obligations 
under union contracts.
    Fourth, nurses. For the first time in history, the 
regulations state that licensed practical nurses are entitled 
to overtime protection, while leaving unchanged the current 
rules regarding registered nurses.
    Fifth, engineering technicians. The final preamble adopts 
the comments filed by the International Federation of 
Professional and Technical Engineers, which is the parent union 
of the Society of Professional Engineering Employees and 
Aerospace, that engineering technicians and similar technical 
employees are entitled to overtime protection.
    Sixth, veterans. The final rule deletes the language in the 
draft rules regarding military training and states that the 
Department intends no change to the educational requirements 
for the professional exemption.
    Some organizations have now raised new issues regarding new 
occupations and I look forward to answering your questions, 
particularly about the team leaders, and any other specific 
occupations discussed in the final regulations.
    For now, let me just state that the changes made in the 
final rules merely adopt current Federal case law, Wage and 
Hour opinion letters, or longstanding enforcement policy from 
the Wage and Hour Division field operations handbook.
    Before closing, I would like to spend a few minutes to 
discuss why the Department has opposed Senator Harkin's 
amendment. The Department shares your concern that the overtime 
protections for low-wage and middle class workers should be 
maintained or strengthened, but we believe the final 
regulations are the best way to achieve this result. The 
amendment raises many questions, and we believe will put 
overtime protections for millions of employees at risk.
    For example, how would we determine which sections, 
paragraphs, or even sentences of the final rules would still be 
in effect should the amendment pass?
    How would the amendment work for employees whose 
entitlement to overtime pay is unclear under the current 
regulations?
    How would the amendment affect employees receiving overtime 
pay today not because it is required under the FLSA statute or 
the regulations, but because the employer is paying that 
overtime voluntarily?
    How would the amendment affect the last 50 years of Federal 
case law, Wage and Hour opinion letters, and Wage and Hour 
field operations handbook sections which are not reflected in 
the current regulations but are in the final rule? Would all or 
some of these still have the force of law, and which ones?
    What about new employees who are hired? Will they be 
subject to a different set of rules? And what rules would apply 
to an employee who changes employers but performs the same 
work? It appears that the amendment could result in different 
employees who perform the same work for the same employer being 
paid differently and that could raise a whole new set of legal 
issues.
    In short, we have opposed the amendment because we do not 
know what the law would be for any employee if the amendment is 
passed. We do know that it would add confusion and double the 
litigation. The amendment would make our enforcement of the 
regulations more difficult because each case would require two 
determinations instead of one. First, was the employee exempt 
under the current regulations, and second whether the employee 
is exempt under the final regulations.

                           PREPARED STATEMENT

    Mr. Chairman, for the last 20 years, both Republican and 
Democratic administrations have recognized the need to reform 
these regulations. These are constructive changes that will 
benefit millions of workers and they are long overdue.
    Thank you for inviting me here today, Mr. Chairman, and I 
will be happy to answer questions.
    [The statement of follows:]

             Prepared Statement of Hon. Tammy D. McCutchen

    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.\1\ 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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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 \2\ 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.''
---------------------------------------------------------------------------
    \2\ Fair Labor Standards Act: White-Collar Exemptions in the Modern 
Work Place (GAO/HEHS-99-164, September 30, 1999).
---------------------------------------------------------------------------
    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.\3\ They 
are predominately married women with less than a college degree and 
live in the South.
---------------------------------------------------------------------------
    \3\ See Final Rule, Table A-4 of Appendix A.
---------------------------------------------------------------------------
    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.

    Senator Specter. Thank you very much, Ms. McCutchen.
    The Washington Post editorialize today on the regulation 
and notes that the 1938 law makes an exception for white collar 
workers, those in executive, administrative, and professional 
positions. Figuring out who falls into this category has become 
a particularly byzantine area of labor law and the regulations 
outlining the exceptions have not been updated for 50 years.
    When Secretary of Labor Chao responded to questions for the 
record from our January 20 hearing this year, she noted the 
discretion and independent judgment standard was described as 
``one of the most confusing and difficult requirements in the 
regulations,'' and further noted that Federal courts have had 
difficulty interpreting and applying the standard.
    When I look at the current regulation on administrative 
employees, it says, ``customarily and regularly exercises 
discretion and independent judgment.'' When I look at your 
final regulation, it says, ``primary duty includes the exercise 
of discretion and independent with respect to matters of 
significance.''
    Ms. McCutchen, where is the improvement from the current 
law to your proposed final regulation to avoid the vagaries of 
litigation?
    Ms. McCutchen. First of all, of course, we made an attempt 
in our proposed rules to adopt a new test, which the commenters 
uniformly did not like. So we decided to go back to the 
discretion and independent judgment in the current standard.
    The ``includes'' language is in the current short test, 
which is 541.2(e)(2), and it states that the exemption applies 
to employees whose primary duty consists of the performance of 
work described in paragraph (a) of this section which includes 
work requiring the exercise of discretion and independent 
judgment.
    The ``customarily'' language comes from current long test, 
which of course applies only to employees earning between 
$8,000 and $13,000 a year and therefore has been replaced with 
a guarantee of overtime, which is an improvement.
    We have also added the words in the regulatory text itself 
``with respect to matters of significance.'' Under the current 
rule, that is in the interpretive guidelines, which courts are 
free to ignore, and we put it up into the regulatory text at 
the suggestion of our career professionals at the Wage and Hour 
Division who felt it was very important to make the point that 
the primary duty must include exercise of discretion or 
judgment with respect to matters of significance, not with 
respect to matters such as deciding which pens to buy, that it 
has to be discretion and independent judgment on a major issue 
for the employer, not a minor one. And that is an improvement 
that will benefit employees.
    Senator Specter. Well, Ms. McCutchen, where you have the 
core language saying ``customarily and regularly exercises 
discretion and independent judgment'' and then you add to it 
two layers of additional description, ``primary duty,'' there 
you have a question of interpreting what is a primary duty, and 
then you have the subsequent language ``with respect to matters 
of significance.'' Here again, there is no clear-cut 
delineation as to what may be significant or not.
    In a context where you have had a lot of litigation, a lot 
of class actions--and I share the Department of Labor's 
interest in minimizing the litigation and class actions--and 
you have had many, many lawsuits with a lot of factual 
settings, it seems to me that you would have a basis for coming 
to closure with those vagaries. I have been involved in a lot 
of litigation matters, and you learn from the experience of the 
court cases. But to come right back with the same language, 
``customarily and regularly exercises discretion and 
independent judgment,'' and adds only ``primary duty'' and 
``matters of significance,'' which require a lot of 
interpretation themselves, I do not see that you have advanced 
the ball much.
    Ms. McCutchen. What we did in the final regulation is we 
took a lot of the Federal court case law, some of the new 
language in the definitional section, what is a matter of 
substantial importance, what is primary duty, what is 
discretion and independent judgment. There are new definitional 
sections which take language out of the current case law and 
out of the Wage and Hour enforcement policy and opinion letters 
and incorporates that into the regulation itself. So now it is 
clearer which cases and which language from which cases are the 
ones that are the law. Whereas before, employees would have to 
go and do their own legal research or file a FOIA request with 
the Department to get the information, the information is now 
in the regulatory text itself.
    I will also say that most commenters believed that sticking 
with the current language would cause them less problems than 
the proposed position of responsibility test. They felt that 
the position of responsibility test was vague and that they 
would prefer to go back to the current language because that is 
what they are comfortable with. We would have liked to have 
clarified it even further, but we did not receive any comments 
with any better ideas. Obviously, our idea of position of 
responsibility was not working because the commenters felt that 
it was too vague and the definitions would not help.
    So what we did instead is looked at the Federal case law, 
looked at the Wage and Hour opinion letters, and incorporated 
the key parts of that case law and opinion letters into the 
regulatory text itself, which we believe will be beneficial, 
especially to employees and HR managers because they will no 
longer have to hire a lawyer to find those cases that describe 
what is discretion and independent judgment. They will be able 
to go to the list of factors that is in the final regulation to 
make that determination.
    Senator Specter. Well, my red light went on in the middle 
of your answer.
    Senator Harkin. Go ahead.
    Senator Specter. No, no. I am going to adhere to the time 
limit.
    I have grave reservations that notwithstanding the changes 
you have made, that they will not have to have legal 
interpretation. I have yet to see a regulation which does not 
require a lot of analysis and a lot of legal interpretation, 
but if we can avoid the lawyers, so much the better, speaking 
as a lawyer.
    Senator Harkin.
    Senator Harkin. Ms. McCutchen, first, to clear up one 
point. If an employer in the past or today wanted to determine 
whether or not certain employees were exempt or not exempt, 
they could go to you for an advisory opinion, could they not?
    Ms. McCutchen. They can.
    Senator Harkin. And so I was thinking about this case 
against the Farmers Insurance Exchange in California last year. 
A jury slapped them with a $90 million judgment because they 
had not been paying the claim adjustors overtime for years. The 
company said it believed it was correctly exempting its 
adjustors as professionals. But they could have gone to you to 
try to determine that. They could have gone for an advisory 
opinion. Right? Why would an employer not come to seek your 
advice on whether or not an employee is exempt or not?
    Ms. McCutchen. First of all, the Farmers Insurance case was 
brought under California law and not Federal law.
    Senator Harkin. I understand that.
    Ms. McCutchen. Since California law is different, I could 
not have opined on that.
    But actually we did have a request for an opinion letter on 
insurance claims adjustors and we did issue that opinion 
letter, which has been adopted by two Federal courts since we 
issued it.
    Senator Harkin. Now. I am just talking about in the past. 
My point is any employer can come to DOL right now and ask for 
an advisory opinion.
    Ms. McCutchen. Including an advisory opinion about the 
effect of the current rules, which we expect to get requests 
for.
    Senator Harkin. I understand. I just wanted to make that 
point.
    Second, Ms. McCutchen, Secretary Chao said that under the 
new regulations issued last week, no workers earning between 
$23,660 and $100,000 a year would lose overtime protection and 
that the only provision in this regulation that would restrict 
overtime eligibility is new section 541.601 on highly 
compensated employees under which approximately 107,000 workers 
earning over $100,000 a year would lose overtime rights. Is 
that correct?
    Ms. McCutchen. I believe that is correct for two reasons. 
One, the changes that we made to the duties test that apply 
between $23,660 and $100,000 are all adopting current Federal 
case law, current Wage and Hour opinion letters, or the current 
Wage and Hour field operations handbook. So although it is a 
change in the language of the regulation, it is not a change in 
the current law that is being applied in the courts today.
    What you have to recall is since these regulations have not 
been changed in 50 years, there is 50 years of case law and 
Wage and Hour opinion letters that are not incorporated into 
the regulations.
    Senator Harkin. There is a new provision in the final rules 
about team leaders. Team leaders is not in the current 
regulations, nor is it defined in the final rule. The final 
rule--let me find the thing on team leaders--on the team leader 
issue, which I believe is a loophole big enough to drive any 
kind of a truck through, there is no real definition of what a 
team leader is and how a team leader would operate in the 
workforce here. I am just trying to find where this is right 
here.
    Section 541.203. An employee who leads a team of other 
employees assigned to complete other projects for the employer 
meets the requirements for the exemption even if the employee 
does not have direct supervisory responsibility over the 
employees on the team. And you list a few white collar 
examples. But employers are given no clear guidance on what the 
rule contemplates by the term ``major projects,'' and nowhere 
does the rule define what a team leader is or state that the 
team leader exemption is not to be applied to blue collar work.
    How can you say that no one--you say you believe this. No 
one who makes between $23,660 and $100,000 a year under this 
new rule will lose overtime pay protection that they have under 
the current law. That is what you are saying.
    Ms. McCutchen. I believe our economic analysis says few if 
any because I do not think anybody can speak in absolutes.
    Senator Harkin. Oh, few.
    Ms. McCutchen. No one can speak in absolutes.
    Senator Harkin. She said none.
    Ms. McCutchen. Well, we believe it is going to be none, but 
the economists say few if any.
    Senator Harkin. What about a team leader? What about all 
these team leaders that can now be exempt?
    Ms. McCutchen. Well, this is a particularly puzzling issue 
to me because the language that you quoted--and I would like to 
quote the full language--is actually a pro-employee change from 
the current language. And I would like to read the current 
regulation and the final regulation.
    The language in the current regulation, which is in 
541.205(c), says that the administrative exemption applies ``to 
a wide variety of persons who either carry out major 
assignments in conducting the operations of the business or 
whose work affects business operations to a substantial 
degree.'' So the current language says that the administrative 
exemption is available to a wide variety of employees who work 
on major projects.
    We have limited that definition of an administrative exempt 
employee to limit it only to the person who leads the team who 
works on major projects. And we have defined what the major 
projects are, which is the key to the final rule. What the 
final rule says is ``an employee who leads a team of other 
employees assigned to complete major projects for the employer, 
such as purchasing, selling, or closing all or part of a 
business, negotiating a real estate transaction or a collective 
bargaining agreement or designing and implementing productivity 
improvements.''
    That parenthetical is key to the section, and what it says 
is that the current language of a wide variety of persons who 
carry out major assignments is now limited only to a person who 
leads a team who conducts a major assignment like opening a new 
plant or being the lead in a collective bargaining negotiation 
on behalf of the company. We are not talking about union 
bargaining unit members, who are sometimes called team leaders, 
who might direct the work of other employees day by day but are 
not assigned to complete major corporate change type of 
functions.
    So it is much more limited in the final than it is in the 
current. And I agree with you that we should be comparing the 
rule to the current law and the current regulation, and this is 
a pro-employee change from the current regulation.
    Senator Harkin. So that list of examples that you just gave 
me is exhaustive?
    Ms. McCutchen. Our examples are not--in this one, I think 
we said ``such as.'' We did not include the language 
``including or limited to,'' but I think the purpose of the 
parenthetical is to indicate that we are talking about major 
projects. We are talking about people who are leading a project 
to buy a new business, not to buy office supplies.
    Senator Harkin. An employer can decide what a major project 
is.
    Ms. McCutchen. Well, ultimately the Department of Labor and 
the Federal courts are going to decide, and if anybody has 
questions about a particular team leader who does not complete 
major projects, they are free to send a request for an opinion 
letter from me.
    Senator Harkin. Well, I thought it is interesting that they 
put that thing in there, that they do not even have to have 
supervisory authority.
    Let me get to one other thing.
    Ms. McCutchen. Well, this is the administrative exemption. 
I am sorry for interrupting you. This is the administrative 
exemption, and the executive exemption is the exemption that is 
designed for managers and supervisors. The administrative 
exemption covers employees who do not have supervisory 
responsibility but still work on major issues for the employer.
    Senator Harkin. I think I see.
    Two other things. Well, you want to get into the 
management. It has long been held that--the Wage and Hour field 
operations handbook defines those exempt employees--a rule of 
thumb is their primary duty must be more than 50 percent. Fifty 
percent of their time has to be in management or professional 
work. Is that not true?
    Ms. McCutchen. It has been a guidance, a rule of thumb. It 
has never been an absolute rule.
    Senator Harkin. It is a rule of thumb in your operations 
handbook. That has been deleted from the final rule. Is that 
not true?
    Ms. McCutchen. It is a guideline, yes.
    Senator Harkin. That 50 percent has been deleted.
    Ms. McCutchen. It has been a guideline and it is still as a 
guideline under the final rule.
    Senator Harkin. No, it is not. Fifty percent is not a 
guideline under the final rule. No, it is not. It has been 
deleted. Is that not right?
    Ms. McCutchen. In the final rule, 541.700(b) states the 
amount of time spent performing exempt work can be a useful 
guide in determining whether exempt work is the primary duty of 
an employee. Thus, employees who spend more than 50 percent of 
their time performing exempt work will generally satisfy the 
primary duty requirement. The final rule adopts the Federal 
court decisions in a series of cases involving Dairy Queen and 
Burger King that state that the 50 percent rule is a guideline 
but supervisors who can both supervise and perform nonexempt 
work at the same time can still be executives. So what we did 
is we adopted the case law in the Burger King and the Dairy 
Queen cases.
    Senator Harkin. So you adopted that to take away the 50 
percent rule of thumb.
    Ms. McCutchen. No. It is a guideline. We call it a ``useful 
guide.'' We replaced the word ``rule of thumb,'' which seemed 
to us a very odd word to have in a regulatory text, and 
replaced it with the language ``useful guide.''
    Senator Harkin. Well, no. What you say is the amount of 
time spent on a primary duty can be a useful guide.
    Ms. McCutchen. Is a useful guide.
    Senator Harkin. Well, but it is different than what it is 
now. It is not a 50 percent rule of thumb.
    Let me get to the police. DOL's talking points on fair 
overtime security for the 21st century says that the final 
regulations ``contain an ironclad guarantee of overtime 
protection for police officers.'' Does this mean all police 
sergeants are entitled to overtime protection? Yes or no.
    Ms. McCutchen. It is very hard for me to speak in 
absolutes, but we believe that the vast, vast, vast, vast 
majority of sergeants would be entitled to overtime because 
generally they may direct the work of other employees but they 
do not have management as their primary duty and they do not 
have authority to hire or fire, which is the third requirement 
that we added to the executive exemption.
    Senator Harkin. So which police sergeants would be entitled 
to overtime protection and which would not?
    Ms. McCutchen. Well, I actually just discussed this issue 
with our district director out of Kansas City who said that 
sometimes in a very, very small police department, the sergeant 
actually might be the top executive in the department, but they 
are called a sergeant.
    In the regulation, what we did and particularly in the 
preamble is we discussed the many, many different cases that 
are out there regarding police officers. It is our view of the 
cases that the Federal courts generally view sergeants and 
below as entitled to overtime and that is what we tried to 
adopt in the final rule, and police captains and police 
commissioners as not entitled to overtime, with the 
battleground really being lieutenants. And the Federal courts 
have found some lieutenants to be exempt and some lieutenants 
to be nonexempt depending upon their particular job duties. So 
it all depends upon your job duties, but we believe that we 
have increased the protection substantially for sergeants in 
the final rule.
    Senator Harkin. Ms. McCutchen, I just will close on this. 
You went on about my amendment and all these problems and how 
you determine it. That is really reaching, Ms. McCutchen.
    My amendment would work as follows. There are one or two 
steps, very simple. In each case you see if the employee is 
eligible for overtime under the old regs. If they are, they get 
overtime. Very simple. Then if no, if they are not eligible for 
overtime under the old regs, you look at the new regs. If they 
are eligible for overtime under the new regs, they get it. If 
not, they do not. Two steps. Very easy.
    Last I would say that the amendment I offered invalidates 
the whole section of the new regulation, not just for a single 
litigant but for all future litigants. If someone is eligible 
for overtime now, they will continue to be eligible for it 
under my amendment. If they are not eligible under the present 
rule, they look at the new regulation, if they are eligible, 
they get overtime. If not, they do not. Because I thought the 
whole idea of this was to expand overtime pay protections.
    That is what my amendment does. If you are eligible under 
the old, you continue to get it. If you are not eligible under 
the old, you look at the new regulation. If under the new 
regulation you are eligible for overtime, you get it. That 
expands overtime pay protection. If you are not eligible under 
the old and you are not eligible under the new, you do not get 
overtime. It is a very simple two-step process. It is not quite 
as convoluted as what you said.
    Last I would just say that you were quoted last year--well, 
it is not a quote. It was in a story saying that you predicted 
a deluge of lawsuits as employees and employers press for 
clarification once the new rules go into effect. John Bilhorn, 
whom I do not know, a Chicago attorney who represents employees 
in lawsuits said it is just going to create new areas of fog. 
And I would just close by saying that that is what I think is 
exactly what is going to happen here.
    Thank you, Ms. McCutchen. Thank you, Mr. Chairman.
    Senator Specter. Thank you, Senator Harkin.
    Ms. McCutchen, would you please stay with us for the 
balance of the hearing? Because there may well be issues raised 
by the next panel which we would like to have your comment on.
    Ms. McCutchen. I do have to step out for another event for 
probably a half an hour, but I will try to come back. I am 
sorry. I am just previously scheduled for another event, but I 
will try to come back so that I am here when the next panel is 
done. I apologize.
    Senator Specter. Well, Ms. McCutchen, though, we need you 
to listen to what they have to say so that you are in a 
position to comment about them. When we schedule these 
hearings, we really expect witnesses to be able to stay. We had 
an experience with the Secretary last time which was difficult 
for the subcommittee. So we expect you to stay.
    Let us proceed now to panel two. Questions will be 
submitted to the record.
    Senator Craig, do you have questions of Ms. McCutchen?
    Senator Craig. I do not. Thank you.
STATEMENT OF CRAIG BECKER, ASSOCIATE GENERAL COUNSEL, 
            AFL-CIO
    Senator Specter. Our first witness is Mr. Craig Becker, 
Associate General Counsel of AFL-CIO. He is also Associate 
General Counsel of the Service Employees International Union. 
Bachelor's degree from Yale and a law degree from the Yale Law 
School. Thank you for joining us, Mr. Becker, and we look 
forward to your testimony.
    Mr. Becker. Thank you for the opportunity to appear before 
you on this very important subject. I have litigated in this 
area and also taught the Fair Labor Standards Act at UCLA and 
University of Chicago Law Schools, published several articles 
on the subject.
    In my view the new regulations in both obvious and subtle 
ways will expand the scope of the four primary exemptions to 
the basic protections of the Fair Labor Standards Act.
    These regulations are obviously dense, long, and complex, 
61 type script pages. So what I want to do in my very short 
time before you is illustrate how they depart from some 
fundamental principles which have guided the construction of 
the amendments in four ways.
    First, the old regulations governing these exemptions 
contained a clear and explicit percentage limit on the amount 
of time employees could spend on nonexempt work. 20 percent of 
their time, 40 percent in the retail and service industries 
could be spent on nonexempt duties.
    Now, outside the outside salesman exemption, that 
percentage limited fall into disuse because of the woefully 
inadequate salary levels for the long test. The Department, 
however, has now increased those salary levels but discarded 
this very clear and explicit bright line rule and replaced it 
with a vague test of the primary duty which ultimately rests on 
a subjective analysis of what the ``most important'' duty of 
the employee is. We submit that if you want to avoid 
litigation, you retain the bright line rule and do not 
substitute a vague and subjective analysis.
    This will have particular impact in two areas. One, low 
level managers and supervisors. The cases cited by the 
Administrator, Burger King cases, universally held that these 
low level assistant managers spent most of their time flipping 
burgers and serving customers, and therefore they did not meet 
this bright line rule and were nonexempt under the 20 percent 
tolerance level.
    Second, in the area of outside sales, there was no salary 
requirement for the 20 percent limitation. So here is an 
absolutely clear area where the new regulations exempt 
employees who were not exempt under the old regulations; that 
is, outside salesmen who spend more than 20 percent of their 
time performing non-outside sales work. We substitute for that 
clear and explicit test a vague primary duties test.
    The second area where the regulations clearly depart from 
longstanding principles is in regard to the salary basis test. 
It has long been held that people who qualify on the duties 
tests universally are paid a salary, not only a salary level, 
but they are paid on a salary basis; i.e., they do not punch a 
clock. So in return for not being paid overtime, they have 
certain compensatory privileges. They can leave for an hour 
during the day to take their kid to the doctor. The salary 
basis test has existed for over 50 years. The old regulations 
provided that you could not be paid on an hourly basis. The new 
regulations retain in name the salary basis test, but define 
salary basis away by saying explicitly you can be paid on a 
salary basis even though you are actually paid hourly. Even 
though you are actually paid hourly.
    In other words, many employees who used to qualify under 
the duties test--and the most obvious example is registered 
nurses--in many cases--and I cite them in my written 
testimony--held that nurses do not qualify for exemption 
because they are not paid on a salary basis. I.e., in a 
hospital a nurse's time is strictly controlled. They do not 
have the kind of autonomy that Congress had in mind for exempt 
employees, and therefore they do not qualify on the salary 
basis test.
    The Department has now defined away what it meant to be 
paid on a salary basis, and I quote from the Court of Appeals 
for the Third Circuit which said, ``Paying an by the hour 
affords the employee little of the latitude that the salary 
requirement recognizes. A basic tension exists between the 
purpose behind a salary requirement and any form of hourly 
compensation.''
    The Department has now said, you can be paid hourly and 
still qualify on a salary basis test. Again, here is another 
area where clearly employees such as nurses--and that is a very 
important classification because of the high number of forced 
overtime hours which nurses work, given the nursing shortage--
who were previously not exempt because they could not satisfy 
the salary basis test will now be considered exempt because of 
the dilution of what it means to be paid on a salary basis.
    Third--and let me just say in the 5 seconds I have left--
the old regulations did not expressly exempt any named 
classifications. That is, the old legislative regulations had 
tests and then the interpretive regulations, which did not have 
the force of law, had certain examples of how the tests apply. 
The interpretations have been eliminated and in the legislative 
regulations, named classifications are now exempt. The rule has 
always been that titles did not matter. It mattered what you 
actually did. But now the Department is saying in the 
legislative regulations that certain named titles are exempt, 
and beyond titles, certain whole industries, financial services 
employees are exempt.
    My fourth point was going to be team leaders, but team 
leaders have been extensively discussed.
    So let me just say that I did a Federal court search for 
exemption cases involving team leaders to see if this new 
provision would be consistent----
    Senator Specter. Mr. Becker, could you sum up?

                           PREPARED STATEMENT

    Mr. Becker. And all I wanted to say about team leaders, 
since it has already been discussed, is that a search of 
Federal court cases for cases holding team leaders to be exempt 
under the old regulations found no cases whatsoever. So this is 
a new provision in the regulations.
    Thank you for your time.
    [The statement follows:]

                   Prepared Statement of Craig Becker

    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 percent of their time (or in 
the case or retail or service employees, 40 percent of their time) in 
any workweek to nonexempt duties. 29 C.F.R. Sec. 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 
percent. 29 U.S.C. Sec. 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,'' 
Sec. 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 ``salary 
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, ``The 
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. Sec. 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.'' 
Sec. 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 percent 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 ``infractions of safety rules of major 
significance.'' 29 C.F.R. Sec. 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.'' Sec. 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.\1\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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 \2\ 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.'' Sec. 541.604(a).
---------------------------------------------------------------------------
    \2\ Or in excess of the alternative standard permitted in hospitals 
and similar institutions by 29 U.S.C. Sec. 207(j).
---------------------------------------------------------------------------
    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. Sec. 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.'' 
Sec. 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.'' Sec. 541.603(a). Proving a practice 
of making deductions requires more than proving deductions were 
intentionally made. Sec. 541.603(a). Intentional improper deductions 
will not cause a loss of exempt status if they are ``isolated.'' 
Sec. 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. Sec. 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. Sec. 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.'' Sec. 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. Sec. 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.'' Sec. 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. Sec. 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. Sec. 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. Sec. 541.115(a). The old 
regulations provided that a working foreman who spent more than 20 
percent of his time performing the same work as his subordinates or 
other nonmanagerial work was not exempt. 29 C.F.R. Sec. 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.'' Sec. 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.'' Sec. 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 B 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 PERCENT 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 
percent interest in the enterprise. 29 C.F.R. Sec. 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 percent owner as 
exempt if he or she ``is actively engaged in [the enterprise's] 
management.'' Sec. 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 Sec. 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. Sec. 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.'' Sec. 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 Sec. 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.'' Sec. 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.'' Sec. 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. Sec. 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. Sec. 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 percent of his or her time to nonexempt work. 29 C.F.R. 
Sec. 541.2(a)-(d). The new regulation expressly eliminated the 20 
percent 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 Sec. 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.'' Sec. 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. Sec. 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. Sec. 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. Sec. 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. Sec. 541.3(a) (3).
    The final regulations eliminate all these requirements. 
Sec. 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. Sec. 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. Sec. 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. Sec. 541/
302(f)(2). The new regulations, in contrast, to not contain any of this 
language. Sec. 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.''

Sec. 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. Sec. 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. 
Sec. 541.303(c). The new regulations eliminate the prefatory language 
and its interpretation, thus exempting all employees working in these 
computer fields. Sec. 541.400(b).

                WIDENING OF THE OUTSIDE SALES EXEMPTION

    The old outside sales exemption contained a 20 percent limit on the 
amount of non-outside sales work an exempt employee could perform. 29 
C.F.R. Sec. 541.5(b). The new regulation eliminates this tolerance 
level. Sec. 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 percent tolerance level was a bright line rule. 
Elimination of the 20 percent 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.

STATEMENT OF DAVID S. FORTNEY, PARTNER, FORTNEY & 
            SCOTT, LLC

    Senator Specter. Thank you very much, Mr. Becker.
    We turn now to Mr. David Fortney, co-founder of Fortney and 
Scott, a Washington-based firm specializing in labor and 
employment issues. He had been with the Department of Labor in 
the capacity of acting solicitor and chief legal officer, a 
bachelor's degree from Penn State and a law degree from 
Duquesne. Thank you for joining us, Mr. Fortney, and we look 
forward to your testimony.
    Mr. Fortney. Good morning, Mr. Chairman and members of the 
subcommittee. It is a privilege to be here again to discuss 
what we now have as the final regulations, whereas before, the 
committee was looking at the proposed regulations.
    Without spending too much time on it, let us remember where 
we are coming from. We are coming from current regulations that 
I think everyone agrees, even those that perhaps are 
challenging these regulations, the current regulations do not 
work well. They create a morass. They create uncertainty.
    My primary practice is working with employers to help them 
comply. I will tell you typically an employer will come and 
say, how are we supposed to compensate people? And as someone 
who has spent a great deal of time, both at the Labor 
Department trying to enforce and in the private sector trying 
to work with various employers, answering those questions is 
sometimes unnecessarily difficult and it results in giving less 
than satisfactory answers. Those are the so-called weasel 
answers that lawyers give that drive employers crazy. Well, I 
think it is probably this way.
    These regulations in my view are a significant step forward 
in clarifying the rules. They do provide more certainty, and 
they do, I think, responsibly address the current environment, 
in which we have seen what are the current salary requirements, 
which are a technical morass and has resulted in the slightest 
error in how people are compensated, resulting in hundreds if 
not millions of dollars in liabilities and really creating a 
frenzied litigation lottery.
    Moreover, the duties tests--the way they have been defined 
in the current regulations where the regulations are vague, you 
look at field operation handbooks and other guidance in court 
cases that I would suggest are not readily available to 
employers and certainly not to small business people, or to 
employees for that matter, are now at least codified within the 
rules in a much clearer, more concise fashion.
    With respect to specifics, this is not all a pro-employer 
set of changes. In general, these rules codify the current 
requirements. There are several substantive changes, however.
    With respect to executives, the requirements are more 
rigorous now than they have been under the current law. Now 
there is a requirement to have hire and fire authority to some 
degree. Under the current rule, there are many folks who are 
properly exempt from overtime who do not have such authority.
    The administrative exemption, which has received I think 
the lion's share of the focus of the hearing and the criticism, 
I submit is codifying what rules we have there. Now, the rules 
may not be perfect, and as Ms. McCutchen indicated in her 
statement, a proposal was made to change those rules. I think 
generally everyone said, wait a minute, do not give us a new 
test that is vague and uncertain. If those are our choices, we 
will take the existing test, clarify it, which I think is what 
the Department has done. We now have a test within the four 
corners of the reg that is supported by the court decisions 
that go behind it. So it is more than just the words, it is the 
whole fabric that goes with it, and I think that is very, very 
helpful.
    Professional exemptions again have been clarified 
appropriately and in my view have not been expanded or changed. 
There is one new addition. It is certainly a new exempt 
category that has before not existed, the so-called highly 
compensated, and that focuses on $100,000. The Labor 
Department, though, has modified that some. So it is not just 
that you are paid $100,000. First of all, they have made clear 
no matter how much you are paid, if you are blue collar, that 
is, do primarily manual work, work with your hands, you get 
overtime. It does not matter whether we call you a team leader. 
It does not matter whether you are highly compensated earning 
more than $100,000. You get overtime. The rules are crystal 
clear on that. There is no room for doubt or wiggle on that.

                           PREPARED STATEMENT

    With respect to the highly compensated, though, we are 
talking about folks who have to perform at least one duty and 
have to be paid in accordance with the salary requirements at 
the minimum of $455 per week.
    With that, I will save my time for answering questions as 
they may come up. I know there are a lot of areas that I think 
the chair and others would like to discuss. Thank you.
    [The statement follows:]

                 Prepared Statement of David S. Fortney

    Mr. Chairman, Members of the Subcommittee. My name is David 
Fortney, and I am a co-founder of the law firm, Fortney & Scott, LLC in 
Washington, DC. I am testifying today to provide the Subcommittee with 
my assessment of the U.S. Department of Labor's newly promulgated Final 
Regulations governing overtime in the workplace. My testimony reflects 
my experience as a practicing labor and employment attorney for twenty 
four years, as well as my previous experience at the U.S. Department of 
Labor, where I served as the Deputy Solicitor and Acting Solicitor 
during the first Bush Administration, under Secretaries of Labor 
Elizabeth Dole and Lynn Martin. In my positions at the Labor 
Department, my responsibilities included the interpretation and 
enforcement of the Fair Labor Standards Act of 1938 (``FLSA''), as 
amended, and the regulations implementing the FLSA, including the 
``white-collar'' exemption regulations that are the focus of today's 
hearing and that provide exemptions from overtime and minimum wage for 
``white-collar'' jobs, including executive, administrative and 
professional positions. In addition to my government experience, I have 
extensive experience and expertise in counseling and advising employers 
to comply with the white-collar regulations and to respond to the 
growing number of class action claims being filed against employers. I 
will discuss my experience and views on these matters in the context of 
the newly promulgated white-collar exemption regulations.

     INTRODUCTION AND OVERVIEW OF THE FLSA WHITE-COLLAR EXEMPTION 
                              REGULATIONS

    The white-collar exemption regulations are dramatically outdated 
and have imposed significant confusion and uncertainty in determining 
who is, and who is not, exempt from the FLSA's minimum wage and 
overtime requirements. The FLSA imposes minimum wage and overtime 
requirements on covered employers, but also, in 29 U.S.C. Sec. 213 (a), 
provides certain exemptions from these requirements. Section 213 (a) 
states that the minimum wage and overtime requirements shall not apply 
to any employee employed in a bona fide executive, administrative, or 
professional capacity or in the capacity of outside salesperson. 
Section 213 also authorizes the Secretary of Labor to ``define and 
delimit'' these exemptions. As you know, the regulations for 
implementing these statutory exemptions--commonly referred to as the 
``white-collar'' exemptions--are codified at 29 CFR Part 541. The 
white-collar exemption regulations impose two requirements for a job to 
be classified as exempt. First, the employee must be paid on a salary 
basis and at the required salary level. And, second, the job duties 
must involve managerial, administrative or professional skills and 
duties.

THE CURRENT WHITE-COLLAR EXEMPTION REGULATIONS ARE OUTDATED AND REQUIRE 
                          COMPREHENSIVE REFORM

    The problem that all stakeholders face under the current 
regulations, including employers, employees and the Labor Department, 
is in trying to apply the outdated regulations to today's workplace. 
The duties tests were last modified in 1949--over 50 years ago--and 
have remained essentially unchanged since that time. The salary basis 
was added to the regulations in 1954 and was last updated in 1975--over 
25 years ago. As a result, the long-outdated requirements create 
uncertainty and frustrate compliance efforts. For example, the ``long 
test'' for determining whether an employee is exempt from the overtime 
provisions of the statute is currently triggered by a weekly salary of 
only $155, a figure so out-of-date that it renders the long test 
meaningless. Virtually every salaried employee earns more than $155 per 
week and is therefore potentially outside the overtime protections of 
the law. Indeed, if an employee is paid the minimum wage of $5.15 per 
hour, which equals $206 for a 40-hour workweek, the long test is met. 
Moreover, the alternative salary test of $250 for ``highly 
compensated'' exempt employees (the ``short test'') is nearly met with 
the minimum wage and, as a practical matter, is not a useful tool. 
Therefore, as a practical matter, because of the general obsolescence 
of the salary test, and assuming that the technical salary requirements 
are satisfied, typically the evaluation of whether jobs properly are 
classified as exempt primarily turns on the duties requirements.
    The duties tests, however, have proven to be a vast ``gray'' area, 
because the current regulations are too vague. As a result, both 
employers and the Labor Department are faced with inconsistent results 
that often are no more certain than the next court decision. In 
particular, the administrative exemption's requirements, which require 
exempt employees to perform ``staff'' rather than production or sales 
work, and exercise ``discretion and independent judgment'' on important 
matters in managing the employer's general business operations, are 
particularly difficult to apply. For example, a court ruled that a 
project superintendent, who supervised three large construction 
projects for a construction management company, earning an annual 
salary of $90,000, was not an exempt administrative employee. The court 
reasoned that under the staff versus production dichotomy, the employee 
``produced'' construction project management and thus was a nonexempt 
production employee. See Carpenter v. R.M. Shoemaker Co., 2002 WL 
987990, 7 Wage & Hour Cas. 2d (BNA) 1457 (E.D. Pa. May 6, 2002). 
Similarly, the professional exemption was found not to apply to network 
communications specialists who had advanced physics, mathematics and 
engineering degrees, and who trained mission control personnel, 
because, the court held, the employees failed to exercise discretion, 
because they used technical manuals and made group decisions. Hashop v. 
Rockwell Space Operations, 867 F. Supp. 1287 (S.D. Texas 1994).
    The result is that the current vague regulations result in 
unintentional noncompliance and resulting liabilities. The significant 
increase in employment claims is a clear indication that the current 
rules are not working--why should we have escalating claims when the 
rules have not changed? Wage and hour class actions now are the most 
frequently filed class action claims employers face, and individual 
wage and hour lawsuits doubled in 2002.
    In my experience, the explanation for these unacceptable 
developments is simple--plaintiffs' lawyers have discovered that the 
outdated regulations provide an excellent basis for filing ``gotcha'' 
claims that primarily benefit the attorneys. Moreover, under the 
current outdated rules, employers often are required to secure 
expensive legal guidance on what is required to secure compliance, and 
even then the best that typically can be provided is somewhat guarded 
advice. As one of our clients once asked me, why should extensive good 
faith compliance efforts have the same feel as spinning a roulette 
wheel?
    Everyone--perhaps with the exception of a small cadre of 
plaintiffs' lawyers who are making huge fees filing these wage and hour 
class action lawsuits--agrees that the outdated regulations require 
revision, because the rules are not only vague and ambiguous but also 
difficult to apply to many positions in today's modern workplace. The 
U.S. General Accounting Office (``GAO'') review of regulations in 1999 
recommended that the Secretary of Labor comprehensively review and make 
the necessary changes to the white-collar regulations to better meet 
the needs of both employers and employees in the modern workplace and 
to anticipate future workplace trends. The GAO's recommendations 
recognized the problems in achieving compliance. My personal experience 
has been that it often is difficult to advise employers because the 
rules are not clear. Additionally, the judicial interpretations vary 
and compound the problems in securing compliance. Moreover, it is my 
belief, based on my personal experience, that these same factors pose 
challenges to the Labor Department's ability to effectively and 
efficiently enforce these rules in a uniform and consistent manner.

       OVERVIEW OF THE CHANGES IN THE FINAL OVERTIME REGULATIONS

    The Final Regulations, to be codified at 29 CFR Part 541, provide 
clarified tests for the executive, administrative and professional 
exemptions. See 69 Fed Reg 22122-22274 (April 23, 2004). These new 
regulations should make compliance easier and provide greater 
certainty. This result directly benefits all stakeholders--employers, 
employees and the Labor Department. Greater compliance should directly 
result in lower litigation claims and resulting exposures.
    Although the higher standard salary test of $455 per week ($23,660 
per year), which is nearly a 300 percent increase from the current long 
test, may impose a hardship on some sectors, this material change is a 
return to the original exemption criteria that required a salary of 
sufficient magnitude in order for an employee to be classified as 
exempt. Thus, the only employees who will be affected by the new higher 
minimum salary levels are those who will start to receive overtime. The 
estimates by the Labor Department are that 1.3 million workers now 
exempt would gain overtime protection by the new $455 per week ($23,660 
per year) requirement. These are employees who today are performing 
jobs with exempt duties but who are being paid below the $455 per week 
salary requirement.
    The Final Regulations also retain and clarify the two long-standing 
requirements for classifying employees as exempt--the duties and salary 
tests. The Final Regulations, however, also impose new duties test for 
some white-collar exemptions, and some of the changes result in more 
demanding requirements. For example, under the executive duties test of 
the Final Regulations, employees are required to (1) have a primary 
duty of managing the entire enterprise or a department or subdivision, 
(2) direct the work of two or more other workers and (3) have hiring/
firing authority or substantial influence over these decisions. This is 
a more restrictive test, and some executives who currently are exempt 
will no longer be exempt. The Final Regulations also provide 
clarification of existing criteria, many of which are retained. Thus, 
for example, while the Administrative exemption's criteria remain 
essentially unchanged, the Final Regulations provide extensive, helpful 
examples of which administrative job duties are exempt and nonexempt. 
Similarly, under the Professional Exemption of the Final Regulations, 
the duties test is generally retained (the ``discretion'' requirement 
of the long test under the Current Regulations is eliminated), but the 
Final Regulations clarify when education and experience qualify an 
employee as a professional.
    The Final Regulations retain the salary basis requirement that 
employees be paid a fixed, predetermined salary for each week in which 
the employee performs work, but allows employers greater latitude in 
making pay deductions for, for example, employee misconduct and 
violations of safety and workplace conduct rules. The liability for 
improper deductions or ``dockings'' is reasonably limited to the 
employees who are directly affected.
    Finally, the proposed regulations add new eligibility for exempting 
highly compensated workers with an annual salary of at least $100,000, 
if they perform office or non-manual work, are paid on a salary basis 
at the rate of at least $455 per week, and customarily and regularly 
meet one of the duties of either an exempt executive, administrative or 
professional employee. The payment of a salary of $100,000 or more does 
not meet the requirements for the highly compensated exemption unless 
the duties and salary requirements also are satisfied.

  THE FINAL REGULATIONS PROVIDE MUCH GREATER CLARITY TO THE OVERTIME 
    REQUIREMENTS AND WILL RESULT IN GREATER COMPLIANCE AND OVERTIME 
                              PROTECTIONS

    The Labor Department deserves significant credit for meeting the 
challenge of updating the long-ignored overtime rules. Under Secretary 
Chao's leadership, the Department successfully has completed a very 
complex rulemaking. Faced with such clearly outdated regulations and 
with recommendations by the General Accounting Office and others urging 
an overhaul of the regulations, the current Secretary of Labor 
undertook the long-neglected task of providing regulations that are 
meaningful for the modern workforce. This was a task that earlier 
Administrations, both Democratic and Republican, had considered but 
shied away from, undoubtedly over concern that revising these 
regulations would be controversial.
1. The Rulemaking Process Resulting in the Final Overtime Regulations
    In the FLSA, Congress quite consciously left undefined those broad 
terms describing which jobs were exempt (``any employee employed in a 
bona fide executive, administrative, or professional capacity'') and 
explicitly placed on the Secretary of Labor the duty to ``define and 
delimit'' the terms used in the exemptions. Congress also explicitly 
provided that the Secretary's actions in defining and delimiting the 
exemptions are subject to the provisions of the Administrative 
Procedure Act.
    During 2002, the Department initially met with over 40 interest 
groups, representing employers and employees, to learn of their 
suggestions and concerns. On March 31, 2003, the Department of Labor 
published proposed regulations (the ``Proposed Regulations'') in the 
Federal Register, and requested comments on the proposal. See 68 Fed 
Reg 15560-15597 (March 31, 2003). In the preamble to the Proposed 
Regulations, the Department explained the existing regulations and the 
changes proposed, and provided comparisons between the two. In 
accordance with Executive Order 12866, the proposal included a 
Preliminary Regulatory Impact Analysis, and a regulatory flexibility 
analysis assessing the impact of the proposed regulations on small 
businesses, as required by the Regulatory Flexibility Act. The public 
had an opportunity to comment on these economic analyses, as well as on 
the substantive provisions of the proposed regulations.
    The rulemaking record remained open for 90 days. When it closed on 
June 30, 2003, the Department of Labor had received more than 75,000 
comments from a wide variety of interests, including employees, 
employers, trade and professional associations, labor unions, small 
business owners, Members of Congress and others. The proposal also 
prompted vigorous public policy debate in Congress and the media.
    Against this backdrop, the Department issued the Final Regulations, 
to be codified at 29 CFR Part 541 that provide the much-needed update 
of the overtime requirements. See 69 Fed Reg 22122-22274 (April 23, 
2004). The Final Regulations clearly evidence that the Labor Department 
fully reviewed the comments received in the rulemaking record and 
carefully determined what changes it should make to the regulations, 
based on the comments received.
2. The Salary Component Will Again Become a Meaningful Criterion
    Among the major improvements achieved by the Final Regulations is 
the updating of the salary requirements, resulting in a restoration of 
the salary component as a meaningful criterion in the determination of 
whether employees receive overtime. The Final Regulations nearly triple 
the current $155 per week minimum salary level required for exempt 
employees to $455 per week, or $23,660 per year. 29 CFR Sec. 541.600. 
As a result, any employee earning less than $455 per week will receive 
overtime--regardless of their duties or how they are paid. The Labor 
Department estimates that this change alone results in 1.3 million 
currently exempt white-collar workers gaining overtime protection. At 
the same time, employers clearly benefit from having an unambiguous 
rule that helps facilitate compliance.
    The Final Regulations also introduce clarity and common sense to 
the highly compensated white-collar employees who earn at least 
$100,000 per year. 29 CFR Sec. 541.601. These highly compensated 
employees properly can be classified as exempt if they ``customarily 
and regularly'' perform any one or more of the exempt duties, and 
receive at least $455 per week on a salary basis. These salary changes 
are consistent with the underlying purposes of the FLSA, which are to 
protect overtime for those workers who earn the least, and presumably 
are least able to negotiate adequate compensation arrangements.
3. The Administrative Exemption is Clarified
    Another improvement implemented by the Final Regulations is the 
clarification of the Administrative exemption. 29 CFR 
Sec. Sec. 541.200-541.204. The Proposed Regulations set forth a new 
duties test for Administrative employees, requiring such employees to 
hold a ``position of responsibility.'' Many feared that the 
introduction of a new standard would have the inevitable effect of 
triggering significant uncertainty and litigation regarding the scope 
of the exemption. In response, the Labor Department's Final Regulations 
rejected that new standard and, instead, essentially retain the current 
test for Administrative employees, with significant clarifications and 
better guidance. The result is that employers and employees now have 
the benefit of using long established criteria that is further 
clarified by the numerous examples set forth in the Final Regulations. 
Thus, under the Final Regulations, a worker who is compensated on a 
salary or fee basis at a rate of not less than $455 per week must have 
as his/her primary duty ``the performance of office or non-manual work 
directly related to the management of the general business operations 
of the employer or the employer's customers and whose primary duty must 
include the exercise of discretion and independent judgment with 
respect to matters of significance.'' The addition of the requirement 
of ``matters of significance'' to the former discretion and independent 
judgment requirement is in keeping with current law and is useful in 
understanding that the Administrative exemption takes into account the 
level of importance or consequences of the work performed. 29 CFR 
Sec. 541.202.
    Moreover, the listing of examples of the job duties that typically 
are either exempt or non-exempt under the Administrative exemption is 
particularly useful. 29 CFR Sec. 541.203. The examples essentially 
codify the major court rulings, and provide much needed clarity and 
certainty in determining whether employees properly can be classified 
under the Administrative exemption. The examples of employees who often 
are exempt include:
  --insurance claims adjusters;
  --financial services industry employees whose duties include 
        ``collecting and analyzing information regarding the customer's 
        income, assets, investments or debts; determining which 
        financial products best meet the customer's needs and financial 
        circumstances; advising the customer regarding the advantages 
        and disadvantages of different financial products and 
        marketing, servicing or promoting the employer's financial 
        products'' (NB: if the employee's primary duty is selling 
        financial products, the exemption is not available);
  --employee who leads a team of other employees assigned to complete 
        major projects for the employer;
  --executive assistant or administrative assistant to a business owner 
        or senior executive of a large business;
  --human resources managers who formulate, interpret or implement 
        employment policies and management consultants who study the 
        operation of a business and propose changes (NB: personnel 
        clerks typically are non-exempt); and,
  --purchasing agents with authority to bind the company on significant 
        purchases.
    On the other hand, examples of workers who typically are not exempt 
include:
  --inspectors doing ordinary inspection work along standardized lines 
        involving well-established techniques and procedures;
  --examiners or graders;
  --comparison shoppers who report a competitor's price, distinguished 
        from the buyer who evaluates the reports on competitors prices; 
        and,
  --public sector inspectors or investigators of various types, such as 
        fire prevention or safety, buildings or construction health or 
        sanitation, environmental or soils specialists and similar 
        employees.
    These changes to the Administrative exemption in the Final 
Regulations add much needed clarity and make it much easier for 
employees to be properly classified as exempt or non-exempt. The result 
should be greater compliance with the overtime requirements, which is 
in the interest of employers and employees alike.
4. The Learned and Creative Professional Exemptions Are Clarified
    The Final Regulations for the Professional exemption provide much 
clearer guidance for today and the future, similar in approach to the 
changes in the Administrative exemption. 29 CFR Sec. 541.300-541.304. 
The Professional exemption continues to be divided into the Learned 
Professional and Creative Professional categories.
    The Learned Professional test tracks the existing learned 
professional criteria, and streamlines and summarizes the current 
criteria without material changes. The Final Regulations focus on 
employees with the primary duty of performance of work requiring 
knowledge of an advanced type in a field of science or learning 
customarily acquired by a prolonged course of specialized intellectual 
instruction. 29 CFR Sec. 541.301. The proposed regulatory language that 
would have allowed equivalent knowledge ``through a combination of work 
experience, training in the armed forces, attending a technical school, 
attending a community college of other intellectual instruction'' has 
not been included in the Final Regulations. This proposed language had 
been criticized as allowing military training to suffice as training 
for a learned profession, sufficient to qualify for exemption. The 
Labor Department clarified in the Preamble to the Final Regulations 
that it ``never intended to allow the professional exemption based on 
veterans' status.'' 69 Fed Reg 22123. Also see 69 Fed Reg 22150 
(``Thus, a veteran who is not performing work in a recognized 
professional filed will not be exempt, regardless of any training 
received in the armed forces.'').
    The Learned Professional regulation includes examples and 
explanations illustrating the application of the exemption, including 
occupations that properly are classified as exempt, such as:
  --Registered or certified medical technologists who have four years 
        of college and course work approved by the Council of Medical 
        Education of the American Medical Association;
  --Nurses--registered nurses who are registered by the appropriate 
        State examining board continue to be exempt, as they are and 
        have been under the current regulations. Licensed practical 
        nurses generally do not qualify for the learned professional 
        exemption;
  --Dental hygienists who have completed four academic years of study 
        approved by a designated credentialing body;
  --Physician's assistants who have completed four academic years of 
        study approved by a designated credentialing body;
  --Accountants--certified public accountants generally are exempt, but 
        clerks and bookkeepers are non-exempt;
  --Chefs, including executive and sous chefs with specialized, four 
        year degrees are exempt, but fast food cooks and cooks who 
        perform predominantly routine mental, manual, mechanical or 
        physical work are non-exempt;
  --Athletic trainers who have four academic years of pre-professional 
        and professional study in a curriculum accredited by the 
        designated credentialing body;
  --Funeral directors and embalmers who are licensed in states 
        requiring four years of study and graduation from an accredited 
        college of mortuary science.
    The new regulations also provide that paralegals generally do not 
meet the learned professional exemption.
    Another significant clarification is that Learned Professionals now 
can use manuals that provide guidance involving highly complex 
information pertinent to difficult or novel circumstances. See 29 CFR 
Sec. 541.704. The preamble explains that this new section is intended 
to avoid the absurd result reached by a court, ruling that instructors 
who trained Space Shuttle ground control personnel were non-exempt 
because they relied on manuals to assist in their training. 69 Fed Reg 
22188-22189. This welcome change means that scientists and other 
learned professionals do not become non-exempt technicians if they use 
manuals that provide general guidance on addressing open-ended 
questions or novel circumstances, as distinguished from directions on 
routine and recurring circumstances.
    Finally, in what will clearly be valuable future guidance, the 
Final Regulations recognize that the areas in which the professional 
exemption may be available are expanding. The Final Regulations provide 
that when specialized curriculum and courses of study are developed by 
accrediting and certifying organizations similar to those listed in the 
examples, additional Learned Professional exemptions will be 
recognized. 29 CFR Sec. 541.301(f). These provisions will help ensure 
that the Final Regulations continue to be viable and provide guidance 
for the Learned Professional exemption as our workforce continues to 
develop and change in the 21st Century.
    The Creative Professional exemption under the Final Regulations has 
been modified primarily with respect to journalists. See 29 CFR 
Sec. 541.302. The Final Regulations specifically recognize that some 
journalists may qualify for the exemption, while others will not. While 
the Labor Department did not intend to create an across-the-board 
exemption for journalists, the Final Regulations reflects the status of 
case law, which recognizes that ``the duties of journalists vary along 
a spectrum from the exempt to the nonexempt. The determination of 
whether a journalist is exempt must be made on a case-by-case basis.'' 
69 Fed Reg 22158.
5. The Executive Exemption is More Restrictive
    The most significant changes to any exempt classification are those 
relating to the Executive exemption. 29 CFR Sec. Sec. 541.100-541.106. 
While the Final Regulations maintain many of the same requirements and 
definitions of the current regulations, the Final Regulations do make 
significant changes to the exemption qualification criteria. Most 
notably, the Final Regulations impose a requirement that executives 
must have either the authority to hire or fire other employees or that 
such executives' suggestions and recommendations as to the hiring, 
firing, advancement, promotion or any other change of status be given 
``particular weight'' (the ``Hire/Fire Requirement''). 29 CFR 
Sec. 541.100(a)(4). While this requirement exists under the long test 
of the current regulations, it is rarely invoked because most 
executives qualify under the short test that contains no such 
requirement. Thus, for many employers, this new, more restrictive 
criterion may limit the number of employees who can qualify as exempt 
under the Executive exemption. In fact, many executives who currently 
are exempt may lose their exempt status. Although most employers and 
their representatives did not favor the restriction of the Executive 
exemption with the additional requirement of the hire/fire authority, 
employers at least have the benefit of reasonably clear requirements. 
Realistically, employers will need to assess whether currently exempt 
executive employees meet this new criterion.
    The Final Regulations also modify the executive exemption for a 
business owner by adopting the new classification of exempt executive 
employee proposed in the Proposed Regulations; i.e., any employee who 
owns at least a bona fide 20 percent equity interest in the enterprise 
in which the employee is employed and who is actively engaged in its 
management. 29 CFR Sec. 541.101. The Final Regulations, however, modify 
the Proposed Regulations in two material ways. First, the Final 
Regulations require that an owner/employee's 20 percent business 
interest be a ``bona fide'' one. This was designed to insure that the 
ownership in the business must be genuine, not illusory. Second, the 
Final Regulations require the owner/employee to be ``actively engaged'' 
in the business' management. Moreover, in the case of a 20 percent 
business owner, the salary threshold of $455 does not apply. The Final 
Regulations make additional changes to the executive exemption. The 
``sole charge'' exemption is eliminated completely. Also, the Final 
Regulations make clear that performing exempt and nonexempt duties 
concurrently will not disqualify an employee from the executive 
exemption, if the employee meets the other requirements of the 
executive exemption. 29 CFR Sec. 541.106. The determination of whether 
the employee meets the other requirement when he/she performs 
concurrent duties is made on a case-by-case basis.
6. The New Regulations Require that the ``Primary Duty'' be the 
        Performance of Exempt Duties
    The Final Regulations adopt the requirement that the ``primary 
duty'' constitute exempt duties. 29 CFR Sec. 541.701. The primary duty 
requirement replaces the current regulations that limited the 
percentage of time to activities that were not directly and closely 
related to exempt work, as in the Outside Sales exemption discussed 
below. Under the current regulations, often there were drawn out 
disputes requiring expensive time-motion studies or similar efforts in 
order to determine whether the employee was properly engaged in exempt 
work. The adoption of the primary duty standard will avoid the need for 
such expensive and time consuming analyses and promotes greater 
compliance.
7. Salary Deductions--The Salary Requirements Are Clarified so that 
        Deductions from Pay Now can be Made Due to Suspensions for 
        Infractions of Workplace Conduct Rules, and There is a ``Safe 
        Harbor'' for Employers to Address Improper Pay Deductions
    The salary requirements under the Final Regulations continue to 
prohibit partial day deductions or ``dockings'' from exempt employees' 
pay. The Final Regulations add an exception to the salary basis 
requirement for deductions from pay due to suspensions for infractions 
of workplace conduct rules. 29 CFR Sec. 541.602(b)(5). This added 
exception reflects recognition of the growing trend to place increased 
responsibility and risk of liability on employers for their employees' 
(exempt and non-exempt) conduct. 69 Fed Reg 22177.
    The effect of improper deductions also is clarified. 29 CFR 
Sec. 541.603. A practice of making improper deductions demonstrates 
that the employer did not intend to pay on a salary basis, as is the 
case under the current regulations. If there is an improper practice of 
deductions, then the exemption is lost during the time period in which 
the improper deductions were made for the employees in the same job 
classification working for the same managers responsible for the actual 
improper deductions. 29 CFR Sec. 541.603(b). This new provision is a 
significant improvement in the current rules. This currently results in 
a windfall of overtime payments to exempt employees who were properly 
paid on a salary basis, simply because, for example, a manager mispaid 
a small subset or one of the employees. These changes close a loophole 
that resulted in undeserved windfalls to many properly salaried 
employees.
    Finally, the ``safe harbor'' provision, codified in 29 CFR 
Sec. 541.603(d), is a modification of the existing window of correction 
whereby employers can address improper deductions in salary payments. 
This provision provides that employers with clearly communicated 
policies that include a complaint procedure will not lose the exemption 
for any employees unless the employer violates the policy by continuing 
to make improper deductions after receiving employee complaints. This 
provision creates helpful incentives for employers to promulgate clear 
policies about how employees should be paid, thereby enabling employees 
to help police compliance. The provision also provides a mechanism for 
employers to be promptly advised if salary payment discrepancies occur 
and allows employers to take necessary remedial action.
    The revisions to the salary deductions and the safe harbor for 
investigation and corrections of improper salary deductions are 
significant steps in enabling employers to comply with the overtime 
rules, while avoiding disproportionate windfalls to unaffected 
employees. Similarly, the provisions empower employees, who can take 
steps to help ensure prompt compliance.
8. There are Limited Changes to the Computer and Outside Sales 
        Exemptions
    The Final Regulations make limited changes to the Computer and 
Outside Sales exemptions, codified at 29 CFR Sec. Sec. 541.400-.402 and 
541.500-.504, respectively. The Computer exemption regulation 
consolidates all of the regulatory guidance on computer occupations 
into a new regulatory subpart. The consolidation of the Computer 
regulations will help ensure that the exemption is applied properly. 
The Outside Sales exemption's primary change is the imposition of the 
primary duties discussed above, and the elimination of the 20 percent 
limit on duties in the current regulations.
9. Conclusions About the Final Regulations
    The Final Regulations are a significant improvement over the 
current regulations and will result in improved compliance in 
administering the exempt classifications. The Final Regulations are 
more concise, easier to understand, clearer in scope, and drafted in a 
manner that will make them easier to apply in the changing workplaces 
we face in the 21st Century. The elimination of exemptions for persons 
making less than $23,660 ($455 per week) means that all such employees 
will be eligible for overtime. The Final Regulations also eliminate 
many of the technical requirements and are much easier for a human 
resources representative or business owner to understand and follow. 
The changes in the salary rules will promote greater compliance and 
limit overtime payments to those employees who were affected by the 
practices that violate the salary requirements. The safe harbor changes 
will encourage employers to have clear compensation practices and 
complaint procedures to ensure that employees are properly compensated 
without the delay, costs and uncertainty of litigation.
misinformation and confusion relating to the final overtime regulations
    There also has been a significant amount of confusion resulting 
from inaccurate information and news stories relating to the Final 
Regulations, and I would like to briefly address some of those matters. 
One common misconception is that the Final Regulations result in a 
``take away'' of overtime on a widespread basis. This is not the case. 
Although we can allow economists to project the impact of the Final 
Regulations, the only changes that are guaranteed are that 1.3 million 
workers gain overtime protection because of the new $455 per week 
requirement.
    Many employees' representatives have raised false alarms, claiming 
that their exempt/non-exempt status will be changed by the Final 
Regulations. Take nurses, for example. Registered Nurses currently are 
exempt, even though the overwhelming majority receives shift premiums 
or similar additional payment as a result of market factors and that 
classification remains unchanged. Generally, Licensed Practicing Nurses 
currently are not exempt, and their status also has not changed. The 
Final Regulations provide that RNs are exempt, 29 CFRR 
Sec. 541.301(e)(2), and the Preamble provides that the Labor Department 
``. . . . did not and does not have any intention of changing the 
current law regarding RNs, LPNs or other similar health care employees. 
. . .'' 69 Fed Reg 22153. Thus, claims by nurses that the Final 
Regulations have, in some way, negatively affected nurses' status, are 
simply not true.
    The Final Regulations also include similar provisions specifying 
that police officers, firefighters paramedics, emergency medical 
technicians and similar public safety employees are non-exempt. 29 CFRR 
Sec. 541.3(b). Again, this continues the same status that these 
occupations have under the current regulations.
    Unionized employees will continue to receive overtime as provided 
by their collective bargaining agreements, and a specific provision has 
been added to the regulations specifying that ``blue collar'' workers 
are not exempt from overtime. 29 CFR Sec. 541.3(a). Again, there is no 
change from the current regulations. These are, and have always been, 
the ``white-collar'' exemption regulations.
    Finally, the claim that the Proposed Regulations would have allowed 
military experience to be used as a course of study sufficient to 
justify a Learned Professional exempt status has been refuted by the 
Labor Department. In the Preamble to the Final Regulations, the Labor 
Department notes that it was ``. . . never intended to allow the 
professional exemption based on veterans' status.'' 69 Fed Reg 22123. 
Also see 69 Fed Reg 22150 (``Thus, a veteran who is not performing work 
in a recognized professional field will not be exempt, regardless of 
any training received in the armed forces.''). Thus, in order to avoid 
any confusion on the matter, the language in Section 541.301(d) of the 
Final Regulations defining the criteria for Learned Professionals was 
amended to clarify that veteran status alone will not be sufficient, 
but that a combination of work and experience may allow the employee to 
qualify for the exemption, determined on a case-by-case basis.

                               CONCLUSION

    Where do we stand today? The Department of Labor has completed a 
protracted and long overdue rulemaking process. The current regulations 
are not serving anyone's interests except those of class action 
lawyers. The employment community--employers, employees and government 
enforcement agencies alike--should embrace the Final Regulations as a 
great step forward in creating working guidelines that all can 
understand and implement as we move headfirst into the 21st Century 
workplace.
    Thank you for your time. I will be happy to answer any questions 
you may have.

STATEMENT OF ROSS E. EISENBREY, VICE PRESIDENT, 
            ECONOMIC POLICY INSTITUTE

    Senator Specter. Thank you very much, Mr. Fortney.
    Our next witness is Mr. Ross Eisenbrey, vice president of 
the Economic Policy Institute, former Commissioner of U.S. 
Occupational Safety and Health Review Commission. An 
undergraduate degree from Middlebury, and a law degree from 
Michigan. Thank you for joining us, Mr. Eisenbrey, and the 
floor is yours.
    Mr. Eisenbrey. Thank you, Senator Specter and members of 
the committee. It is an honor to be here. Thank you for 
inviting me.
    I have three things to say about this rule. The first is 
that the benefits that the Department claims for it are phony, 
that they have invented the number, that 1.3 million low-wage 
workers will benefit from this rule, and I will show you why 
that is so. The rule will increase litigation in a number of 
ways. I know that that has been a justification for the rule. 
It has been a particular concern of the chairman and there are 
just so many ways that this is going to increase litigation. 
Finally, the third point is that millions of workers I believe 
are going to lose overtime rights because of this rule. Let me 
start with the benefit calculations.
    The Department of Labor admits in its economic analysis 
that it has inflated the estimate. Their data show that a 
minority of workers actually work overtime, and yet the 
Department assumes, for purpose of inflating the benefit 
estimate, that all of them, all 100 percent of the workers that 
are in the survey and that they identify worked overtime. So 
they have admitted that they have inflated this estimate.
    More importantly perhaps, if you look at the estimate and 
their economic analysis and look at the kinds of workers that 
they have included, you can see that they have included workers 
who do not benefit. There is no way on this earth that they 
could benefit. They have said that cashiers, secretaries, 
typists, receptionists, bookkeepers, general office clerks, 
bank tellers, and data entry keyers are the kinds of employees, 
even though they are paid less than $23,660 a year, who are 
exempt executives under current law or exempt administrative 
employees. I submit that there is no circumstance under which a 
cashier is exempt under current law and this is just phony.
    We have looked at these rules ourselves, at their economic 
estimate and the effects on low-wage workers. Our estimate is 
that it is closer to 240,000 or 250,000 workers who might 
benefit from this rule, a far cry from the 1.3 million they 
claim.
    My second point is that this is going to increase 
litigation. A prime example is the professional exemption where 
going from a rule that is a bright line test that you have to 
have a specialized degree and then the interpretive guidelines 
that the administrator said courts are free to ignore say that 
in the rare case, an employee who does not have a degree could 
be a professional, they have now made that the rule and with 
language that says if they have substantially the same 
knowledge and do substantially the same work as a degreed 
professional employee. What in the world does that mean and is 
that not going to be the cause of endless litigation?
    They have dumbed down the requirement for what it means to 
be a manager. You no longer have to manage a department or a 
subdivision. The preamble cites approvingly a district court 
case from Illinois that says you can be the manager of a team 
or a grouping and be an exempt executive. That is going to 
cause endless litigation.
    This whole notion of doing away with the 20 percent limit 
on nonexempt work and saying working foremen now have 
concurrent duties and can be treated as exempt executives will 
cause needless litigation.
    Then they create this notion of--they say they are 
clarifying the rule--that blue collar employees are nonexempt 
and entitled to overtime, but then they qualify it. They say 
non-management blue collar workers and non-management 
production line employees. Well, what is a management 
production line employee? Can you imagine the litigation over 
this issue?
    Finally, I would say that the net result of all this is 
absurdity, that instead of changing these rules to do away with 
the notion that a Burger King assistant manager is an exempt 
executive, even though he spends 90 percent of his time frying 
fries and flipping burgers, they have made that the basis of 
their test and that will be the law from here forward if the 
Harkin amendment is not enacted.
    Finally, millions of workers will lose their right to 
overtime pay. Some are inarguable, the highly compensated that 
they admit. Funeral directors and embalmers, except in the 
Sixth and Seventh Circuit, have always been held to be 
nonexempt. They are not professional employees. Nursery school 
teachers, chefs and cooks. They have created two new exemptions 
for chefs and cooks. Then there are others that are less 
obvious. All of these professional employees who in the 
proposed rule they admitted were losing their right to 
overtime--they admitted 350,000 of them who were being paid 
overtime now would lose their right to overtime. They just wave 
a wand and they have disappeared from the economic analysis, 
but they are still there.

                           PREPARED STATEMENT

    The team leaders that you have identified.
    Computer employees. Nothing has been mentioned about the 
changes there. They have removed language that protects 
computer employees as professionals.
    So overall you have I think clearly millions of workers who 
will lose under this rule.
    Thank you.
    [The statement follows:]
                Prepared Statement of Ross E. Eisenbrey

                              INTRODUCTION

    The U.S. Department of Labor has issued a final rule that changes 
the legal exemptions from the right to overtime pay for executives, 
professionals and administrative employees. Many in Congress, the 
press, and the public have asked EPI to estimate how many employees 
will lose overtime pay or the right to receive it as a result of this 
new rule. However, such an estimate will take time and it is too soon 
to give a complete answer to that question. The rule and its 
explanatory text and regulatory analysis are more than 500 pages long 
and differ in unexpected ways from the proposed rule the DOL issued 
last year. The final rule and its preamble are also rife with 
ambiguity. Many regulatory provisions have been changed without real 
explanation, even while the Department claims--contrary to the plain 
language of the rule--that it is not changing the law.
    All in all, the rule means longer hours and less pay for millions 
of workers--and more litigation for our entire economy. A number of 
things about the rule are immediately clear:
    First, the Department has created new exemptions that jeopardize 
the overtime rights of millions of employees who earn between $23,660 
and $100,000 a year. The overtime rights of the nation's 367,000 
nursery school and pre-school teachers are weakened. Low-level working 
supervisors all throughout American industry will be reclassified as 
``executives'' and will lose overtime rights; just as fast food 
assistant managers already have in some jurisdictions, even though they 
spend 90 percent or more of their time doing routine, production-line 
work such as flipping burgers and taking customer orders.
    Despite its claims to the contrary, the new rule's treatment of 
cooks, chefs, and sous chefs, for example, of whom 2.4 million are 
employed in the United States, will cause hundreds of thousands to lose 
their right to overtime pay. Funeral directors and embalmers will be 
treated as exempt learned professional employees by the Labor 
Department for the first time, and large numbers of employees in the 
financial services industry will be adversely affected by a new blanket 
exemption.
    Second, the rule will lead to an explosion of litigation because 
the Department chose to adopt new definitions that are unclear and new 
tests for exemption that require a case-by-case analysis that will be 
almost impossible for Wage and Hour's enforcement staff. Most notably, 
the new rule encourages employers to treat non-degreed employees as 
professionals, as long as they have ``substantially similar'' knowledge 
and do substantially similar work. The best possible objective 
criterion is missing: there is no requirement that they receive 
substantially similar pay. How will the Department know whether a non-
degreed sous chef has substantially the same knowledge as a college 
grad? By making him prepare a souffle, or taste-testing his Caesar 
salad? The rule also reduces the requirement that an exempt executive 
manage ``the enterprise in which he is employed or of a customarily 
recognized department or subdivision thereof,'' to a new and 
embarrassing level of absurdity. Rather than the enterprise or a 
department or subdivision, it will be enough to be in charge of a 
``grouping or team.'' Unhelpfully, the Department suggests that a 
``case-by-case analysis is required''--a guaranteed recipe for 
litigation. Department stores will argue that an employee ``in charge 
of'' the perfume counter is an exempt executive because she has the 
``authority'' to suggest shift assignments for two other employees.
    Third, contrary to the Bush Administration's claims, it is not the 
case that 1.3 million low-wage workers who are not getting overtime pay 
now will. The Administration is engaged in consumer fraud, selling this 
new regulation on the promise of benefits it knows full well will not 
materialize. Part of the problem is that the Department's estimate 
assumes that every employee among these 1.3 million low-wage workers 
actually worked overtime during the year, even though the evidence is 
that they did not, and even though only about one employee in seven 
generally works overtime. If the Department had made this same 
assumption with respect to the proposed rule, it would have found that 
almost 5 million employees would have lost overtime pay, rather than 
the 644,000 it claimed. Moreover, the number of employees who will be 
guaranteed coverage by the $23,660 threshold will diminish over time 
because it is not indexed for inflation. An administration that cared 
about low-wage workers would have raised the threshold to at least keep 
pace with inflation since 1975, in other words, to at least $28,075.
    Fourth, by the Department's own estimates, more than 100,000 
employees who earn $100,000 a year or more will lose their right to 
overtime pay. As inflation and rising productivity increase the pay of 
American workers, the number of employees adversely affected by this 
new test will grow each year.
    Fifth, a bizarre and poorly explained new exemption for ``team 
leaders'' creates the potential for hundreds of thousands of currently 
exempt non-supervisory workers to lose their overtime rights. The use 
of self-managed teams of non-managerial, non-supervisory, front-line 
employees is widespread in American industry, and millions of employees 
are routinely involved in them. The regulations provide no definition 
of ``team leader,'' it has never been defined in FLSA case law, and the 
Department's assertion that it is clarifying current law is patently 
false.
    Sixth, the Department's claims that it has clarified and expanded 
the overtime rights of police officers and other first responders are 
untrue. The ambiguities in the rule make their rights more uncertain 
than ever.
    Seventh, despite the Department's claims in power point 
presentations to public officials that blue-collar workers are entitled 
to overtime, the rule limits overtime rights to ``non-management blue-
collar employees,'' begging the question of who gets classified as a 
management blue-collar worker, a seemingly new class of exempt workers 
that will grow significantly under these new rules.
    Eighth, by reducing the penalties for employers who illegally dock 
the pay of salaried workers, the Department removes an important 
deterrent and makes it more likely that hourly employees will lose 
overtime pay.

                                ANALYSIS

1. Chefs and cooks
    The treatment of cooks and chefs is a good example of the artful 
deception of the final rule and the magnitude of the rule's potential 
harm. Under current law, chefs, sous chefs, and other cooks can be 
found exempt and denied overtime pay only if they manage a kitchen, 
supervise, hire and fire other employees, and have executive duties as 
their primary duty. They are not, however, learned professionals, 
because cooking is not a learned profession (it is not ``a field of 
science or learning'' and does not involve ``work that is primarily 
intellectual in nature''), and most chefs learn through on-the-job 
training and apprenticeship, not formal education at a college or 
school of culinary arts. Nevertheless, the final rule expands the 
exemption to treat ``chefs and sous chefs'' with a four-year degree as 
exempt learned professionals. In addition, the rule for the first time 
extends the exemption for creative professionals to chefs and sous 
chefs even though cooking has never been found by a court to meet the 
test of being ``a recognized field of artistic or creative endeavor,'' 
as required by new 541.302(a) or the current law's test for artistic 
professionals--``a recognized field of artistic endeavor.'' 541.302(b).
    The effect of these two new avenues of exemption for chefs and 
cooks will be a significant loss of overtime coverage. Now that the 
Department has created the ``learned profession'' of being a chef or 
cook \1\ with a four-year culinary arts degree, 541.301(d) of the final 
rule permits employers to deny overtime pay to any of the hundreds of 
thousands of chefs or cooks who have ``substantially the same knowledge 
level and perform substantially the same work as the degreed employees, 
but who attained the advanced knowledge through a combination of work 
experience and intellectual instruction.'' As the Department of Labor's 
Occupational Outlook Handbook points out, ``many chefs are trained on 
the job,'' ``others may receive formal training in independent cooking 
schools,'' and still others get two-year degrees or learn through 
apprenticeships sponsored by industry associations and trade unions. 
The new creative professional exemption legalizes the denial of 
overtime to non-degreed chefs who do not have executive duties, 
effectively catching any chef the other exemptions missed, since every 
chef creates unique new recipes--the criterion identified at a hearing 
before a House committee by Secretary Chao and Administrator McCutchen 
for distinguishing between a creative chef and a non-exempt chef or 
cook.
---------------------------------------------------------------------------
    \1\ The American Heritage Dictionary defines chef as ``A cook, 
especially the chief cook of a large kitchen staff.'' According to the 
Department of Labor's Occupational Outlook Handbook, ``The terms chef 
and cook are often used interchangeably. . . .'' ``Chefs and cooks 
create recipes and prepare meals. . . .'' ``A sous chef, or sub chef, 
is the second-in command and runs the kitchen in the absence of the 
chef.''
---------------------------------------------------------------------------
    There are about 2.4 million cooks and chefs in the United States, 
about 60 percent of whom are fast food cooks, institution and cafeteria 
cooks, or short order cooks, and are unlikely to be exempted, whatever 
their skills might be. The other 850,000 chefs, head cooks, and 
restaurant cooks are fair game for the three exemptions, depending on 
their skills and creativity--and the creativity of their employers.

Nursery school teachers
    According to the testimony of Karen Dulaney Smith, a management 
consultant on FLSA issues who for 12 years was a federal Wage Hour 
Division investigator, nursery school teachers who devoted most of 
their day to custodial care were always considered non-exempt 
employees, regardless of their educational attainment, because their 
work did not require the consistent exercise of discretion and 
independent judgment. A Wage Hour Division opinion letter written in 
2000 is consistent with Ms. Smith's testimony that most pre-school 
teachers are non-exempt and entitled to overtime under current law.

    ``Based on the information provided, it is our opinion that while 
``childhood education settings'' (for ages 0-5), commonly referred to 
as preschools may engage in some basic educational activities for the 
children attending, preschool employees whose primary duty is to 
protect and care for the needs of the children would not ordinarily 
meet the requirements for exemption as teachers.''----2000 DOLWH Lexis 
14 (September 20, 2000).

    The final rule removes the discretion and judgment requirement from 
the current regulation's definition of a professional employee in 
current section 541.3(b) and places it in the definition of ``work 
requiring advanced knowledge'' at 541.301(b)--a provision that applies 
only to learned professionals. Thus, under the final rule, all nursery 
teachers will be exempt, and all of those who have been found to be 
entitled to overtime in the past will lose that entitlement.

Funeral directors and embalmers
    With the exception of two federal judicial circuits, funeral 
directors and embalmers have never been held to be exempt learned 
professionals. As the Department admits in the preamble to the final 
rule, ``In the past, the Department has taken the position that 
licensed funeral directors and embalmers are not exempt learned 
professionals.'' Moreover, for at least the past six years, Congress 
has considered legislation to exempt funeral directors and embalmers 
but has chosen not to do so. Nevertheless, the Department has chosen to 
create a new exemption requiring only four years of post-secondary 
education, including a year of mortuary science school (which includes 
courses in cosmetology, according to the court in Rutlin v. Prime 
Succession, Inc.). In most of the nation, the final rule takes away the 
overtime rights of funeral directors and embalmers, yet the 
Department's economic analysis does not account for any change in 
coverage.

Working foremen and working supervisors
    The final rule turns current law on its head and eliminates the 
right to overtime pay for low-level supervisors who spend the vast 
majority of their time performing routine, manual, non-exempt 
production, as long as their most important duty is managerial. Relying 
on poorly reasoned cases interpreting the current regulations, most 
notably the Burger King cases from the First and Second Circuits, the 
final rule completely reverses those regulations, which set a limit of 
20 percent on the amount of non-exempt work a supervisor can do and 
still be found an exempt executive.
    Section 541.115(b) of current law provides:

    ``Clearly, the work of the same nature as that performed by the 
employee's subordinates must be counted as nonexempt work, and if the 
amount of such work performed is substantial the exemption does not 
apply.''----(``Substantial'' as used in this section means more than 20 
percent.)
    Section 541.115(c) of current law applies the same rule to a 
supervisor whose work is different from his subordinates':

    ``Another type of working foreman or working supervisor who cannot 
be classed as a bona fide executive is one who spends a substantial 
amount of time in work which, although not performed by his 
subordinates, consists of ordinary production work or other routine, 
recurrent, repetitive tasks which are a regular part of his duties. 
Such an employee is in effect holding a dual job.''

    The current rule is simple common sense. An employee who spends 90 
percent of his time frying French fries and flipping burgers is not a 
bona fide executive, even if he is simultaneously responsible for 
supervising the other two employees on his shift. An employee who works 
on a sewing machine six or seven hours a day is not a bona fide 
executive, even if he does supervise other employees.
    Nevertheless, the final rule rejects common sense and adopts the 
position that an employee can spend 100 percent of his time performing 
ordinary, routine, repetitive, non-exempt production tasks and yet 
still be a bona fide executive by concurrently or simultaneously 
performing ``executive'' duties such as supervision of two other 
employees. New section 541.106(b) provides:

    ``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 if the assistant manager's primary duty 
is management. An assistant manager can supervise employees and serve 
customers at the same time without losing the exemption. An exempt 
employee can also simultaneously direct the work of other employees and 
stock shelves.''

    The implications of this change in the law are far greater than the 
Department admits. While claiming to conform the regulations to current 
case law, in fact the Department is rejecting the better-reasoned cases 
and extending the worst case law beyond retail to the rest of American 
industry. Burger King and the other cases that have permitted employees 
to do unlimited amounts of menial work while still being held to be 
exempt executives are not the law in every judicial circuit, and they 
have not been extended outside of the fast food and retail industries. 
New section 541.106 applies the notion of concurrent duties to every 
industry, including construction, manufacturing, and other ``blue 
collar'' work. Employees who spend the vast majority of their time 
doing blue-collar, manual labor will now be subject to exemption as 
``bona fide executives'' as long as the employer can establish that 
their most important duty is supervisory.
    Because the Department treats this sweeping new rule as established 
law, its economic analysis does not account for any loss of overtime 
rights or pay. One can get a sense of how damaging this change will be, 
however, by examining the Department's estimate that 346,000 low-income 
``managers and administrators not elsewhere classified'' and 
``supervisors and proprietors of sales occupations'' will have their 
overtime rights restored by the new $23,660 salary test. In the 
Department's view, all of those low-income employees would otherwise 
qualify as ``bona fide executives'' or administrators, despite their 
abysmal pay.

Clarity and litigation
    The new concurrent duties test in 541.106 is a good example of how 
the final rule increases confusion and makes increased litigation a 
certainty. The final rule abandons the bright line test that an 
employee who spends more than 80 percent of his time doing nonexempt 
work cannot be a bona fide executive and replaces it with language that 
forces the employer and employee to make a determination on a ``case-
by-case basis and based on the factors in section 541.700.''
    The learned professional exemption, which has required, except in 
rare instances, that any bona fide exempt professional must have a 
specialized academic degree (a clear, objective test), is expanded in 
the final rule to permit non-degreed employees to be exempted and 
denied overtime pay if they have ``substantially the same knowledge and 
do substantially the same work'' as the degreed professionals. This one 
provision will generate thousands of unnecessary cases and devour the 
resources of the Wage and Hour Division as it tries to weigh the 
knowledge of thousands of non-degreed employees working in dozens of 
different professional occupations. The Department failed to add any 
sensible objective measure of equivalence, such as a market test: is 
the non-degreed employee receiving substantially the same pay?
    Even when the Department claims to be bringing clarity to difficult 
issues, it isn't. New 541.3 provides that the ``exemptions do not apply 
to manual laborers or other `blue-collar' workers who perform work 
involving repetitive operations with their hands, physical skill and 
energy.'' Anyone doing any such work would seem to be exempt under the 
final rule, but the Department has thrown in a qualifier that destroys 
any illusion of clarity. Section 541.3 goes on to say that ``non-
management production-line employees and non-management employees in 
maintenance, construction and similar occupations . . . are not exempt 
under the regulations.'' This raises the question: What is a management 
blue-collar employee? What is a management production line worker? We 
have already seen the answer in 541.106: an employee can spend all day 
doing production work or construction work--manual, blue-collar work--
and be exempt as a bona fide executive as long as he simultaneously 
supervises two other employees. Construction and utility crews all over 
America work without any manager higher than a working foreman to 
supervise them, a more senior employee charged with ensuring the safety 
and quality of the work, even as he works side-by-side with the other 
laborers. If his most important duty is managing the other employees, 
his employer will exempt him as a bona fide executive who concurrently 
does exempt and non-exempt work. As the preamble of the final rule 
makes clear, the Department now believes that an executive can be in 
charge of a unit no more substantial than ``a grouping or a team.''
Team leaders
    There are many other examples of the Department changing the law to 
weaken overtime protection while simultaneously increasing the law's 
confusion and the likelihood of litigation. None is more glaring than 
the new exemption for ``team leaders'' in 541.203(c). Current law has 
no equivalent provision, and I have found no case that holds ``team 
leaders'' to be exempt even if they have no supervisory duties. The 
term ``team leader'' is widely used in American industry, and usually 
describes a non-management employee responsible for calling meetings 
and directing a group of front-line employees who have been given an 
important task of a kind that historically was reserved to management, 
such as improving efficiency and productivity, improving customer 
service, researching and implementing IT improvements, identifying 
safety problems and recommending solutions, or improving employee 
morale. According to an expert in the field, Professor Thomas Kochan of 
the MIT Sloan School of Management, there are somewhere between 750,000 
and 2.3 million currently non-exempt team leaders who could lose their 
right to overtime because of this new exemption. It appears that the 
management of a team would transform a manual laborer or other blue-
collar employee into a ``management blue-collar employee,'' leading to 
exemption and loss of overtime pay.
    The Department has opened an enormous loophole, but does almost 
nothing to explain it in the preamble of the final rule. Administrator 
McCutchen has suggested that current section 541.205(c) also allows the 
exemption of team leaders, but that language bears no resemblance to 
new 541.203(c):

    ``Employees whose work is `directly related' to management policies 
or to general business operations include those whose work affects 
policy or whose responsibility it is to carry it out. The phrase also 
includes a wide variety of persons who either carry out major 
assignments in conducting the operations of the business, or whose work 
affects business operations to a substantial degree.''

New 541.203(c) has created a significant new exemption and a 
significant new source of confusion and litigation.

Police officers
    New section 541.3 seems to deny the application of the exemptions 
to most law enforcement personnel, and the preamble specifically 
addresses the case of police sergeants, normally the lowest level of 
front-line supervision on a police force. The treatment of sergeants is 
instructive. The preamble explains that sergeants are entitled to 
overtime ``because their primary duty is not management or directly 
related to management or general business operations; neither do they 
work in a field of science or learning where a specialized academic 
degree is a standard prerequisite for employment.'' This raises the 
question, what if a sergeant had so much management responsibility that 
it did constitute his primary duty? When asked in a public forum 
whether a sergeant is exempt regardless of his duties, just by virtue 
of his rank, Solicitor of Labor Howard Radzeley refused to respond. 
This is not surprising, since the Fair Labor Standards Act does not 
permit the DOL to exempt employees by title or rank: their duties must 
be examined to determine whether they are executive, administrative, or 
professional. Nor does the statute justify treating one kind of manager 
differently from another based on whether one is a first responder. 
Congress could change the statute to accomplish such distinctions, but 
it has not.
    The bottom line is that the rights of police officers are still at 
risk. The final rule makes it easier to find that an employee's primary 
duty is an exempt duty, because it allows employees to spend unlimited 
amounts of their time doing non-exempt work (work such as investigating 
crime scenes, making arrests, etc.) and yet still be found exempt. 
Police officers could also be exempt if they are deemed ``team 
leaders,'' whose primary duty is presumed by the final rule to be 
administrative.

Low-income workers
    There is no basis in fact for the Department's estimate that 1.3 
million low-income workers will receive overtime pay that they are not 
receiving now. There are only 1.2 million salaried white collar 
employees who work overtime and make less than $23,660 a year. Using 
the Department's own estimates of the likelihood of exemption for such 
low-paid employees, fewer than one-fifth--about 250,000--are likely to 
be exempt. As the Department admits, the lower paid an employee is, the 
less likely it is that she is exempt as a bona fide executive, 
professional or administrator. The Department actually admits that it 
has fabricated its estimate. Even though the BLS Current Population 
Survey data show that a minority of the employees the Department 
considers likely to be exempt actually reported working any overtime, 
the Department assumed for the purpose of its estimate that 100 percent 
of them did.

STATEMENT OF DR. RONALD BIRD, Ph.D., CHIEF ECONOMIST, 
            EMPLOYMENT POLICY FOUNDATION
    Senator Specter. Thank you, Mr. Eisenbrey.
    Our next witness is Dr. Ronald Bird, Chief Economist at the 
Employment Policy Foundation. He had been chief economist at 
Dynacorp, holds a Ph.D. in economics from the University of 
North Carolina at Chapel Hill. Thank you for joining us, Dr. 
Bird, and the floor is yours.
    Dr. Bird. Thank you, Mr. Chairman and members of the 
subcommittee.
    My name is Ronald Bird. I am an economist. Unlike the other 
members of the panel, I am not a lawyer, and I have spent much 
of the past 30 years studying the conditions and trends 
affecting the American workplace.
    I think lost in the debate over the Labor Department's 
proposed revision of the rules concerning who is exempt and who 
is nonexempt under the Fair Labor Standards Act is the reason 
why amending the regulations is necessary in the first place. I 
think before considering the impact of any particular change or 
any particular change in wording, it is important to consider 
why reform of the FLSA white collar regulations has been on the 
Department of Labor's regulatory calendar for over 25 years 
under both Democratic and Republican administrations.
    The FLSA was enacted in 1938 when America was still in the 
midst of the Great Depression. Nearly 1 in 5 Americans who 
wanted a job could not find one. Labor supply exceeded demand, 
and the bargaining position of the typical worker was weak. The 
Fair Labor Standards Act was envisioned in part as a way to 
redress the perceived imbalance between employers and employees 
in free market bargaining about wages, hours, and working 
conditions.
    Today the fundamental competitive conditions of the labor 
market are very different. In March 2004, the unemployment rate 
was 5.7 percent, dramatically lower than the 19.1 percent in 
1938. The peak unemployment rate following the 2001 recession 
was the lowest of any recession of the past 30 years and the 
second lowest in 50 years. An ironic indicator of the sweep of 
change in labor market conditions since the passage of the Fair 
Labor Standards Act in 1938 is the fact that most of us 
consider today's 5.7 percent unemployment rate to be too high, 
primarily because recently we have enjoyed the benefits of it 
being even lower.
    As an employee, I like low unemployment rates that have 
become the norm over the past 20 years and that will likely 
remain the norm in the future as an aging population pressures 
the economy to produce more goods and services with a 
relatively smaller proportion of the population active in the 
labor force. As an employee, I like the trend of lower 
unemployment rates not just because I am less likely to be 
unemployed, but because the relative scarcity of potential 
replacements gives me power, power to make demands about wages, 
hours, and working conditions that my grandfather in 1938 would 
have never dared make.
    Before World War II, nearly 1 in 3 workers were employed in 
manufacturing. In contrast, today less than 1 in 7 works in 
manufacturing. Industries that have experienced relative job 
growth have been characterized by workplace organizations in 
which job duties are just not as narrowly defined as they used 
to be.
    Managerial and professional jobs, ones with a high 
probability of being exempt, given the right duties being 
satisfied, have increased more than any other category. In 
1940, only about 1 in 6 workers were employed in managerial and 
professional occupations. Today nearly 1 in 3, 30 percent, are 
in such jobs.
    I think it is also important to recognize that everyone who 
is eligible by duties for exempt status is not automatically 
paid on a salary basis. Qualifying for exemption does not mean 
that pay status or pay amount will change. For example, I used 
to work for a Government contracting firm. My job duties 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 reported hours, and I was paid an overtime premium when I 
worked over 40 hours. Needless to say, I wanted to work over 40 
hours a lot more than I had the opportunity to do so.
    The point is that I was an hourly worker and technically 
nonexempt because of the pay status, but my employer could have 
converted me based on my duties to salary and exempt status at 
any time. That did not happen because it was in both of our 
interests to keep things on an hourly basis. And if he had done 
so against my wishes, I would have quit because there were six 
other people willing to hire me.

                           PREPARED STATEMENT

    An employer who would change an employee's status to shave 
a few cents off the payroll would do so at his peril and likely 
lose a valuable worker. Today's employers are more concerned 
about the high cost of turnover, the high cost of recruiting 
and hiring and training new workers, averaging over $17,000 per 
worker for the kind of workers we are talking about, than 
shaving a few cents off the payroll through compulsory 
reclassification.
    Revision of the FLSA regulations has been on the regulatory 
agenda for 25 years. This revision is long overdue.
    Thank you, sir.
    [The statement follows:]

                 Prepared Statement of Dr. Ronald Bird

    Thank you, Mr. Chairman and members of the committee. I am honored 
by your invitation to come here today to share the findings of my 
economic research regarding trends of labor market change that may be 
relevant for understanding the need for revision of regulations 
implementing the white collar exemptions under the Fair Labor Standards 
Act (FLSA). My name is Ronald Bird, and I am an economist who has spent 
much of the past thirty years studying the conditions and trends 
affecting the American workplace, employment, unemployment, earnings 
and the role of education and training to ensure American 
competitiveness in the global economy.
    My research career has taken me from graduate study at the 
University of North Carolina at Chapel Hill to faculty positions at 
North Carolina State University and the University of Alabama. For the 
past five years, the Employment Policy Foundation has enabled me to 
pursue a broad agenda of research regarding the condition of the 
American workplace and the forces of change that are rapidly reshaping 
it. My work relevant to the issue of FLSA reform is one aspect of those 
efforts.
    The Employment Policy Foundation is a non-profit, non-partisan 
educational and research institution. EPF supports research to develop 
facts--hard data--that are relevant to the assessment of workplace 
conditions and policies. I am here today to share with you some of the 
facts that I have been able to find that may be relevant to your 
inquiries about the need for revision of FLSA rules revisions and the 
impact of revisions.

          WHY REFORM OF THE EXEMPT-NON EXEMPT RULES ARE NEEDED

    Lost in the debate over the Department of Labor's proposed revision 
of the rules concerning who is exempt and non-exempt under the Fair 
Labor Standards Act (FLSA) is why amending the regulations is necessary 
in the first place. Before considering the impact of any particular 
change, it is important to consider why reform of the FLSA white collar 
regulations has been on the Department of Labor's regulatory calendar 
for over 25 years in both Democratic and Republican administrations.

                 THE WORKPLACE HAS CHANGED DRAMATICALLY

    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 65 years reflects at least six dimensions of 
change that affect relevance and applicability of current FLSA 
regulations.

                        LABOR DEMAND AND SUPPLY

    The FLSA was enacted in 1938 when America was still in the midst of 
the Great Depression. Figure 1 shows the unemployment rate in 1938--
19.1 percent. Nearly one in five Americans who wanted a job could not 
find one. Labor supply exceeded demand, and the bargaining position of 
the typical worker was weak. The FLSA was envisioned, in part, as a way 
to redress the perceived imbalance between employers and employees in 
free market bargaining about wages, hours and working conditions. The 
FLSA was also envisioned as a way to encourage sharing of work among 
those seeking it. In 1938, the average workweek was only 44 hours, and 
typical hours of work for factory workers had been falling steadily 
since 1900, even during pre-depression boom times. The overtime premium 
concept was seen in 1938 by many of its proponents as a way to reduce 
hours (and pay) of employed workers and open new jobs and shift pay to 
unemployed people.
    Today the fundamental competitive conditions of the labor market 
are very different. Figure 1 shows unemployment in March 2004 at 5.7 
percent, dramatically lower than the condition in 1938. The peak 
unemployment rate following the 2001 recession was the lowest of any 
recession of the past 30 years and the second lowest in 50 years. An 
ironic indicator of the sweep of change in labor market conditions 
since the passage of the FLSA in 1938 is the fact that most of us 
consider today's 5.7 percent unemployment rate to be too high, because 
recently we have enjoyed the benefits of it being even lower.
    As an employee, I like the low unemployment rates that have become 
the norm over the past twenty years and that will likely remain the 
norm in the future as an aging population pressures the economy to 
produce more goods and services with a relatively smaller proportion of 
the population active in the labor force. I like the trend of lower 
unemployment rates not just because I am less likely to be unemployed, 
but because the relative scarcity of potential replacements gives me 
power to make demands about wages, hours and working conditions that my 
grandfather in 1938 would have never attempted.

                          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. (See Figure 2.) 
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 50-year old regulations make the process of 
determining FLSA status for workers in management and professional jobs 
the most complex and time consuming. (See Figure 3.)
    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 straightforward--the job title 
and the job duties were closely aligned and readily associated with 
decision criteria of the FLSA rules. Today, there are fewer numbers of 
``easy-to-classify'' jobs. 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 structures 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 postsecondary (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. (See Figure 4.)
    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. In 1938, the average full-time equivalent worker earned 
$1,249 (equivalent to $15,800 in 2003 dollars). Today, the average 
full-time, year-round worker earns $44,579, 15.7 percent of full-time, 
year-round workers earn over $65,000 and 4.2 percent earn over 
$100,000.
    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, and the number earning over $100,000 increased 41 percent from 
2.5 million to 4.2 million. Growth of number of employees earning over 
$100,000 per year accounted for 8.7 percent of total employment growth 
for full-time, year-round workers over the past decade. The number of 
full-time, year-round workers earning 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.
    Figure 5 shows the change in annual earnings per full-time 
equivalent workers from 1940 to 2002. In current dollars, annual 
earnings have increased by a factor of 30. After adjusting for 
inflation, real earnings have increased by a factor of 2.5.
    Higher earnings and the strong growth of numbers of highly skilled 
workers at the highest end of the earnings spectrum are factors that 
also indicate the shift in bargaining power in favor of employees. 
Figure 6 compares the average hourly earnings per full-time equivalent 
worker in 1938 to the 25 cents per hour minimum wage that was set in 
1938. The average worker in 1938 earned only 2.4 times the minimum--60 
cents per hour. In 2003, the average hourly earnings per full-time 
equivalent worker was 6.1 times greater than the 2003 real dollar 
equivalent of that original minimum wage ($3.17).
    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 has 
been a stated 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.
     accelerating workplace change and increased regulatory burden
    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. However, the need for revisions to 
Part 541 does not rest solely on the history of workplace change and 
increased burden.
    The complexity and ambiguity of the existing rule is evidenced by 
the amount of disagreement and litigation it generates. For the past 
three years, FLSA issues--most related to the exempt-nonexempt status 
of workers--have been the leading employment-related civil action in 
federal courts. For the 12 months ending September 30, 2003, a total of 
2,251 FLSA cases were filed, including 102 large class action cases. 
The number of class action FLSA cases has tripled since 1997. Figure 7 
(on the next page) shows the significant increase in the number of FLSA 
cases filed from 1993 to 2003.
                           status and choice
    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 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 technically non-
exempt because of the pay status, but my employer could have converted 
me to salary and exempt status 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 likely lose a valuable worker to a competitor.
                               conclusion
    The revision of FLSA regulations has been 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--virtually moot. In 
2003, 75.9 percent of employees who earned between the current minimum 
threshold of $155 per week and the proposed new salary test threshold 
of $455 also earned over $250 per week. For those 6.0 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 new rule will ensure that everyone who earns less than $455 is 
classified as nonexempt. 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. 



    Senator Specter. We will now proceed with 5-minute rounds. 
We really have to conclude the hearing in advance of 11 
o'clock.
    Dr. Bird, is the thrust of your testimony that the improved 
status of the workers, as a matter of the marketplace, makes it 
a situation where it does not matter a whole lot what the 
technicalities are of the regulation in effect?
    Dr. Bird. Well, certainly we need the Fair Labor Standards 
Act and we need it to be able to protect the people it was 
designed to protect.
    Senator Specter. I agree with you about that, but as I 
listened to your testimony--and I found it very illuminating--
the comparison you make with 1938 is that the employee is in a 
lot better position.
    Dr. Bird. Yes.
    Senator Specter. So it might not make a whole lot of 
difference what the definitions are if the employee can walk 
away from the job and find a new one if he is not being treated 
fairly. Maybe we are making a too much of a fuss about the 
semicolons. I am just trying to get the thrust of your 
testimony.
    Dr. Bird. Right, yes, sir. I appreciate that question 
because it really does illustrate I think the problem that we 
have encountered in the discussion about the old rule versus 
the final new rule. We see in that discussion a lot of jumping 
to conclusions I think.
    Senator Specter. We are experts at that, Dr. Bird.
    Dr. Bird. I guess that is why we have got three lawyers and 
one economist on the panel.
    Senator Specter. That is the second time you have made that 
observation.
    Dr. Bird. First of all, people are jumping to conclusions.
    Senator Craig. As a non-lawyer, it is a good point, Mr. 
Chairman.
    Senator Specter. But you are not an economist, Senator 
Craig.
    Senator Craig. That does not make any difference.
    Senator Specter. Let me move over to Mr. Fortney for just a 
minute. Just a thought when you talked about a job for your 
grandfather in 1938. My father would have loved to have any job 
regardless of what the regs had to say.
    Mr. Fortney. And my grandfather knew he was lucky to have 
one.
    Senator Specter. That is when he went to Lyons, Kansas to 
open up a junkyard with his bare knuckles.
    Mr. Fortney, what about Mr. Eisenbrey's testimony that 
there is a vast overstatement, a vast inflation in the number 
of workers who will work overtime?
    Mr. Fortney. Senator Specter, I am not sure I am the best 
witness to comment on the numbers, the economic impact of these 
regulations.
    Senator Specter. You are the best one available, Mr. 
Fortney.
    Mr. Fortney. Well, I can tell you that with respect to 
whether the classifications have changed--I listened to Mr. 
Eisenbrey's comments--those are examples that he listed there. 
They are not changes. They are examples. They are codifications 
of what otherwise today an employer or an employee has to pay a 
lawyer to go out and dredge through the cases and provide those 
examples. That is not new. It is there. They are listed 
specifically as examples. We are not, if you will, exempting or 
carving out specific occupations or classifications. They are 
listed as examples not by title, but describing job duties. I 
mean, if the law is not changing, the numbers should not change 
materially. So I would disagree I guess on that level with his 
comments.
    Senator Specter. Well, you raise a good point and Ms. 
McCutchen raised a good point when she said that regs do make a 
selection of the cases and give the parties some detailed 
information as to which cases are to be followed. Implicitly in 
that, cases were rejected if they are not included.
    I would like to ask both Mr. Becker and Mr. Eisenbrey 
whether that is not a significant improvement, to have the case 
law readily at hand so that people who are trying to figure out 
what these words mean--and as I noted before, they are very 
similar under the current reg or under the final proposed reg. 
But is it not true that incorporation of the case law into the 
regulations is a substantial help, Mr. Eisenbrey?
    Mr. Eisenbrey. I am not persuaded that it is a substantial 
help, but I think it is important to realize that the 
Department chose the cases to put in here very selectively. For 
example, they chose a case from several years ago on insurance 
claims adjustors that went against the employees. They did not 
include a case from February that they could have from the 
State of Oregon where it held that insurance claims adjustors 
were entitled to overtime.
    Senator Specter. So they made a selective basis which you 
think undermines their credibility.
    Mr. Becker, in the opening class with Professor Kessler in 
contracts, he had a Wisconsin case at Yale and a Minnesota 
case. They were about the sale of a cow, as I recollect. Maybe 
you can refresh my recollection. You have been there more 
recently. So it is hard to figure out from the case law what 
was what. That is how they confuse law students, Senator Craig.
    Senator Craig. That is why I did not become one.
    Senator Specter. How about it, Mr. Becker? Is this case law 
too selective to be valid or does it give some fair indication 
to the prospective parties as to what the law is?
    Mr. Becker. I think to say that what has happened here is a 
codification of case law which was well established under the 
old regulations is misleading, and let me give you two 
examples.
    Take, for example, chefs. Now, chefs we may think are 
important or unimportant as a group of employees, but what is 
important is the principle. The cases cited by the Department 
relate to chefs who are actually executives, that is, chefs who 
are not exempt as professionals, but chefs who are exempt 
because they have the requisite managerial authority. The 
exemption of chefs is not unusual simply because for the first 
time it explicitly exempts this classification and tempts 
employers to say anybody called a chef is exempt, but it also 
alters the nature of the professional exemption in an important 
way.
    The professional exemption has always said it applies to 
people in a profession, the vast majority of whom acquire their 
professional knowledge through a prolonged course of study, 
lawyers, doctors, et cetera. The difference here is they say 
even though it is the minority of chefs who have a prolonged 
course of study, those who do are now exempt. So it is not 
simply that the case law does not support what they are doing 
in that area, but they are also changing the nature of the 
exemption.
    Take areas where they have not codified the case law, and I 
cite case law concerning nurses. They repeatedly say we are 
expressly saying that registered nurses are exempt under these 
regulations, but that is misleading because they are expressly 
saying that under the duties test and registered nurses have 
been held in case after case not to be exempt under the salary 
basis test. Do they codify that case law? No. In fact, they 
expressly change that case law. So it is misleading to think 
that what is happening here is the codification of the 
consensus view in the courts.
    Senator Specter. Senator Harkin.
    Senator Harkin. Thank you, Mr. Chairman. I think the more 
we get into it, the more I am convinced that this should have 
gone through the normal legislative process with hearings and 
taken some time to figure all this out rather than the slam-
dunk type of process that the Department used in issuing these 
rules last year, getting comments, and then coming back again 
with the final rule without really having a legislative hand in 
it from those of us who represent our constituents, both 
employees and employers. Again, it is just the wrong way to 
make these kinds of changes.
    Just a couple of things. Dr. Bird, an economist, in 1975 
the threshold level was around I think $8,060, if I am not 
mistaken.
    Dr. Bird. Yes.
    Senator Harkin. You mentioned in your testimony about the 
effects of inflation and what has happened on inflation. It is 
time to change these things because of inflation. Well, if you 
were to factor in inflation for the threshold test, the 
threshold would be $28,075 rather than $23,660. Do you know why 
the Department picked $23,660 instead of $28,075?
    Dr. Bird. I am not aware of why a particular number was 
picked. Certainly the fact is, though, the number that is in 
the final rule is significantly higher than what was in the old 
rule and therefore extends protection to a large number of 
people.
    Senator Harkin. I am not disputing that, but you rely on 
inflation. I am just saying, well, I am just taking your 
inflation figures and it really ought to be $28,075. I can find 
no justification anywhere why it is $23,660. There is a 
justification for $28,075 because that would factor in 
inflation from the last time it was changed in 1975.
    Dr. Bird. I think too I would need to look at whether you 
are inflating the $155 number per week or the $250 per week, 
the long test threshold or the short test threshold. The new 
number $455 per week is equivalent to the concept of the long 
test threshold under the old rule because there are added 
duties that have some parallel to the long test for people who 
make between $455 and $100,000 per year.
    Senator Harkin. Mr. Eisenbrey, you mentioned that in your 
testimony, the $28,075. That is where I got the figure.
    Mr. Eisenbrey. Yes. I can help you with that. $28,075 would 
be the lower figure, $155 increased for inflation. If you took 
the $250 figure for the short test that Mr. Bird referred to, 
it would be up around $44,000 a year. That would be significant 
protection for workers.
    Dr. Bird. And if I may interject, though, in setting the 
equivalent of the short test threshold, instead of merely 
setting it at $44,000, the Department has set that now at 
$100,000, much higher over inflation.
    Mr. Eisenbrey. It is a vastly different test. The highly 
compensated test admittedly does not apply the same duties 
test. It allows an employee who customarily and regularly, 
which means perhaps once a week does one of these executive 
duties, to be considered exempt. So it is very different from 
the old test.
    Senator Harkin. Mr. Fortney, you talked about employers not 
knowing how to operate here and all of these class action 
lawsuits and stuff. I will ask you again, as I asked Ms. 
McCutchen, if an employer has any question about whether or not 
an employee is exempt or not, they can, can they not, get an 
advisory opinion from the Department of Labor?
    Mr. Fortney. That is an excellent question, and the answer 
is in theory yes. In the real world, that process typically 
takes years.
    Senator Harkin. How many?
    Mr. Fortney. Years. How many years? 2 years, 3 years, 
sometimes more. There are a significant number of requests that 
the Department----
    Senator Harkin. Maybe that is what we ought to fix.
    Mr. Fortney. Well, maybe so, but that is something that I 
personally have had clients that have been through significant 
efforts to try because this is the next step. If the lawyer 
cannot give you a clear answer, let us go to the Department and 
see if we can get a clear answer. That is a process that in 
fact does not work well.
    Senator Harkin. I would just interrupt. My time is running 
out. It has been my information that many of the employers who 
are caught up in some of these suits have never sought an 
advisory opinion from the Department of Labor as to whether 
they should pay overtime or not.
    Mr. Fortney. They may or may not. I will give the current 
administration credit. At least they have, as part of their 
compliance assistance focus, made that option much more widely 
known and available. It is still somewhat slow.
    Can I follow up with a point that you raised earlier with 
respect to nurses? Would that be helpful or not?
    Senator Harkin. Fine. Yes, please, go ahead.
    Mr. Fortney. Two things. I think there is some confusion. 
The nurse issue has not changed. The duties test is the same. 
And I do not think there is any disagreement on the panel. The 
salary requirements are the same, and that is that what this 
reg does, which codifies the wide range of methods that can be 
used to pay a salary, including paying people--this is not 
self-evident--in hourly components is permissible. The 
Department, in one these rare opinion letters, has issued 
opinion letters within the last couple of years clarifying 
this. And so I think that there has been a lot of confusion 
with respect to registered nurses who in theory can be exempt 
but in the marketplace, because of market factors, often are 
compensated in such a way that they are not treated as exempt.
    Senator Harkin. Well, I think if you look at the case of 
Elwell v. University Hospitals Home Care Services, a Sixth 
Circuit case in 2002, I think it is illustrative of what we are 
talking about here where a court held that Nurse Elwell was 
eligible for overtime on the grounds that even though she was 
otherwise a learned professional, she was not paid on a salary 
basis. Well, the new rule is going to be a punch in the gut to 
our registered nurses of this country, like Nurse Elwell. Under 
these new rules, a registered nurse who earns $25 an hour, 
works 50 hours a week, will lose $6,500 a year under these new 
rules. That is a registered nurse.
    Mr. Fortney. With all due respect, I think I would reach a 
different conclusion on that point.
    Senator Harkin. Well, the new rule also allows employers to 
pay registered nurses at straight time over 40 hours rather 
than time-and-a-half, does it not? The new rule.
    Mr. Fortney. For an exempt registered nurse, that is 
correct. You could put on additional payments beyond the base 
salary. Whether you call them straight time, holiday time, 
there are a variety of additional payments that can be made. 
That is correct.
    Senator Harkin. And then another loophole. What about a 
head nurse paid hourly who is a team leader? Another loophole.
    Mr. Fortney. Well, ``loophole'' of course is a word 
designed to characterize it. I do not think it is a loophole.
    The team leader area illustrates an area of confusion which 
is the term ``team leader'' as used on the shop floor is not 
what is codified in these regs. There are a lot of people who 
are referred to as team leaders in the workplace. These regs 
are very specific about the subset of team leaders who are 
covered and possibly could be exempt under the administrative 
exemption as a team leader as the administrator discussed and 
it focuses on the major project responsibilities.
    Senator Harkin. My time is up. A team leader is not defined 
in the regulations. It is not defined.
    Senator Specter. Thank you, Senator Harkin.
    Senator Craig.
    Senator Craig. Thank you, Mr. Chairman. Well, I am neither 
an attorney nor an economist, and it is an area of the law that 
I frankly know very little about, gentlemen. So let me ask some 
fairly basic questions.
    I say that because I think the Fair Labor Standards Act's 
frustration today is that it is becoming a place to go litigate 
almost on a constant basis and the threat of litigation is a 
phenomenal tool to be used in the marketplace. Most people like 
to avoid it. It is expensive. Therefore, it is a leverage or a 
tool oftentimes used where it serves a variety of purposes.
    I guess, Mr. Becker, I would ask you, is it your opinion 
that the rule as proposed brings greater certainty, less 
ambiguity, and therefore less potential for lawsuits?
    Mr. Becker. No. I do not think that is the case. I just 
return to my initial example. We obviously commend the 
Department for raising the salary levels, which has not been 
done since the 1970's and we all concede is long overdue. But 
the old rule attached a very clear standard to those who are 
most in doubt, that is, those at the lower end of the salary 
threshold. And that rule was that if you perform more than 20 
percent of nonexempt duties, that is, a clear bright line rule, 
you are nonexempt. So that is ordinarily clear.
    Senator Craig. Do you feel that will have to get litigated?
    Mr. Becker. I am saying the abolition of that clear 
percentage rule is going to cause more litigation. Take the 
outside sales area. Now it is a subjective question. What is 
the primary duty? And that is defined basically as what is the 
``most important'' duty. How do we know what is the most 
important duty, and are we not going to tempt employers to say 
I think this is the most important duty as opposed to saying, 
does this person spend more than 20 percent of their time in 
the office not performing outside sales? That is obvious. That 
is clear.
    Senator Craig. Thank you.
    Mr. Fortney, same question.
    Mr. Fortney. I think that the proposed regulations, in 
fact, do add clarity. This primary duty point----
    Senator Craig. Can I follow the logic of clarity, meaning 
less risk of lawsuit?
    Mr. Fortney. Well, let us start with----
    Senator Craig. Or are we just a litigious society today 
where no matter how we write the rules, somebody is going to 
try to use them----
    Mr. Fortney. I hope the answer is no. So I think that 
clarity will ultimately produce less litigation, but let us 
talk about the steps that you get there.
    If you are running a small- or medium-sized business, the 
fundamental question is how do I properly pay people. I would 
suggest to anyone if they would go look at the current 
regulations now, it is not terribly helpful.
    Now, are the final regulations that have come out perfect 
in that regard? No. I am not suggesting that. I do not think 
anyone is. But they are significantly better than what we have, 
and the listing of examples and explanation of duties, the 
types of duties, make it so that I think it is realistic that 
we can expect a small- or medium-sized employer or an 
employee--because it is just as important that they know what 
the rules are----
    Senator Craig. I would hope so.
    Mr. Fortney [continuing]. Can read that and get a sense, 
okay, here is how I am to be treated under this law. I should 
get overtime; I should not get overtime.
    I think it is a significant step forward, and I think then 
if we get people classified properly, that then will resolve 
the litigation and the threat of litigation that often results 
in the current environment. So I do think it will improve and I 
think that would be the steps whereby it would occur.
    Senator Specter. Mr. Eisenbrey, I recall you saying you 
thought this would bring more litigation, would not bring less. 
There is greater ambiguity. Did I hear you correctly?
    Mr. Eisenbrey. You did and let me just give you two 
examples. This team leader provision--the Department says we 
are not changing the law. This is the same as the major 
assignment language. If it were the same, why not keep the 
major assignment language? They have changed the law. They have 
changed the law. They have changed that language. It will be 
subject to litigation just because it is changed. But they have 
not defined team leader. They have put in this language about 
it being a major assignment, but they give an example of 
productivity teams which are widespread all throughout American 
industry. Every team leader on one of those productivity teams 
now is going to subject to exemption and that will be 
litigated.
    The chairman had a good example----
    Senator Craig. Let me move to Dr. Bird before my time is up 
on the same question, Dr. Bird.
    Dr. Bird. Yes, sir. I think when you look at that question, 
there are really two pieces to the litigation issue. One is 
what will happen to litigation next year or the next 2 years, 
and what will happen to litigation on average over the much 
longer time. Even with a clearer rule, a rule that rolls into 
the surface that is obvious to everybody, all of the footnotes 
and decisions from the past so that everything is up front, 
certainly in the initial phase, you may well have a lot of 
issues to settle and there may be a----
    Senator Craig. A testing for clarification as much as 
anything.
    Dr. Bird. Testing it, but then I think that it is 
reasonable to expect the new rule will lower the rate of 
litigation in the longer run. When you look at litigation 
costs, there are two aspects, not only the number of suits 
filed, but also the intensity of resource use in prosecuting a 
suit. I think that even where the number of suits filed might 
not go down, the cost of defending and prosecuting a case may 
be less because the applicable rules are clearer and more on 
the surface.
    Third, I think you also have to look at a related 
compliance cost issue which is the administrative burden. That 
is the cost of making the day-to-day declassification decisions 
and hoping that you make it accurately enough and well enough 
to avoid getting sued, to avoid making a mistake.
    I think this rule is clearer. When you listen to what Ms. 
McCutchen said about how they rolled all of the footnotes and 
the residual from 50 years of case law into the rule, you have 
got an essentially clearer item that should lower both the 
administrative costs and the direct litigation costs.
    Senator Craig. Thank you, Mr. Bird. Thank you, Mr. 
Chairman.
    Senator Specter. Thank you, Senator Craig.
    Senator Murray.
    Senator Murray. Thank you, Mr. Chairman. I appreciate the 
opportunity to make a statement at this hearing. I ask 
unanimous consent that my full statement be in the record.
    Senator Specter. Without objection, it will be.
    [The statement follows:]

               Prepared Statement of Senator Patty Murray

    Mr. Chairman, thank you for calling this hearing to examine the 
Department of Labor's ongoing efforts to deny overtime protections to 
American workers.
    I've been concerned about the Administration's plans for a long 
time.
    I was hoping that this final rule would ease the concerns of 
working families, but instead it has made them worse.
    There is a lot we still need to explore in this 400-page rule, but 
from what I've seen so far, it is bad news for working families.
    This rule opens the door for workers to lose their overtime 
protections. Specifically, it cuts the rights and incomes of hundreds 
of thousands of pre-school school teachers, veterans, nurses, and law 
enforcement personnel. Let me share a few examples.
    As a former pre-school teacher, I know that many pre-school and 
nursery school teachers work more than 40 hours a week and deserve 
overtime pay.
    Today, they are protected. Under this final rule, up to 360,000 
pre-school and nursery school teachers will lose their overtime pay.
    This rule is also bad news for veterans. Some people claim that the 
Administration made changes to protect veterans, but here's the bottom 
line:
  --Veterans who acquire training outside of the military could still 
        be denied their overtime pay.
  --Our veterans deserve better.
    This rule will also hurt many nurses. It will make it easier for 
employers to reclassify RN's as salaried professionals--making them 
ineligible for overtime protections.
    Finally, this rule is a slap in the face to law enforcement 
officers. For example, this rule does not protect sergeants from losing 
their overtime protections.
    Overall, the Labor Department's final rule will make things worse 
for many hard-working Americans.
    We should be strengthening the rights and opportunities of working 
Americans, but this rule undermines them.
    Today, long-term unemployment is at an all-time high, and families 
continue to struggle in this tough economy. I don't see how this 
Administration can continue to cut the pay of hardworking Americans who 
rely on overtime to make ends meet.
    I'm left to ask--Haven't working families been punished enough by 
this President's economic policies?
    Let me just add that this rule doesn't even do what the 
Administration said it wanted to do--to clarify and simplify existing 
protections. This 400-page rule will undoubtedly lead to new rounds of 
litigation as both sides seek clarifications.
    I look forward to the testimony of our witnesses, and I hope we 
will have time to discuss the many problems with this rule in greater 
detail during our question and answer period.

    Senator Murray. I know I just have a couple minutes, 
because members need to leave for a vote. But I just have to 
say if the purpose of this hearing was to clarify and simplify 
the existing rules, just listening to the last 45 minutes of 
this hearing, I am not certain that that objective was 
achieved. But I know I just have a couple of minutes, so just 
let me ask a few questions.
    I am really concerned that workers with a little more than 
a high school diploma or little or no on-the-job discretionary 
authority or responsibility may be really impacted by this 
proposal. Under this new rule, those workers can be 
reclassified as executive or administrative employees who no 
longer would be able to claim extra pay for hours worked above 
40 hours a week. I am really concerned about the lessening of 
this education requirement.
    Mr. Becker, let me start with you. What do you see as the 
direct result of weakening the education requirement for 
determining overtime?
    Mr. Becker. Well, let me answer in two ways. And we share 
your concern about those at the bottom end of the spectrum. I 
think you see them affected importantly in two ways.
    One is that the type of employees who now are expressly 
classified as professional are a wholly new type; that is, 
funeral directors, athletic trainers, chefs. They are not in 
what any of us, I think, would considered learned professions, 
that is, professions where the norm, the vast majority of 
people have a prolonged course of study. Doctors, lawyers, are 
the classic examples. Athletic trainers I just do not think any 
of us would consider to fall into that classification.
    Senator Murray. Preschool teachers would fall into that?
    Mr. Becker. Excuse me?
    Senator Murray. Preschool teachers perhaps would fall into 
that?
    Mr. Becker. So that is one area where a--because a minority 
of people now have some kind of training or education, they are 
classified as professional even though the majority in their 
field do not.
    The other area where you have people with very little 
education who are classified exempt is obviously in this low 
level manager and supervisor working foremen category where 
case law under the old rule, even under the old long test 
because these employees are paid so little, found that they 
spent more than 20 percent of their time, in fact, in some 
cases 90 to 100 percent of their time, performing ordinary 
duties, selling products, flipping hamburgers, stocking 
shelves, that those employees can now be classified under this 
concurrent duties test and with the elimination of the working 
foreman provision and the elimination of the 20 percent 
tolerance level as exempt even though they perform ordinary 
rank and file duties.
    Senator Murray. Mr. Fortney, would you disagree with that?
    Mr. Fortney. I do disagree with that. As discussed, let us 
go in reverse order. The folks with low levels of education 
that you initially said you were focused on, those are not 
folks who today would be classified as being exempt under the 
professional exemption possibly, meaning that they presumably 
should be getting overtime, because the professional exemption 
today clearly requires advanced education and learned training. 
So with respect to those folks, it seems to me the only way 
they possibly could be exempt, meaning not getting overtime 
today, would be if they are executives or administrative.
    These regulations now clarify, for example, that 
executives, a working supervisor whose primary duty is 
performing nonexempt work on the production line, those people 
do not lose their overtime. The regs specifically provide that. 
Indeed, the regs have gone a step further in clarifying that 
you have to have supervisory hire/fire authority, not just 
supervisory, hire/fire authority in order to qualify as an 
executive. This was a point that I tried to address in my 
opening statement that I think that many folks who may have 
limited education and be exempt today are going to gain over 
time that are in these lower level manager supervisory 
positions, number one.
    Number two, with respect to chefs and some of these other 
issues----
    Senator Murray. Real quickly because I do want to get to 
Mr. Eisenbrey.
    Mr. Fortney. Chefs and other issues. The focus is not on 
what their job is. It deals with advanced accreditation and 
training by universities and in most cases State licensing such 
as for embalmers.
    And finally, kindergarten teachers who you referenced----
    Senator Murray. I said preschool teachers.
    Mr. Fortney. I am sorry. Preschool. But the regulations do 
represent teachers of kindergarten or nursery school pupils 
will continue to be exempt, and the regulations provide that.
    Senator Murray. Mr. Eisenbrey, you get my last 20 seconds.
    Mr. Eisenbrey. On the professional exemption, Mr. Fortney 
said it clearly requires advanced education and learned 
training. That is no longer true. The rule says you can get to 
be a professional and exempt with work experience. So that is a 
major change.
    The hire/fire authority that Mr. Fortney mentioned is not 
hire/fire authority. If you even have the ability to suggest 
that somebody have a shift change or that they be considered 
for a promotion, that is all the authority. You do not have to 
have hire/fire authority.
    And nursery school teachers. This is important. They are 
losing their right to overtime that they have now. There is a 
Wage/Hour opinion letter that says that most nursery teachers, 
preschool teachers do not exercise independent judgment and 
discretion. They are not instructing students. They are 
watching over them, 2-and 3-year-olds. And they are entitled to 
overtime now. Under this rule, they lose their right to 
overtime. As a class they are exempt.
    Senator Murray. Mr. Chairman, I am out of time. I thank all 
of our witnesses.
    Senator Specter. Thank you very much, Senator Murray.
    Beyond any question, this hearing could go on and on and on 
on a very, very complicated subject. But we very much 
appreciate your coming, gentlemen, and I think it better 
prepares not only the panelists but those who will following 
the transcripts. We have to make a judgment on this very 
important subject.

                     ADDITIONAL PREPARED STATEMENT

    We have received the prepared statement of the American 
Nurses Association that will be included in the record at this 
point.
    [The statement follows:]
         Prepared Statement of the American Nurses Association
    In regards to the Senate Appropriations Subcommittee on Labor, HHS 
hearing on May 4, 2004, the American Nurses Association appreciates the 
opportunity to provide a written statement on the U.S. Department of 
Labor final revisions to the Federal Labor Standards Act (FLSA) 
regulations as published in the Federal Register on April 28, 2004.
    The American Nurses Association (ANA) represents the nation's 
registered nurses through its 53 state and territorial state nurses 
associations. Our members represent the interests of registered nurses 
practicing in hospitals and nursing homes and a wide range of other 
health care settings. The implementation of these proposed revisions to 
the FLSA will have implications for their practice, their work 
environment and the quality of patient care they provide.
    ANA has reviewed the final rule and while the final rule includes 
some improvements over the proposed rule it still remains controversial 
for registered nurses. Part 541 of the rule redefines which workers are 
salaried professionals, administrative managers and executives, and, 
therefore, exempt from federal overtime protections. A worker can be 
exempted from overtime protections under one of these categories if he 
or she meets a two-pronged test: her/his qualifications and duties must 
meet the standards outlined in the regulations; and s/he must be paid 
on a salary basis an amount more than $455 per week.
    Registered nurses have long met the ``duties test'' to be 
considered learned professionals; however, because most registered 
nurses are paid on an hourly basis, they do not meet the second prong 
of the existing rules, i.e., the salary component, and therefore are 
entitled to overtime compensation. The Department of Labor is correct 
in their claim that the status of salaried registered nurses remains 
unchanged under the new rule, but it has overlooked the impact on the 
large percentage of registered nurses who are paid on an hourly basis. 
The rule is further complicated by changes in the definition of a 
salaried employee by now allowing salaried compensation to be 
calculated on a hourly or a shift basis. The new regulations create a 
degree of legal ambiguity that employers may try to exploit. For 
example, ANA is concerned that employers may try to claim that more RNs 
are salaried. Creating doubt about registered nurses' right to overtime 
pay threatens ongoing efforts to retain and recruit nurses--
particularly in a time when mandatory overtime is a common practice and 
RNs are in short supply.
    As stated by Patti Heffner, RN, in her testimony on January 20, 
2004, nurses are paid for overtime, whether voluntary or mandatory. 
Under the proposed changes, nurses will be working the same long hours 
they currently work, but without the guarantee for overtime 
compensation. Expanding the number of professional workers, such as 
registered nurses, who are exempt from overtime protections, will lower 
the marginal cost of overtime work for the employers. In health care 
institutions, this will encourage the use of mandatory overtime as a 
staffing strategy. ANA strongly opposes mandatory overtime as it has 
been widely recognized as one of the major factors contributing to 
nurses' job dissatisfaction and the nursing shortage. Mandatory 
overtime also increases the risk of medical errors and concerns for 
patient safety.
    The Institute of Medicine (IOM) released a report in November, 2003 
which shows a clear link between patient safety and the nursing work 
environment. The study, Keeping Patients Safe: Transforming the Work 
Environment of Nurses recommends limiting the number of hours a nurse 
can work to 12 hours in any 24-hour period and 60 hours in any seven 
day period.
    The overtime regulations are set to go into effect in August, 2004 
barring Congressional action to change them. ANA has joined with other 
organizations representing nurses to send a letter to the U.S. Senate 
asking Senators to support an amendment introduced by Sen. Harkin (D-
IA) to roll back any portion of the regulations that restricts 
eligibility for overtime pay. While ANA appreciates the need for 
clarification of some the regulatory provisions of the FLSA, ANA is 
concerned these revisions in the final rule will not accomplish that 
goal. In fact, the net effect of the final rule will add to the 
uncertainty by substituting one confusing set of definitions for 
another. ANA urges you to continue to oppose these changes to the 
overtime rule.
    Once again, thank you for allowing the American Nurses Association 
to comment on the issues facing nursing.

                         CONCLUSION OF HEARING

    Senator Specter. Thank you all very much for being here. 
That concludes our hearing.
    [Whereupon, at 11:02 a.m., Tuesday, May 4, the hearing was 
concluded, and the subcommittee was recessed, to reconvene 
subject to the call of the Chair.]

                                   - 
