Commentary | Wages Incomes and Wealth

On the Department of Labor’s Final Overtime Regulations

Share this page:

Opinion pieces and speeches by EPI staff and associates.

[ THIS TESTIMONY WAS PRESENTED BEFORE THE SUBCOMMITTEE ON LABOR, HEALTH AND HUMAN SERVICES, AND EDUCATION OF THE UNITED STATES SENATE COMMITTEE ON APPROPRIATIONS ON MAY 4, 2004 ]

On the Department of Labor’s Final Overtime Regulations

Preliminary Analysis of DOL’s Final Rule on Overtime Exemptions

By Ross 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% 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 soufflé, 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

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-y
ear 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.

There are about 2.4 million cooks and chefs in the United States, about 60% 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% 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% 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% 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 unlimit
ed 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% 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 tim
e 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% of them did.

Notes

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.”

Ross Eisenbrey is Vice President and Policy Director of the Economic Policy Institute in Washington, D.C.


See related work on Wages Incomes and Wealth

See more work by Ross Eisenbrey