Fair Labor Standards Act: White-Collar Exemptions Need Adjustments for
Today's Work Place (Testimony, 05/03/2000, GAO/T-HEHS-00-105).

Pursuant to a congressional request, GAO discussed the white-collar
exemptions to the Fair Labor Standards Act (FLSA), focusing on: (1) how
shifts in the American economy have affected the exemptions in today's
work place; (2) how the regulations underpinning the exemptions have
changed in the decades since the enactment of the FLSA; (3) why both
employer and employee representatives believe that adjustments are
needed to update the regulatory structure; and (4) why the need to
balance the interests of both employers and employees suggests that
comprehensive review is key to equitable regulatory reform.

GAO noted that: (1) GAO's data showed that an increasing number of
American workers are covered by the exemptions--GAO estimates that
between 19 and 26 million workers (between 20 to 27 percent of the
full-time workforce) were covered by the exemptions in 1998; (2) based
on GAO's high estimate of 26 million, GAO's estimate represents an
increase of 9 million workers over GAO's 1983 estimate of 17 million
exempt full-time wage and salary workers; (3) the rapidly growing
services sector had a higher proportion of exempt workers than other
sectors, and is responsible for much of the overall increase in numbers
of exempt workers; (4) similarly, GAO's data indicated that more women
than men entered full-time white collar exempt positions over this
period; (5) despite these shifts in the American work place, there have
been few changes in the laws and regulations establishing the exemptions
since 1954; (6) for most American workers, the rules for determining
whether they are exempt from the FLSA, and thus its requirements for
overtime pay, have remained largely unaltered in the past 46 years; (7)
from the prospective of either the employer or the employee, the
exemption rules are overdue for adjustment; (8) for employers, the rules
have become increasingly rigid and inflexible, particularly in view of
the technological advances in the work place; (9) for employees,
inflation and oversimplification have reduced the protections formerly
provided by the regulations; (10) as currently set, the rules provide
far less protection for the worker, particularly for lower-income
supervisors; (11) however, equitable adjustment of the regulatory
structure is difficult, requiring a balance of the often-conflicting
interests of employers and employees; and (12) because the regulations
are made up of many interlocking provisions intended to balance these
competing interests, piecemeal corrections can lead to unsatisfactory
results.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-HEHS-00-105
     TITLE:  Fair Labor Standards Act: White-Collar Exemptions Need
	     Adjustments for Today's Work Place
      DATE:  05/03/2000
   SUBJECT:  Labor law
	     Industrial relations
	     Labor statistics
	     Personnel classification
	     Wage surveys

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   * For Release on Delivery
     Expected at 10:30 a.m.

Wednesday, May 3, 2000

GAO/T-HEHS-00-105

FAIR LABOR STANDARDS ACT

White-Collar Exemptions Need Adjustments for Today's Work Place

        Statement of Cynthia M. Fagnoni, Director

Education, Workforce, and Income Security Issues

Health, Education, and Human Services Division

Testimony

Before the Subcommittee on Workforce Protections, Committee on Education and
the Workforce, House of Representatives

United States General Accounting Office

GAO

Fair Labor Standards Act: White-Collar Exemptions Need Adjustments for
Today's Work Place

Mr. Chairman and Members of the Subcommittee:

Thank you for inviting me here today to speak about the white-collar
exemptions to the Fair Labor Standards Act (FLSA). For more than 60 years,
the FLSA has set the minimum wage and hour standards for the vast majority
of American workers. The exceptions to these standards that affect the most
workers are the so-called white-collar exemptions, covering employees
working in a bona fide executive, administrative, or professional capacity.

My remarks today focus on (1) how shifts in the American economy have
affected the exemptions in today's work place, (2) how the regulations
underpinning the exemptions have changed in the decades since the enactment
of the FLSA, (3) why both employer and employee representatives believe that
adjustments are needed to update the regulatory structure, and (4) why the
need to balance the interests of both employers and employees suggests that
comprehensive review is key to equitable regulatory reform. My testimony is
based primarily upon a September 1999 report we issued to the Subcommittee.

In summary, our data showed that an increasing number of American workers
are covered by the exemptions-we estimate that between 19 and 26 million
workers (between 20 to 27 percent of the full-time workforce) were covered
by the exemptions in 1998. Based on our high estimate of 26 million, our
estimate represents an increase of 9 million workers over our 1983 estimate
of 17 million exempt full-time wage and salary workers. The rapidly growing
services sector had a higher proportion of exempt workers than other
sectors, and is responsible for much of the overall increase in numbers of
exempt workers. Similarly, our data indicated that more women than men
entered full-time white-collar exempt positions over this period. Despite
these shifts in the American work place, there have been few changes in the
laws and regulations establishing the exemptions since 1954. For most
American workers, the rules for determining whether they are exempt from the
FLSA, and thus its requirements for overtime pay, have remained largely
unaltered in the past 46 years.

From the prospective of either the employer or the employee, the exemption
rules are overdue for adjustment. For employers, the rules have become
increasingly rigid and inflexible, particularly in view of the technological
advances in the work place. For employees, inflation and oversimplification
have reduced the protections formerly provided by the regulations. As
currently set, the rules provide far less protection for the worker,
particularly for lower-income supervisors. However, equitable adjustment of
the regulatory structure is difficult, requiring a balance of the
often-conflicting interests of employers and employees. Because the
regulations are made up of many interlocking provisions intended to balance
these competing interests, piecemeal corrections can lead to unsatisfactory
results. Accordingly, we have recommended that the Secretary of Labor
comprehensively review the regulations and adjust the entire regulatory
structure as needed, carefully balancing the needs of employers for clear
and unambiguous regulatory standards with those of employees for fair
treatment in the work place.

Background

Ever since the FLSA was enacted, the interests of employers in expanding the
white-collar exemptions as broadly as possible have competed with those of
employees in limiting the use of the exemptions. Balancing these competing
interests, the Department of Labor (DOL) established specific regulatory
tests that must be met before an employee can be classified as an exempt
white-collar employee. DOL compliance investigators use these tests to
determine whether employers have properly complied with the law. In general,
there are three major parts to these tests for determining if an employee is
exempt from the FLSA:

   * First, the employee must be paid on a salary basis, not an hourly rate.
   * Second, the employee must be paid at least a specified base salary
     level that is supposed to indicate managerial or professional status.
   * Third, the employee must have duties and responsibilities associated
     with managerial or professional work. Generally, such duties must
     require the employee to exercise independent judgment and discretion.

Number of White-Collar Exemptions Increases With Growth of the Service
Sector and Among Women

Our data showed a general increase in white-collar exempt positions between
1983 and 1998, and much of the growth in these positions can be attributed
to the expansion of the service industries related to business and repair
services, entertainment, and recreation, as well as professional and
personal services. These service industries grew more rapidly than any other
sector during the 15-year period, nearly doubling from 13 million employees
in 1983 to 24 million employees in 1998. Along with this expansion, the
percentage of white-collar exempt employees jumped from 19 percent to 29
percent within these service industries, far higher than any other industry
sector (see fig. 1). The increase in the number of exempt workers in this
sector-about 3.6 million employees-represented almost 50 percent of the
overall growth in exempt employees.

Figure 1: Percentage of Full-Time White-Collar Workers Exempt in 1983 and
1998, by Industry

Note: The percentage estimates represent the average of GAO high and low
estimates.

Source: Current Population Survey Outgoing Rotations Data for 1983 and 1998.

Likewise, the numbers of working women grew significantly, and women were
increasingly more likely to be part of the exempt workforce. In 1998, 42
percent of the exempt workers were women, compared to 33 percent in 1983.
This was a much larger change than the percentage of women in the nonexempt
workforce, which grew only slightly (about 1 percent) in the 15-year period.

Overall, full-time workers covered by the white-collar exemptions are much
more likely to work overtime-that is, more than 40 hours per week-than
nonexempt workers. In 1998, 44 percent of the full-time exempt workers said
that they worked overtime, increasing from 35 percent in 1983. In contrast,
only 19 percent of nonexempt employees worked more than 40 hours per week at
their main job in 1998.

Basic Regulatory Tests for Exemptions Largely Unchanged in 46 Years

Table 1: Summary of Major Statutory and Regulatory Revisions to the
White-Collar Exemptions
 Year of
 revision      Summary of revision
 1938 through
 1954          Basic regulatory tests set forth in regulations.
               Separate retail trade exemption repealed but retail
 1961          employees were included, with a limitation, under the
               general coverage of the white-collar exemption.
               FLSA was applied to public educational institutions but
 1966/1967     teachers and school administrators were included under the
               exemption.

 1972/1973     The equal pay provision of the FLSA was made applicable to
               all those included under the white-collar exemption.
               Under certain circumstances, state and local government
 1992          workers were excepted from selected aspects of the salary
               basis requirement.
               Certain computer professionals earning over 6ï¿½ times the
 1992          minimum wage were exempted from the FLSA, even though they
               were paid an hourly wage.

Source: GAO analysis of statutory and regulatory provisions.

For most employees, the only regulatory changes to the tests since 1954 have
involved upward adjustment of the salary levels specified as indicative of
managerial or professional status. These salary levels were adjusted in
1958, 1963, 1970, and 1975. However, there has been no inflation adjustment
for these salary levels in the 25 years since 1975.

Both Employers and Employees Call for Adjustments

Employers Stress Need for Clarity and Flexibility

From our discussions with employers, DOL officials, and various legal and
economic experts, as well as our review of federal court cases and DOL
compliance cases, three issues stood out as being of particular concern to
employers:

   * First, the employers believe that the complex requirements of the
     salary-basis test or the so-called no-docking rule presented possibly
     the greatest potential liability for employers and made it difficult to
     account for employees' time and actions.
   * Second, employers contend that traditional distinctions in the
     application of the white-collar exemptions to two groups-highly paid,
     very skilled nonexempt production workers, and exempt professional and
     administrative employees-are no longer valid in the modern work place.
   * Third, the requirement for independent judgment and discretion on the
     part of administrative and professional employees was a major area of
     contention in DOL audits involving the white-collar exemptions.

I will now provide some details on each of these three issues.

Salary-Basis Test

First, DOL regulations specify that employees can be exempt executives,
administrators, or professionals only if they are paid on a salary
basis-that is, employers must pay them a full salary for any week worked
regardless of the number of days or hours worked. Under this rule, employers
must pay exempt employees a full weekly salary even though the employees
may, for example, take time off during the day for an extended lunch or a
visit to the dentist. Moreover, employers cannot suspend exempt employees
without pay for less than 1 week for such things as tardiness or unexplained
absenteeism. Supporting this rule, DOL officials referred to a longstanding
belief that salary basis is "almost universally recognized as the only
method of payment consistent with the status of the ‘bona fide'
executive."

Employers object to this rule because compliance requires adherence to the
no-docking requirements, limiting their ability to hold their employees
accountable for their time and actions. In the 5-year period from 1994
through 1998, about one-half of the 166 federal court cases we reviewed
involved suits by employees against their employers alleging violations of
the salary-basis test. However, the large majority of these cases were
brought by groups of public managerial employees (such as police chiefs and
fire chiefs) against their government employer because the employer could
suspend, or had suspended, the pay for less than 1 week of exempt employees
for disciplinary infractions.

A 1997 Supreme Court case, Auer v. Robbins, reduced employers' potential for
liability in such cases by requiring that employees show an actual practice
or significant likelihood of pay docking by their employers. In addition,
the Court expressly deferred to the Secretary of Labor as the expert on
regulatory interpretation of the salary-basis test. Notwithstanding this
case, employers we talked to and cases we reviewed indicated some remaining
uncertainty about the limits of the test. Furthermore, certain employers
(such as retail chain stores and some large public employers) still strongly
contend that the rule unnecessarily impinges on proper management of their
employees.

Limitations on Exemption of Production Workers

The second major issue for employers dealt with the traditional limits of
the white-collar exemptions. Ever since the enactment of the FLSA,
nonsupervisory technical workers without professional degrees involved in
the manual production of goods have been treated as nonexempt, no matter how
highly skilled or how highly paid an individual worker may be. Employers
believe that certain well-paid technicians have skills equivalent to those
of a professional worker, and should be treated as exempt workers.

To illustrate the point, one manufacturing company official described the
job of technicians who monitor remote, automated factories around the
country using standardized instruments. The official compared the jobs of
these well-paid (about $70,000 per year) technicians with those of her
company's professional engineers. Both groups held similar jobs and earned
comparable pay. However, because the engineers had professional degrees
while the technicians did not, the company had to treat the technicians as
nonexempt and the engineers as exempt employees.

Independent Judgment and Discretion

The third issue relates to one aspect of the regulatory tests involved in
the DOL compliance cases that we reviewed-the requirement that an exempt
administrator or professional exercise independent judgment and discretion
in carrying out his or her job duties. To assess whether an employee is
properly classified as exempt, DOL compliance investigators must determine
whether the employee's job includes sufficient independent judgment or
discretion. To do this, an investigator must look not only at the general
duties described as part of the position, but also at the specific duties
the employee actually performs. Thus, even though an accountant may have
been hired into a position requiring full professional certification, the
accountant would be nonexempt if his or her major tasks are actually closely
supervised, primarily involving rote work with set procedures.

Our discussions with employers and DOL investigators indicated that this
aspect of the regulations is particularly difficult to apply for both
employers and auditors. Employers complained that the standards used by the
investigators were confusing and applied in an inconsistent manner. For
their part, DOL investigators acknowledged that applying these standards can
be the most difficult part of a compliance audits. An assessment may not
only involve a review of the specific tasks that are assigned to an employee
but also may hinge on how an individual employee views his or her duties.
For example, one administrative assistant may look at his job as answering
telephone calls and following orders, while another person in the same
position might describe the job as involving the independence to establish
office procedures and respond to incoming client inquiries.

Employees Say That Inflation and Oversimplification Have Undermined
Regulatory Protections

   * The salary-test levels that underpin the regulatory framework have been
     unchanged since 1975. Because of inflation, the current salary-test
     levels are now near the minimum wage level, rendering the application
     of certain regulatory tests much less meaningful.
   * The duties test that determines who can be classified as an exempt
     executive has been increasingly simplified by judicial opinions. When
     combined with the low salary-test levels, employees believe that few
     protections remain for lower income workers with supervisory
     responsibilities.

In the 25 years since the salary-test levels were last increased, inflation
has severely eroded the protections available under the exemption
regulations. To illustrate the effect of inflation on the regulations, we
focused on the highest salary-test level-the so-called upset test. For
example, under the regulations, a cook making more money per week than
specified by the upset test would be presumed to be an exempt executive as
long as he supervised two other employees and his primary duty was
management. If, however, he made less money than the upset salary level, his
duties would be subject to much greater scrutiny (including the calculation
of the specific amounts of time spent on routine kitchen tasks) before he
would be classified as exempt.

Since 1975, the upset salary-test level has been set at $250 per week.
Figure 2 shows the upset test over the period from 1949 through 1998. To be
equivalent to the 1975 upset test, the test level would have to be increased
to at least $757 per week.

Figure 2: Actual and Inflation-Adjusted Highest Salary Test, or Upset Test,
for Weekly Income, 1949-1998

To gauge the effect of inflation, consider again the supervisory cook.
Today, the upset test is applicable, and the cook is presumed to be an
exempt executive as long as he makes more than $6.25 per hour, for an annual
salary of $13,000. However, in 1975, when the salary test levels were last
adjusted, the cook would have been presumed to be an exempt executive only
if he made over $39,400 (in 1998 dollars). To put it another way, in 1975,
about 40 percent of the full-time workers would have used the highest salary
level (the upset test) to determine whether they were exempt; in 1998, the
upset test levels were applicable to 91 percent of the workers.

For lower-income supervisors, other factors compound the effect of the very
low salary-test levels. Although the regulations specifically require that
exempt administrators or professionals work in jobs that call for exercise
of independent judgment and discretion, there is no such express requirement
for an exempt executive. Federal court decisions have confirmed that
assistant managers in fast-food restaurants can be exempt executives, even
though they receive explicit instructions on how to perform their jobs as
long as they supervise two or more employees and have management as their
primary duty. Federal case law in the 5-year period from 1994 through 1998
included few instances in which a court overturned an employer's
classification of a lower-income supervisor as an exempt executive.

Employee representatives complained that the application of the executive
duties test has been oversimplified. Under the regulations, as currently
interpreted, almost any employee who is assigned to supervise two or more
employees in a particular department of a company can be classified as an
exempt executive. According to these representatives, employers have
deliberately reorganized their work places to create new levels of
supervision and thus more exempt executive supervisors. Thus, where a
grocery store originally had one or two store managers, it now may have many
different departments-such as the meat department or the produce
department-headed by exempt executives.

Conflicting Interests of Employers and Employees Make Resolution of Concerns
Difficult

Four different proposals that have been advanced illustrate some of the
competing considerations affecting regulatory reform:

   * Eliminate the salary-basis test-From the employer's point of view, the
     exacting requirements of the salary-basis test do not determine
     managerial or professional status, but rather impede legitimate
     requirements for accountability. However, DOL has found no satisfactory
     substitute for the test in the 60 years since it was first introduced,
     and relies upon it to distinguish the bona fide executive from a clerk
     or technician.
   * Raise the salary-test levels-Although nearly everyone we talked
     to-employers, employees, and experts-agreed that the current salary
     levels were far too low and should be increased, employer and employee
     groups disagreed sharply on whether the duties tests should remain the
     same after the salary-test levels are increased. For example, retail
     employers were strongly opposed to reviving the time limitations on
     amount of nonmanagerial work performed, while union representatives
     believe that time limitations are critical criteria for assessing
     managerial status.
   * Add a category of "knowledge worker"-For employers, this would expand
     the exemptions to highly skilled workers who are not engaged in
     traditional manual labor but who follow detailed procedures to perform
     their job. Union representatives, however, believe that these workers
     are only the modern equivalent of the traditional factory workers, and
     that the historic limitations on work hours and requirements for
     overtime pay should apply to the modern workforce.
   * Adjust salary levels and duties, setting an income level (a ceiling)
     above which all employees would be exempt-Although there is nearly
     universal agreement that salary levels for the tests should be raised,
     adding an income ceiling is much more controversial. For employers,
     adding an income ceiling would bring more certainty into the
     classification of higher paid workers-if an employee earns over a
     specified amount of salary, the employer could automatically treat the
     employee as exempt from the FLSA overtime requirements. For employees,
     however, a ceiling would effectively eliminate the requirement for a
     40-hour work week for higher-paid workers-no worker earning over the
     ceiling level would be entitled to overtime pay for hours worked in
     excess of the 40-hour workweek.

Conclusion

GAO Contacts and Staff Acknowledgments

For future contacts regarding this testimony, please call Cynthia M. Fagnoni
at (202) 512-7215 or Nancy Peters at (202) 512-9065. Kelly Mikelson, Carol
Patey, Bill Hansbury, Larry Horinko, Rich Kelley, Charlie Jeszeck, Kirsten
Landeryou, Bob Crystal, Dennis Gehley, and Debra Roush also made key
contributions to this testimony.

(205513)

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