Fair Labor Standards Act: Labor Made Key Decisions in Studies of 
Updated Overtime Rule and Contractor Provided Support (03-JUN-05,
GAO-05-580R).							 
                                                                 
In 2004, the Department of Labor (Labor) updated the rule that	 
determines who is entitled to overtime pay of "time and a half"  
when they work more than 40 hours a week. As part of the	 
rule-making process, Labor was required to estimate the impact of
the updated overtime rule and publish the results in the Federal 
Register. Labor contracted with the CONSAD Research Corporation  
(CONSAD) to assist the agency in studying the impact of both the 
proposed and final overtime rule. Because of Congress' interest  
in these studies and how they were conducted, we agreed to	 
identify: (1) CONSAD's contractual responsibilities in assisting 
Labor with estimating the impact of the updated overtime rule on 
workers and (2) CONSAD's actions in carrying out these		 
contractual responsibilities. To determine CONSAD's		 
responsibilities, we obtained and analyzed two contracts between 
Labor and CONSAD. The first contract covered CONSAD's		 
responsibilities related to Labor's impact study for the proposed
overtime rule, while the second contract covered CONSAD's	 
responsibilities related to Labor's impact study for the final	 
overtime rule.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-580R					        
    ACCNO:   A25720						        
  TITLE:     Fair Labor Standards Act: Labor Made Key Decisions in    
Studies of Updated Overtime Rule and Contractor Provided Support 
     DATE:   06/03/2005 
  SUBJECT:   Economic analysis					 
	     Labor legislation					 
	     Overtime compensation				 
	     Performance measures				 
	     Standards						 
	     Contract oversight 				 
	     Contract performance				 
	     Government contracts				 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-05-580R

United States Government Accountability Office Washington, DC 20548

June 3, 2005

The Honorable George Miller
Ranking Minority Member
Committee on Education and the Workforce
House of Representatives

Subject: Fair Labor Standards Act: Labor Made Key Decisions in Studies of
Updated Overtime Rule and Contractor Provided Support

Dear Mr. Miller:

In 2004, the Department of Labor (Labor) updated the rule that determines
who is entitled to overtime pay of "time and a half" when they work more
than 40 hours a week. As part of the rule-making process, Labor was
required to estimate the impact of the updated overtime rule and publish
the results in the Federal Register. Labor contracted with the CONSAD
Research Corporation (CONSAD) to assist the agency in studying the impact
of both the proposed and final overtime rule.

Because of your interest in these studies and how they were conducted, we
agreed to identify: (1) CONSAD's contractual responsibilities in assisting
Labor with estimating the impact of the updated overtime rule on workers
and (2) CONSAD's actions in carrying out these contractual
responsibilities. To determine CONSAD's responsibilities, we obtained and
analyzed two contracts between Labor and CONSAD. The first contract
covered CONSAD's responsibilities related to Labor's impact study for the
proposed overtime rule, while the second contract covered CONSAD's
responsibilities related to Labor's impact study for the final overtime
rule. To determine CONSAD's actions in carrying out these
responsibilities, we reviewed CONSAD's reports as well as the impact
studies for the proposed and final rule that Labor published in the
Federal Register. In addition, we interviewed officials from Labor and
CONSAD. While this review describes the creation of the impact studies, it
does not assess the soundness of the studies. We conducted our work from
August 2004 to April 2005 in accordance with generally accepted government
auditing standards.

Results in Brief	The contracts required CONSAD to provide technical and
analytic support to assist Labor in estimating the impact of the updated
overtime rule. For

the proposed rule, the contract tasked CONSAD with writing reports on the
costs and benefits of the rule as well as the impact of the rule on
businesses and state and local governments. Although the contract did not
specifically require CONSAD to estimate the impact of the proposed rule on
workers, it did provide for CONSAD's assistance in performing other
analyses. In keeping with this provision, Labor asked CONSAD to estimate
the number of workers who could gain or lose overtime pay as a result of
the proposed rule. After CONSAD completed its work on the proposed rule,
Labor and CONSAD set up a second contract to have CONSAD assist with the
study of the final overtime rule. The contract language covering CONSAD's
work on the final rule specifically required CONSAD to estimate the impact
of the updated rule on workers. CONSAD was required to provide information
on affected workers, including their ages, educational backgrounds, and
occupations. For both contracts, Labor was responsible for overseeing
CONSAD's work and had the authority to select the direction and scope of
CONSAD's analyses.

Consistent with the contracts, CONSAD provided Labor with technical and
analytic support, and Labor made all of the key decisions in estimating
the impact of the updated overtime rule. CONSAD conducted literature
searches, proposed certain research methods, analyzed data, and wrote
summary reports. Labor, in turn, selected the research methodologies,
picked the data sources, and provided the legal and policy interpretations
used in the studies. Labor officials wrote the impact studies published in
the Federal Register. For the CONSAD reports and the impact studies in the
Federal Register, Labor noted it was responsible for creating the numbers
that estimated the impact of the updated overtime rule on workers.

In commenting on the draft of this report, Labor noted that it concurred
with our findings. Labor also provided technical comments that we
incorporated where appropriate.

Background 	The Fair Labor Standards Act (FLSA) limits the normal work
week to 40 hours, requiring most employers to pay hourly overtime wages to
employees who work longer than 40 hours. However, employees working in a
"bona fide executive, administrative, or professional capacity" are

exempted from the wage and hour standards and need not be paid overtime
pay for a work week longer than 40 hours.1

Under the FLSA, Labor is responsible for setting the criteria for these
exemptions, and historically it has formulated specific tests based on the
accumulated experience of employers, employees, and its own field staff.
In 2003, Labor proposed changes to the overtime rule, partly in response
to a GAO report recommending that Labor modernize the rule, which had not
been substantially changed in almost 50 years.2

Labor's proposed rule changed the tests used to determine whether
employers must pay overtime. For example, under the overtime rule in
effect in 2003, workers who earned up to $155 a week were guaranteed
overtime pay (time and a half of their regular rate) for the hours worked
beyond a 40-hour work week. Workers who earned more than this amount were
subject to various tests, called duties tests, to determine whether their
duties exempted them from the overtime pay requirement.3 Under the
proposed rule, overtime eligibility for most workers earning up to $425 a
week would be guaranteed. In addition, the proposed rule changed the tests
used to determine whether the duties of higher income workers qualified
them to be considered executive, administrative, or professional employees
and therefore not entitled to overtime pay.

Labor was required to publish its proposed changes to the overtime rule
and its estimate of the impact of the proposed changes. Several different
statutes and executive orders require executive agencies to prepare impact
studies when publishing significant rules.4 Accordingly, Labor published
both the proposed rule and the related impact study in the

1Fair Labor Standards Act, section 13(a)(1).

2GAO, Fair Labor Standards Act: White-Collar Exemptions in the Modern Work
Place, GAO/HEHS-99-164 (Washington, D.C.: Sept. 30, 1999).

3The base salary level test for executive and administrative employees was
$155 per week, and for professional employees it was $170 per week.

4The primary ones include Executive Order 12866, which requires agencies
to conduct a cost-benefit assessment of "economically significant rules,"
and the Regulatory Flexibility Act, which requires agencies to submit a
regulatory flexibility analysis that describes the impact of the proposed
rule on small entities.

Federal Register.5 The Federal Register publication invited the public to
provide comments on all aspects of the proposed rule.

After considering over 75,000 public comments received on the proposed
overtime rule, Labor revised the proposed changes, finalized the rule, and
published a second impact study. For the final overtime rule, Labor
increased the salary level below which workers would be guaranteed
overtime to $455 per week, and revised the proposed language of the
duties tests for higher income workers.6 In April 2004, Labor published
the
final version of the overtime rule and the related impact study in the
Federal Register.7 The updated rule went into effect in August 2004.

Labor contracted with CONSAD, an economic and public policy
analysis consulting firm, to assist with estimating the impact of both the
proposed and final overtime rule. Labor noted that it solicited bids from
several contractors and chose CONSAD because the firm had the expertise
and experience to do the work and was the low cost bidder. CONSAD
officials pointed out that since the 1970s the firm has assisted federal
agencies in creating impact studies for federal rules.

A general prohibition exists against contractors performing functions that
are inherently governmental. Under guidance from the Office of
Management and Budget, contractor services that relate to the
development of regulations are not considered to be inherently
governmental if agencies preserve appropriate control.

At the time the overtime rule was being updated and the impact studies
were being conducted, there was no federal requirement that technical

5The proposed changes to the overtime rule, entitled "Defining and
Delimiting the Exemptions for Executive, Administrative, Professional,
Outside Sales and Computer Employees" and information on the impact of
these proposed changes were published in the Federal Register on March 31,
2003 (68 Fed. Reg. 15560). Throughout this report, we refer to all of the
impact analyses presented in this Federal Register notice as Labor's
impact study on the proposed rule.

6Similar to the overtime rule in effect in 2003, the updated overtime
rule's salary level for guaranteed overtime is not indexed for inflation.

7The final version of the overtime rule and information on the impact of
the final rule were published in the Federal Register on April 23, 2004
(69 Fed. Reg. 22122). Throughout this report, we refer to all of the
impact analyses presented in this Federal Register notice as Labor's
impact study on the final rule.

  Contracts Required CONSAD to Provide Technical and Analytic Support to Labor

material in impact studies be subject to a peer review by outside
experts.8 Accordingly, the impact studies for the overtime rule were not
given a peer

9

review.

CONSAD was responsible for providing technical and analytic support to
assist Labor in estimating the impact of the updated overtime rule.
Specifically, CONSAD was charged with supplying the "information, data,
and economic" analyses that Labor needed to prepare the impact studies for
the proposed and final overtime rule.

The contract for the proposed rule required CONSAD to produce various
reports on the impact of the updated rule. For example, CONSAD was tasked
with conducting a cost-benefit analysis for the rule, reporting on the
impact of the rule on businesses as well as reporting on how the rule
would affect state, local, and tribal governments. Although the contract
did not specifically require CONSAD to analyze the impact of the proposed
rule on workers, it did allow for "other economic reports and analyses."
According to both Labor and CONSAD, Labor asked CONSAD to estimate the
number of workers who could gain or lose actual overtime pay under the
proposed rule.

After CONSAD completed its work on the proposed overtime rule, Labor and
CONSAD set up a second contract to allow for CONSAD to assist in studying
the final overtime rule. For the final rule, CONSAD was required to
provide a report to Labor estimating the number of workers affected by the
changes to the overtime rule. In addition, the contract specified that
CONSAD would profile the types of workers affected by the updated rule and
provide details on them, including their ages, educational backgrounds,
and occupations. The contract also required CONSAD to review public
comments on the impact study for the proposed rule. A Labor official noted
that the contract for the work on the final rule was more detailed than
the contract for the proposed rule, because the agency

8The Office of Management and Budget has since issued guidance to federal
agencies requiring peer review of important scientific information
distributed by the federal government, including the models used in
regulatory impact analyses. See Office of Management and Budget, Final
Information Quality Bulletin for Peer Review (Washington, D.C.: Dec. 15,
2004).

9Labor noted that the Council of Economic Advisers and the Office of
Management and Budget reviewed the impact study for the final overtime
rule and furthermore, Labor pointed out that this review would have met
many of the new peer review requirements had they been in effect at that
time.

had more experience with the subject matter and had the benefit of
thousands of public comments by the time it asked CONSAD to do this
additional work.

Consistent with federal guidance, both contracts noted that Labor was
responsible for overseeing CONSAD's work. Labor was responsible for
approving the direction and scope of CONSAD's analyses. In addition, Labor
had the authority to approve the specific methodologies used by CONSAD to
collect and evaluate data. According to the contracts, CONSAD's
performance would be evaluated in part on the contractor's responsiveness
to Labor's directions.

CONSAD provided Labor with technical and analytic support in estimating
the impact of the updated overtime rule. Consistent with federal
requirements, Labor made all of the key decisions in the studies for the
proposed and final overtime rule. Figure 1 presents the respective key
responsibilities of both Labor and CONSAD in developing these impact
studies for the overtime rule (see fig. 1).

 While CONSAD Provided Support, Labor Made All Key Decisions in Impact Studies

Figure 1: Key Responsibilities of Labor and CONSAD in Creating the Impact
Studies

Source: Labor and CONSAD officials.

Labor and CONSAD worked closely with one another during the studies of the
proposed and final overtime rule. CONSAD conducted literature searches,
proposed certain methods for conducting the impact studies, analyzed data,
and wrote summary reports. In addition, during the development of the
overtime rule, CONSAD served as a sounding board as Labor assessed the
economic impacts of potential rule changes. Labor was developing the rule
at the same time CONSAD was helping to measure its impact. As a result,
the process can be characterized as quite dynamic, with Labor providing
CONSAD with ongoing changes to the rule and Labor modifying both the
proposed and final rule in response to CONSAD's analyses. For example,
Labor tested several salary levels for guaranteed overtime during the
rule-making process and changed the levels in response to data from CONSAD
on the number of workers who would be affected. To facilitate this
exchange of information, Labor and CONSAD communicated frequently in
person or via telephone and e-mails and sent data spreadsheets back and
forth.

Consistent with the contracts, Labor directed the impact studies and made
the key methodological and data decisions. For example, Labor instructed
CONSAD to estimate the impact of the updated overtime rule by looking at
data on workers' wages and occupations. CONSAD then performed analytic
tasks in response to Labor's direction and made modifications as needed in
response to Labor's requests.

Labor also provided CONSAD with all of the legal and policy
interpretations underlying the impact studies. For example, Labor informed
CONSAD that certain workers- including federal employees, self-employed
workers, and clergy-were not covered by the FLSA and therefore were not
entitled to overtime pay. Additionally, Labor provided CONSAD with the
agency's interpretations of the updated rule's duties tests and explained
to CONSAD how the agency would enforce these tests. CONSAD used this
information to help estimate the impact of the updated overtime rule on
workers.

Although Labor had key decision-making authority in the impact studies for
both the proposed and final overtime rule, it played a much more
"hands-on" role in estimating the impact of the final rule. According to
Labor, the agency had additional staff resources available to assist with
the final impact study.

CONSAD produced two formal reports, one summing up its work with Labor on
the proposed overtime rule and the other documenting its work with Labor
on the final rule. In addition to covering topics such as the impact of
the rule on businesses, both products described the effect of the updated
rule on workers. The reports, however, varied in how they summarized the
number of workers affected by the rule change. For example, the CONSAD
report on the proposed rule used ranges to show the minimum and maximum
number of workers affected by certain provisions of the rule. In contrast,
the CONSAD report on the final rule used specific numbers to estimate the
effect of the rule change on these workers. According to Labor, this shift
from using ranges to using specific numbers to report the impact of the
rule on workers was due to methodological differences between the study of
the proposed rule and the study of the final rule. Labor noted that the
agency decided to change

methodologies due to technical concerns and was interested in improving
the accuracy of the resulting estimates.10

In addition to providing Labor with these reports, CONSAD reviewed some
public comments on the proposed rule. Specifically, CONSAD reviewed public
comments that critiqued the impact study for the proposed rule on
technical grounds. As part of its review of these public comments, CONSAD
examined a critique submitted by the Economic Policy Institute (EPI).
CONSAD officials then held discussions with Labor regarding the
methodological issues raised by the EPI critique. CONSAD noted that it did
not provide any quantitative analysis to Labor regarding the EPI
critique.11 In response to the entire range of public comments on the
proposed rule, Labor modified the final overtime rule and the impact study
for the final rule.

Labor officials wrote the impact studies published in the Federal
Register. Portions of these studies were based on the analyses Labor had
developed with CONSAD (see fig. 2 for timeline of studies and related
CONSAD reports). Although Labor's impact study for the proposed rule
included some information on the rule's impact on workers, it focused
primarily on the impact on businesses and government. However, the study
did note that readers could contact Labor to obtain a related report with
additional information. In response to such requests, the agency provided
copies of the CONSAD report on the proposed rule, which included more
details on the impact of the proposed rule on workers.

10For Labor's full description of the change in methodologies, see the
Federal Register on April 23, 2004 [69 Fed. Reg. 22201].

11The EPI critique discussed the difference between measuring the impact
of the updated overtime rule in terms of the actual number of workers
whose paychecks would be affected and measuring it in terms of the number
of workers whose broader rights to overtime protection would be affected
even if they currently do not work more than 40 hours a week. According to
both Labor and CONSAD, CONSAD did not provide Labor with a ratio
estimating the number of workers whose paychecks would be affected to the
number of workers whose overtime rights would be affected by the updated
rule.

Figure 2: Timeline for CONSAD's Reports and Labor's Impact Studies for the
Updated Overtime Rule

         Source: GAO analysis of CONSAD's reports and Labor's studies.

For the impact study on the final overtime rule, Labor presented a much
more detailed analysis, focusing in large part on the impact of the rule
on workers. Although Labor published this impact study in the Federal
Register before it received the CONSAD report on the final rule, much of
the information in the CONSAD report had already been delivered to Labor,
and the final CONSAD report simply compiled this information into one
document.

For the CONSAD reports and the impact studies Labor published in the
Federal Register, Labor noted it was responsible for creating the numbers
that estimated the impact of the updated overtime rule on workers.
Consistent with federal requirements, Labor stated that it directed,
reviewed and approved of the process for calculating these numbers.

We provided a draft of this report to Labor for review and comment. Labor
noted that it concurred with our report. Labor's official comments are
reproduced in enclosure I. Labor also provided technical comments that we
incorporated where appropriate.

                                Agency Comments

                               and Our Evaluation

As we agreed with your office, unless you publicly announce the contents
of this report earlier, we plan no further distribution of this report
until 30 days after its date. At that time, we will send copies to the
Department of Labor and other interested parties. In addition, this report
will be available at no charge on GAO's Web site at http://www.gao.gov.

Please contact me on (202) 512-7215 or [email protected], if you or your
staff have any questions about this letter. Contact points for our Offices
of
Congressional Relations and Public Affairs may be found on the last page
of this report. GAO staff who made major contributions to this report are
listed in enclosure II.

Sincerely yours,

Robert E. Robertson, Director
Education, Workforce, and Income Security Issues

Enclosures - II

              Enclosure II: GAO Contact and Staff Acknowledgments

GAO Contact Acknowledgments

(130391)

Robert E. Robertson (202) 512-7215

Brett Fallavollita, Assistant Director, and Melissa Emrey-Arras, Analyst
in Charge, contributed significantly to all aspects of this report. In
addition, Theresa Chen assisted in the design of the study and gathered
information for our findings. Richard Burkard, James Rebbe and Sheila
McCoy provided legal support, while Kenneth Bombara helped the team
understand the impact analyses. Corinna Nicolaou assisted the team in
writing the report.

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

GAO's Mission

Obtaining Copies of GAO Reports and Testimony

The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting its
constitutional responsibilities and to help improve the performance and
accountability of the federal government for the American people. GAO
examines the use of public funds; evaluates federal programs and policies;
and provides analyses, recommendations, and other assistance to help
Congress make informed oversight, policy, and funding decisions. GAO's
commitment to good government is reflected in its core values of
accountability, integrity, and reliability.

The fastest and easiest way to obtain copies of GAO documents at no cost
is through GAO's Web site (www.gao.gov). Each weekday, GAO posts newly
released reports, testimony, and correspondence on its Web site. To have
GAO e-mail you a list of newly posted products every afternoon, go to
www.gao.gov and select "Subscribe to Updates."

Order by Mail or Phone 	The first copy of each printed report is free.
Additional copies are $2 each. A check or money order should be made out
to the Superintendent of Documents. GAO also accepts VISA and Mastercard.
Orders for 100 or more copies mailed to a single address are discounted 25
percent. Orders should be sent to:

U.S. Government Accountability Office 441 G Street NW, Room LM Washington,
D.C. 20548

To order by Phone: 	Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202)
512-6061

To Report Fraud, Contact:

Waste, and Abuse in Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: [email protected] Programs Automated answering system: (800)
424-5454 or (202) 512-7470

Gloria Jarmon, Managing Director, [email protected] (202)
512-4400Congressional U.S. Government Accountability Office, 441 G Street
NW, Room 7125 Relations Washington, D.C. 20548

Public Affairs 	Paul Anderson, Managing Director, [email protected] (202)
512-4800 U.S. Government Accountability Office, 441 G Street NW, Room 7149
Washington, D.C. 20548

                                 RECYCLED PAPER
*** End of document. ***