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A Closer Examination of the Department of Labor’s Final Overtime Regulations

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Opinion pieces and speeches by EPI staff and associates.

[ THIS TESTIMONY WAS PRESENTED BEFORE THE WORKFORCE, EMPOWERMENT, AND GOVERNMENT PROGRAMS SUBCOMMITTEE OF THE U.S. HOUSE COMMITTEE ON SMALL BUSINESS ON MAY 20, 2004. ]

A Closer Examination of the Department of
Labor’s Final Overtime Regulations

By  Ross Eisenbrey

The Department of Labor’s (DOL) final rule on overtime will hurt millions of American workers.  If the final rule takes effect, millions of employees will lose the right to overtime pay and will find themselves working longer hours with less in their paychecks to show for it.  I have attached a copy of my testimony before the Senate Subcommittee of Labor, Health and Human Services, and Education (May 4, 2004) on the overtime rule, which explains some of the specific ways this rule harms workers.

The main justification for the new overtime rule advanced by the Department and by some business representatives who have aligned with the Department is that it is a cure for a litigation “explosion” under the Fair Labor Standards Act (FLSA).  There are two problems with this argument: there has not been a litigation explosion, and the rule is far more likely to provoke additional litigation than to prevent it.  You have heard about a tripling in the number of federal FLSA class action suits.  This is true; in 1997 there were 31 such cases, and in 2003 there were 102. But that is only an average of two suits for each state and the District of Columbia, hardly a crisis in a nation with more than 7 million employers.  Moreover, I believe the rule is so ambiguous and internally inconsistent that businesses will find themselves unable to understand or explain it, and workers will be much more likely to sue when employers take advantage of the rule to reclassify their employees and cut costs.

The rule both eliminates key objective tests that provide clarity in the current regulations and introduces a host of ambiguous new terms and provisions that will be the source of litigation for many years to come.  Far from clarifying the law, the Department has removed many of the existing bright line tests and replaced them with terms that literally require a case-by-case analysis–that is to say, a lawsuit-by-lawsuit analysis.  The remainder of my testimony addresses a handful of these problem areas.

Primary Duty – 50% rule of thumb

For half a century, employers and employees have relied on a simple, common sense rule to guide the determination of the fundamental question: what is the employee’s primary duty.  The task that the employee spends most of her time performing is her primary duty.  This “50% rule of thumb” is not iron-clad, but it provides easily understood guidance that makes sense to almost everyone.  The final rule leaves half of the 50% rule of thumb: an employee who spends more than 50% of her time doing management duties is presumed to be exempt, but if she spends less than 50% of her time on exempt duties, no presumption is made.  There is no minimum amount of exempt work that an employee might do and still be found to be exempt. 

Blue collar workers

The Department claims that it has strengthened overtime protection for blue-collar workers by adding a new, clear statement of their entitlement to overtime.  This is untrue.  Section 541.3(a) starts promisingly, by stating 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.”  While this is already confusing – why aren’t  sous chefs, who spend all but a few minutes of the day working with their hands, “blue collar”? – the rule further confuses things by distinguishing non-exempt blue-collar workers from exempt employees by the source of their training: apprenticeships and on-the-job training.  But that is precisely how most chefs get their training; only a relative handful learn their trade in formal cooking schools.  By this definition, chefs and sous chefs are blue collar, but the rest of the rule treats them as subject to exemption.

The most serious problem with the treatment of blue-collar workers is the clarification in the third sentence: it is only “non-management production line employees and non-management employees in maintenance, construction, and similar occupations” who are entitled to overtime premium pay.

The rule gives no clue about how to distinguish a management production line employee from a non-management production line employee, or a management maintenance employee from a non-management maintenance employee.  No one in the Department of Labor, including the deputy wage and hour administrator who is testifying today, can tell you at what point a non-management blue-collar worker is transformed into a management blue-collar worker.  How much administration or supervision is required to become exempt?  If a supervisor spends eight hours of his nine-hour workday alongside a crew of carpenters, sawing wood and pounding nails with them, is he blue collar?  Is he exempt or non-exempt? 

Team leaders

Section 541.203(c) exempts “an employee who leads a team of other employees assigned to complete major projects for the employer” even if the employee does not have direct supervisory authority over the other employees on the team.  This is a broad new exemption that could apply to as many as 2.3 million currently non-exempt team leaders throughout American industry.  The only limitation on this exemption is that the team’s project must be “major.”  No definition of “major” is provided in the rule, though the rule’s examples, which are not exclusive, include “designing and implementing productivity improvements.”  Productivity teams are among the most common teams in use today.  If finding productivity improvements meets the definition of “major,” what else does the classification include?  Safety is a major issue for any employer: will every safety team leader in American now be exempt?  What about employee morale, diversity issues, and customer service improvement?  Teams addressing these issues would arguably all be involved in major projects, and their team leaders would all be exempt.

Will this be a “major” source of litigation?  You bet it will!

Highly compensated employees – “customarily and regularly”

Highly compensated employees lose their right to overtime according to section 541.601 if they “customarily and regularly perform any one or more of the exempt duties of an executive, administrative, or professional employee.”  Thus, whether something is customary and regular is a key issue.  Take as an example a blue-collar employee on an oil rig in Alaska who makes suggestions about the promotion of fellow employees once a year, thus performing a duty of an exempt executive employee.  Is once a year “customarily and regularly”? 

The answer is supposed to be found in section 541.701, which, unfortunately, defines “customarily and regularly” as “a frequency that must be greater than occasional but which, of course, may be less than constant.”  My American Heritage dictionary defines “occasional” as
“occurring from time to time.”  Section 541.701 goes on to give an example of “customarily and regularly” that raises more questions than it answers: “Tasks or work performed ‘customarily and regularly’ includes work normally and recurrently performed every workweek; it does not include isolated or one-time tasks.”

Clearly, this definition is unclear, unhelpful, and will be a source of constant litigation.  While something done once a workweek, such as a weekly safety talk given by a construction worker, obviously fits the illustrative example, the definition permits much less frequent tasks.  But how much less frequent?  A regular, once-a-year review where the oil rig employees make promotion suggestions would be more than occasional; it would not be an “isolated or one-time task” because it would happen every year.  The solicitor of labor told an audience at the National Conference of State Legislatures that a task would have to be performed at last twice a year to be customary and regular, so a twice-a-year suggestion about promotion or shift assignments would be enough to meet the test.

If the DOL had wanted to provide clarity and avoid litigation, it could have required that a task be performed at least once a day, or at least once a week, to be customary and regular.  Instead it left us with an inept and unhelpful definition certain to lead to more lawsuits.

Professional employees – substantially the same knowledge and work

The single change from current law that will create the most confusion and spark the most litigation is probably the new test for exemption as a learned professional.  This new “learned professional” exemption allows employers to deny overtime pay to employees who do not have advanced degrees or college degrees, as long as they “have substantially the same knowledge level and perform substantially the same work as the degreed employees.”  What does “substantially the same” mean?  It doesn’t mean equal knowledge; could it mean less?  How much less could a non-degreed employee know and still be considered a professional?  How will employees and employers, let alone Wage and Hour inspectors, know whether an employee has “substantially the same knowledge” as the degreed employees?  The employer has the burden of proving that an employee satisfies the tests for exemption.  Will employers have to start giving tests to their employees?  Will Wage and Hour have to test the cooking skills of learned professional chefs to determine whether they have substantially the same knowledge?  Under current law, the test is a reasonably bright line: does the employee have a professional degree? 1

The DOL could have provided absolute clarity for employers and employees alike by making a four-year specialized college degree an absolute prerequisite for the learned professional exemption.  That would be a clear and objective basis for determining the employee’s status as a professional.  Under the final rule, poorly-paid, non-degreed employees will be labeled professionals and denied overtime, and many of them will likely sue their employers over it.

Learned professional exemption–veterans

The final rule’s learned professional exemption creates a new problem for employers and employees by allowing knowledge gained from work experience and other sources to substitute for a professional degree.  The DOL has gone to great lengths to deny that knowledge employees gain from service in the armed forces can be used to establish this exemption.  But how will employers (who have the burden of proof in establishing that an employee is exempt) prove that none of the knowledge a veteran has that gives him “substantially the same knowledge” as degreed professionals, was gained in the armed services?

Financial services employees

 
Section 541.203(b) creates a broad new exemption for “employees in the financial services industry…if their duties include work such as 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.  However, an employee whose primary duty is selling financial products does not qualify for the administrative exemption.”

This raises many questions.  What is the financial services industry?  Does it include insurance? Table A-5 in DOL’s Federal Register notice classifies certain jobs as “securities and financial services sales occupations.”  Are securities firms excluded from the financial services industry for purposes of section 541.203(b)? 

Does an employee have to perform all of the listed duties to qualify for the exemption, or just some of them?  Could an employee do no more than collect customer income information and still qualify for the exemption?  What is the difference between marketing or promoting the employer’s financial products, advising the customer regarding the advantages and disadvantages of different financial products, and selling financial products?  How will an employee know whether his primary duty is selling or marketing?

Proof of the confusion this new exemption will cause can be found in Table A-3 in the Federal Register notice.  Despite the rule’s statement that “an employee whose primary duty is selling financial products does not qualify for the administrative exemption,” the DOL estimates that 295,175 out of 389,000 employees (76%) in “securities and financial services occupations” will be exempt.  This is the same proportion that will be exempt in insurance sales occupations and real estate sales occupations.  These figures do not include supervisors in these occupations, who fall into a separate occupational classification.

Creative professionals – journalists

Under current law, editors and reporters are presumed to be non-exempt, because “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.”  The final rule eliminates this language and replaces it with language that implies that all but a few reporters who “only collect, organize, and record information that is routine and already public” will be exempt as creative professionals.  The rule furthers this implication by offering the following example:  “newspaper reporters 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.”  Are reporters who do more than merely rewrite press releases, etc. exempt?  If the Department doesn’t intend to change the law, which currently exempts only 30% of editors and reporters, why has it changed the text of the regulation?  Why has the presumption of entitlement to overtime for journalists been removed?  I talked to a reporter this week whose boss had read the rule and determined that somewhere between one and 20 of the 20 reporters in the newsroom would be exempt as creative professionals under the final rule.  That is not clarity.

Working supervisors/outside sales

Current law has several clear, bright line tests that determine exempt status, including the 20% limit on non-exempt work by working foremen and a 20% limit on non-outside sales work by exempt outside
salespeople.  The final rule eliminates both of these tests and replaces them with a “primary duty” test, a test so slippery and uncertain that it will spawn endless litigation. 

Under the new rule, how will a route sales driver who spends half or less of his time on the road know whether he is entitled to overtime?  Under current law, it would be simple.  He knows he is entitled to overtime because more than 20% of his hours are non-outside sales.  Under the final rule, the question becomes, which is his primary (i.e., most important) duty–outside sales or his other work?  The amount of, however, time is not dispositive; even spending most of his time doing inside sales work would not guarantee him the right to overtime pay.  The DOL has chosen to make the rules murkier, not clearer, and the result will be new litigation.

Similarly, by eliminating the 20% tolerance test for non-exempt work by supervisors, factory foremen who spend virtually their entire day doing manual work on the line next to the employees they supervise will lose their right to overtime pay, as long as the employer can claim that their primary duty was executive, i.e., supervisory.  Instead of an easy test based on time spent doing non-exempt duties, the test will be completely subjective, left to determination “on a case-by-case basis,” according to section 541.106(a).

Conclusion

The Department’s abandonment of clear tests and the substitution of “case-by-case” determinations is a recurring theme of the final rule.  The Department suggests that it will no longer require that executives actually manage the enterprise or a department or subdivision thereof; it may be enough to be in charge of a team or grouping, “but a case-by-case basis analysis is required” (69 Fed. Reg. at 22,134 ).  Similarly, the Department admits that the new creative professional exemption for chefs is so vague that, of course, it “must be applied on a case-by-case basis with particular focus on the creative duties and abilities of the particular chef at issue”  (69 Fed. Reg at 22,154).  Obviously, this approach is a recipe for more litigation, not less.

Notes

[1] In one case, an engineer with 30 years of work experience and three years of college was found to be a professional, but this rare exception is just that – a rare exception.  The final rule makes the substitution of work experience for a degree an easy route to exemption and loss of overtime pay.

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

[ POSTED TO VIEWPOINTS ON MAY 20, 2004 ]


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