HEARING ON H.R. 2710, THE REWARDING PERFORMANCE IN COMPENSATION ACT
SUBCOMMITTEE ON WORKFORCE PROTECTIONS
COMMITTEE ON EDUCATION AND
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
HEARING HELD IN WASHINGTON, DC, JULY 16, 1998
Serial No. 105-132
Printed for the use of the Committee on Education
and the Workforce
TABLE OF CONTENTS *
H.R. 2710, THE REWARDING PERFORMANCE IN COMPENSATION ACT
OPENING STATEMENT, CHAIRMAN CASS BALLENGER, SUBCOMMITTEE ON WORKFORCE PROTECTIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE, U.S. HOUSE OF REPRESENTATIVES *
OPENING STATEMENT, MINORITY RANKING MEMBER, MAJOR R. OWENS, SUBCOMMITTEE ON WORKFORCE PROTECTIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE, U.S. HOUSE OF REPRESENTATIVES *
STATEMENT OF ANITA U. HATTIANGADI, ECONOMIST, EMPLOYMENT POLICY FOUNDATION, WASHINGTON, D.C. *
STATEMENT OF SALLY K. FANNING, DIRECTOR, COMPENSATION AND BENEFITS, PRAXAIR, INC., ALEXANDRIA, VIRGINIA *
STATEMENT OF JODI P. HOLT, MANAGER OF COMPENSATION, CORDANT TECHNOLOGIES, OGDEN, UTAH *
STATEMENT OF MICHAEL T. LEIBIG, ATTORNEY, ZWERDLING, PAUL, LEIBIG, KAHN, THOMPSON, AND WOLLY, FAIRFAX, VIRGINIA *
APPENDIX A -- WRITTTEN OPENING STATEMENT, CHAIRMAN CASS
BALLENGER, SUBCOMMITTEE ON WORKFORCE PROTECTIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE, U.S. HOUSE OF REPRESENTATIVES *
APPENDIX B -- WRITTEN OPENING STATEMENT, MINORITY RANKING MEMBER, MAJOR R. OWENS, SUBCOMMITTEE ON WORKFORCE PROTECTIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE, U.S. HOUSE OF REPRESENTATIVES *
APPENDIX C -- WRITTEN STATEMENT OF ANITA U. HATTIANGADI, ECONOMIST, EMPLOYMENT POLICY FOUNDATION, WASHINGTON, DC *
APPENDIX D -- WRITTEN STATEMENT OF SALLY K. FANNING, DIRECTOR,
COMPENSATION AND BENEFITS, PRAXAIR, INC., ALEXANDRIA,
APPENDIX E -- WRITTEN STATEMENT OF JODI P. HOLT, MANAGER OF COMPENSATION, CORDANT TECHNOLOGIES, OGDEN, UTAH *
APPENDIX F -- WRITTEN STATEMENT OF MICHAEL T. LEIBIG, ATTORNEY, ZWERDLING, PAUL, LEIBIG, KAHN, THOMPSON, AND WOLLY, FAIRFAX, VIRGINIA *
TABLE OF INDEXES *
Thursday, July 16, 1998
The subcommittee met, pursuant to notice, at 10:31 a.m., in Room 2175, Longworth House Office Building, Hon. Cass Ballenger [chairman of the subcommittee] presiding.
Present: Representatives Ballenger, Barrett, Hoekstra, Graham, Owens, Martinez, and Woolsey.
Staff present: Molly Salmi, Professional Staff Member; Gary Visscher, Workforce Policy Counsel; Jason Ayeroff, Staff Assistant/Workforce; Mark Rodgers, Workforce Policy Coordinator; and Rob Green, Professional Staff Member/Workforce.
Chairman Ballenger. [presiding] A quorum being present, the Subcommittee on Work Force Protections will come to order.
The subcommittee is meeting today to hear testimony on H.R. 2710, the Rewarding Performance in Compensation Act. Under Rule 12(b) of the committee rules, any oral statements at the hearing are limited to the Chairman and the ranking minority member. This will allow us to hear from our witnesses sooner, and to help members keep to their schedules. If other members have statements, they may be included in the hearing record. Without objection, all members' statements and the written testimony of each witness will be included in the record.
OPENING STATEMENT, CHAIRMAN CASS BALLENGER, SUBCOMMITTEE ON WORKFORCE PROTECTIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE, U.S. HOUSE OF REPRESENTATIVES
Today's hearing is a continuation of the work of the subcommittee in reviewing various aspects of the Fair Labor Standards Act, specifically focusing on areas where the act needs updating or clarification in order to be relevant to today's work force.
The hearing will focus on the requirement that certain payments to employees, such as commissions, incentive or performance bonuses, must be included in the employee's regular hourly rate of pay for the purposes of calculating overtime pay. This requirement often discourages employers from monetarily rewarding their employees for good performance.
As we will hear from our witnesses, it is becoming more and more common for companies to link pay to performance as they look for innovative ways to improve employee productivity and allow employees to share in the company's success.
More employers are awarding one-time payments, in addition to regular wage increases, to individual employees or to groups of employees. Employers have found that rewarding employees for high-quality work improves their performance and the ability of their company to compete. Even President Clinton has repeatedly called on business to work in partnership with employees by sharing the benefits when times are good.
Unfortunately, many employers who choose to operate such pay systems can be burdened with unpredictable and complex overtime liabilities. Under current law, an employer who wants to give an employee a bonus based on production, performance, or other factors must divide the payment by the number of hours worked by the employee during the pay period that the bonus was meant to cover and add this amount to the employee's regular hourly rate of pay. This adjusted hourly rate must then be used to calculate time-and-a-half overtime pay for the pay period.
On the other hand, employers can easily provide additional compensation to executive, administrative, or professional employees who are not covered by the Act without having to recalculate rates of pay at any time.
Rather than go through this process, many employers simply do not make their hourly employees eligible for the performance bonuses that they give to the executive, administrative, and professional employees who are not covered by the Act and who can receive it.
I sponsored H.R. 2710, the Rewarding Performance in Compensation Act, which will be the focus of today's hearing. The bill would remove barriers within the current law which have the effect of discouraging employers from providing bonuses to hourly paid employees.
I'd like to thank our witnesses for taking time out of their busy schedules to be here with us this morning, and I look forward to their testimony.
I now yield to the distinguished ranking member, Mr. Owens, for whatever opening statement he wishes to make.
WRITTEN OPENING STATEMENT, CHAIRMAN CASS BALLENGER, SUBCOMMITTEE ON WORKFORCE PROTECTIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE, U.S. HOUSE OF REPRESENTATIVES -- SEE APPENDIX A
OPENING STATEMENT, MINORITY RANKING MEMBER, MAJOR R. OWENS, SUBCOMMITTEE ON WORKFORCE PROTECTIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE, U.S. HOUSE OF REPRESENTATIVES
Mr. Owens. Thank you, Chairman Ballenger. I have a very short opening statement. I would like to congratulate you on a brilliant new maneuver in your guerrilla warfare against working families. If this succeeds, it will be quite a blow to the income of working families and quite a boon to the profits of employers.
I'd also like to call to your attention the fact that all of us received a booklet entitled "Minimum Wage and Overtime Hours under the Fair Labor Standards Act: A 1998 Report to Congress," which is required. And there was a letter from Department of
Labor Secretary Herman accompanying this report that stated that this is the sixtieth anniversary of the Fair Labor Standards Act.
I am pleased to join with Secretary Herman in celebrating the sixtieth anniversary of the Fair Labor Standards Act, which is what we're all about changing today, posing a seemingly simple change that is radical indeed. This proposed change in the law, H.R. 2710, effectively repeals the 40-hour week. The Fair Labor Standards Act requires that employees be compensated at a rate that is not less than the minimum wage when figured on an hourly basis. However, the Act does not require that workers receive an hourly wage.
Under H.R. 2710, all of an employee's compensation may be converted to a performance bonus. In effect, any worker presently entitled to overtime could be converted to a piece-rate worker. At that point, under the provisions of H.R. 2710, the worker would not be entitled to any overtime premium at all.
As I said before, under this bill, H.R. 2710, this could happen to virtually any worker. For examples, I could establish a system whereby I will pay my receptionist $500 a week so long as he types a specified number of strokes a week and answers the phone once. That would be his entire compensation. Having established such a performance bonus plan, H.R. 2710 permits me to require the receptionist to work as many hours as I may wish, without paying him any overtime at all.
In my view, the requirement that workers be paid time-and-a-half for overtime work serves two very important public policies. First, it discourages employers from requiring workers to work excessive hours. It therefore encourages employers to hire more people, rather than simply working a fewer number of people for longer hours. Second, where employees are required to work more than 40 hours a week, the overtime requirements of the Fair Labor Standards Act ensure that employees are more fairly compensated for that work.
Diminishing or eliminating overtime pay would produce two results. Those workers with jobs would have to work longer hours for less money. At the same time, the number of workers without jobs would increase.
Today, corporate profits are at unprecedented levels and those in the top 20 percent income bracket are making more money than ever before. At the same time, more and more workers are working longer and longer hours just to make ends meet. H.R. 2710 seems to be specifically intended to accelerate this trend. It's difficult for me to imagine a more wrong-headed policy.
And I must add there's one other thing, in fact, that this change would bring. More people would work themselves into illness or death. It is not exaggerating to make this comparison. You know, New York City has not been known as a place where slavery was a very great issue, but New York City was one of the major slave ports in the United States. It was either second or third, in the same league with Charleston, South Carolina in terms of number of slaves imported.
Early New York City was built by slave labor. In the process of constructing a new Federal building, we discovered a Negro burial ground, and many of the bodies dug up from that burial ground were sent to Howard University lab for analysis of causes of death, et cetera. Large numbers of those workers were found, from the breaks in the collarbones and the backbones and various other kinds of obvious structural defects, to have been worked to death. They were worked to death. The slaves were literally worked to death.
That may seem like an extreme thing to interject into this conversation. In this day and age of civilized American work place that could never happen. And I'm sure nobody would be worked to death literally. But when the corporate bosses are told by the stockholders that you have to increase profits, and there's a widget somewhere that's making great sales gains somewhere in the world and they have to quickly reproduce large numbers of these widgets, instead of hiring more people, they would just institute a piece-rate, bonus-performance system and work the workers there extreme numbers of hours.
We have situations that have developed related to ergonomics, where people literally lose the capacity to type or use their wrists because they've done it too many times. In this day and age, it is possible to wrought great sickness and illness and injury on workers as a result of this kind of policy.
The Fair Labor Standards Act puts a check on the greed of employers. The Fair Labor Standards Act is a long ways removed from slavery, and we ought to keep it that way. Thank you.
WRITTEN OPENING STATEMENT, MINORITY RANKING MEMBER, MAJOR R. OWENS, SUBCOMMITTEE ON WORKFORCE PROTECTIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE, U.S. HOUSE OF REPRESENTATIVES -- SEE APPENDIX B
Chairman Ballenger. Thank you, Mr. Owens. I guess you're saying it's better not to reward the employees who are deemed productive.
I'd like to introduce our panel of witnesses. We will begin with Miss--and this one I apologize--Miss Anita Hattiangadi. I got it. Miss Hattiangadi is an economist from the Employment Policy Foundation. Miss Sally Fanning, Director of Compensation and Benefits at Praxair, Incorporated. Miss Jodi Holt, Manager of Compensation Claims at Cordant Technologies Incorporated. Mr. Michael Leibig who's an attorney with Zwerdling, Paul, Leibig, Kahn, Thompson, and Wolly. I think we've met before and he is a very competent witness.
So let me thank you all for being here, and if you all will come forward and take your places. Before the witnesses begin, I'd like to remind members of the subcommittee that they will be allowed to question the witnesses after the entire panel has testified. And in addition, Committee Rule 2 imposes a five-minute limit on all questions. And with that said, Mrs. Hattiangadi, you may begin your testimony.
STATEMENT OF ANITA U. HATTIANGADI, ECONOMIST, EMPLOYMENT POLICY FOUNDATION, WASHINGTON, D.C.
Ms. Hattiangadi. Good morning, Mr. Chairman and members of the subcommittee. Thank you for the opportunity to testify before you here today. My name's Anita Hattiangadi and I'm an economist with the Employment Policy Foundation. I'm here today to summarize the findings of my recent work on gainsharing and the impact--
Chairman Ballenger. Would you get a little closer to the mike? Slide it up to you.
Ms. Hattiangadi. And the impact that it can have on productivity and wage growth. My testimony will describe how the use of teams and gainsharing in the work place can result in significant productivity increases for firms and higher real wages and living standards for workers.
Gainsharing plans compensate workers based on improvements in performance. They are usually used in combination with employee involvement or team strategies and base pay-out on the performance of small groups of workers, rather than on the organization as a whole. Because bonuses are paid only when gains are achieved, these claims do not adversely affect a firm's costs. Additionally, since payouts are based on factors directly under a worker's control, such as productivity or costs, they are calculated and distributed frequently and the workers feel that they can control these factors.
One of the most significant advantages of gainsharing is that it can be used to target productivity, including long-run productivity. When workers know that a portion of their compensation is based on their own contribution to the firm's productivity, they have an additional incentive to work more efficiently and effectively. In fact, a review of aggregate research in this area shows that firms can achieve significant productivity gains through gainsharing, ranging between five and 49 percent.
An early study by Eldridge Puckett of gainsharing found that productivity improvements in the first two years of plan implementation range between ten and 49 percent, with average productivity growth of 23 percent.
A study by the General Accounting Office found that most firms achieved average labor cost savings of 17 percent, which they attributed to performance improvements in employees, improved employee attitudes, and improved productivity.
A study by Roger Kaufmann of all firms known to have info-share or gainsharing plans, found that the median firm experienced a five to 15 percent increase in productivity. That's compared to a two percent increase for all manufacturing firms.
Finally, a study by the American Compensation Association found that most gainsharing plans translated into 129 percent net return to firms, on average. Gains per employee were about $2,000 per year.
These studies illustrate the significant productivity improvements that can be realized through gainsharing. Many individual firms' studies also find significant results. In addition to these productivity increases, there are also substantial increases in workers' wages that are realized through gainsharing. When gains are distributed to workers through bonus payouts, their compensation rises and their standards of living rise accordingly.
Aggregate studies show that gainsharing bonuses range from three to 29 percent of base pay. Workers in the Puckett study earned average bonuses equal to 17 percent of gross pay during a two-year period, and individual firms' bonuses range between eight and 29 percent. In the Kaufmann study, mean and median bonus payouts during the first quarter of plan operation were four and six percent of wages and salaries, respectively, and remained significant over time. Gainsharing payouts in the ACA study were approximately three percent of base pay and had a median value of $700.
These studies show that workers can achieve significant productivity and wage gains through a gainsharing plan. In fact, EPF research shows that a median-wage worker could earn a total of $17,000 to $26,000 more over a 20-year period if gainsharing and teams were implemented and more widespread.
Gainsharing also leads to improvements in other measures of firm performance. Firms using gainsharing have experienced better teamwork and morale, better use of materials, and better product quality. Gainsharing can also significantly reduce the rates of absenteeism, defects, and down time.
While employee involvement and gainsharing are really two separate strategies, they're often used together because they are complementary in nature. Productivity gains resulting from employee involvement alone range from 18 to 25 percent, with an additional three to 26 percent gain when used with gainsharing.
Unfortunately, usage of teams and gainsharing is discouraged by the existing policy environment. The Fair Labor Standards Act often impedes the adoption of gainsharing in American workplaces.
When a firm, at its own discretion, seeks to raise worker compensation to reward productivity or quality gains, it must recalculate regular rate of pay for workers receiving lump-sum bonuses to determine whether any unpaid overtime is due. As a result, that act discourages firms, especially small firms that cannot absorb these large administrative expenses, from sharing profits with workers through gainsharing. Even in larger firms, it sometimes leads to exclusion of non-exempt workers from gainsharing plans.
Furthermore, the National Labor Relations Act holds that in non-union settings, employee involvement structures that address terms and conditions of employment violate Section 882 of the Act.
Unless current law is changed, some firms will remain reluctant to use gainsharing and teams despite their obvious advantages. This will hurt future U.S. productivity and wage growth, since gainsharing and teams offers a way in which the country can improve these measures and provide a higher standard of living for U.S. workers.
[The statement of Ms. Hattiangadi follows:]
WRITTEN STATEMENT OF ANITA U. HATTIANGADI, ECONOMIST, EMPLOYMENT POLICY FOUNDATION, WASHINGTON, DC -- SEE APPENDIX C
Chairman Ballenger. Thank you. Mrs. Fanning.
STATEMENT OF SALLY K. FANNING, DIRECTOR, COMPENSATION AND BENEFITS, PRAXAIR, INC., ALEXANDRIA, VIRGINIA
Ms. Fanning. Mr. Chairman and members of the subcommittee, my name is Sally Fanning. I am the Director of Compensation and Benefits at Praxair, Incorporated. I'm here today on behalf of the Society for Human Resources Management, which represents over 100,000 individual human resource professionals. I've been an active member of SHRM since 1978 and currently serve on the Society's compensation and benefits committee.
The company I work for, Praxair, Incorporated, was founded in 1992. It was a spin-off company from a major chemical company. It's headquartered in Connecticut. We have over 25,000 employees worldwide. We have employees in all but three states in the United States and in over 47 countries. We produce industrial gases, gases that are as diverse as oxygen you might have in your hospitals or carbon dioxide that you have in your Pepsi and Coca-Cola. We put the bubbles in Pepsi and Coke.
The reason I'm before you today is to demonstrate to you, on behalf of SHRM, why overall reforms are needed to the Fair Labor Standards Act. I'd like to illustrate how FLSA has limited Praxair's ability to provide bonuses to our employees.
Praxair has a philosophy that focuses on sharing profits with employees, on recognizing employees through incentive programs, and to provide employee ownership. In 1992, we established a profit-sharing plan. We went through legal review and determined that it was a bona fide profit-sharing plan under the terms of the Fair Labor Standards Act.
Since 1992, that plan now covers over 5,000 employees and in the most recent year we distributed approximately $25 million in cash to employees through this plan. The payments are in cash; they're made twice a year; and they're given to exempt employees, non-exempt, and bargaining-unit employees. The program has been very widely supported by employees and it has proved to be an excellent link to help employees understand how they actually impact the profits of the company and therefore gain through the profits of the company by being rewarded themselves.
In recent years, employees have indicated that they were interested in more company ownership, more stock ownership programs other than traditional 401(k) plans. The idea came up to combine the very successful profit-sharing plan that we had in place with this request for more employee ownership. So what we decided on was a proposal to have our profit-sharing plan allow employees to elect their payment to be either in the cash that they were already receiving or in stock options. This was to be totally a voluntary choice. We went to employees, including bargaining-unit employees, and ran the idea past them and they were very supportive of the idea.
We submitted the proposal to legal counsel. Their response was that there is nothing in FLSA, there is no case law, and there's no Department of Labor opinion letters on this topic. Even with nothing in the records that would prevent us necessarily from changing the way the payment would be made, our legal counsel said that they thought our plan would be disqualified if we gave employees the alternative of receiving their payment in stock options.
We asked what disqualification would mean. They said that it means that each time you had a payout, you would have to go back and recalculate all of the payments, all of the overtime payments, for the non-exempt employees before the actual payout could occur. We analyzed this very thoroughly to find what that would mean administratively, and basically determined that the administrative burden was something that we just literally could not handle, and so we had to dismiss the proposal.
We did look at another alternative. We could have split the program and had a profit-sharing plan for non-exempt employees that paid only in cash, and for exempt employees that would pay in cash but also give them the alternative of stock options. We dismissed that as an alternative because it's totally contrary to Praxair's philosophy. We do not have programs that are different for exempt and non-exempt employees in pay and benefit programs. It is just totally against our philosophy.
We compete very globally, and we need to be able to use every tool available to reward and motivate employees. It's important you understand that SHRM does not take exception with the intent or the spirit of FLSA. The contention is with the outdated provisions. The regulation that we are talking about today was essentially written in 1953, 45 years ago. And it was really intended to address individual productivity incentive systems such as piece-rate systems for cut-and-sew type of operations. Very easy to measure on an individual basis.
Today's incentive rewards focus on group productivity, teams, company-wide profit sharing. The regulations do encourage profit-sharing, but they do not encourage productivity-improvement programs, nor employee-ownership programs.
I appreciate the opportunity to speak with you today on behalf of SHRM and would be very glad to answer questions.
[The statement of Ms. Fanning follows:]
WRITTEN STATEMENT OF SALLY K. FANNING, DIRECTOR, COMPENSATION AND BENEFITS, PRAXAIR, INC., ALEXANDRIA, VIRGINIA -- SEE APPENDIX D
Chairman Ballenger. Thank you. Ms. Holt.
STATEMENT OF JODI P. HOLT, MANAGER OF COMPENSATION, CORDANT TECHNOLOGIES, OGDEN, UTAH
Ms. Holt. Good morning, Mr. Chairman and members of the subcommittee. My name is Jodi Holt and I am manager of compensation for Cordant Technologies, Incorporated.
Chairman Ballenger. Could you slide the microphone up close?
Ms. Holt. I'd like to thank you for the opportunity to testify before you this morning on an issue that confronts U.S. businesses in their--
Chairman Ballenger. Could you slide it a little bit closer still?
Ms. Holt. Is this on?
Chairman Ballenger. Some of us have a hearing aid.
Ms. Holt. I'd like to thank you for the opportunity to testify before you this morning on an issue that confronts U.S. businesses in their struggle to develop compensation and reward programs that recognize individual contributions and promote teamwork and productivity: the regular-rate requirements of the Fair Labor Standards Act.
I am testifying today on behalf of LPA, the Nation's principal public policy association of senior human resource executives of major U.S. corporations, whose purpose is to ensure that U.S. employment policy supports the competitive goals of its member companies and their employees.
In summarizing my written statement, I would like to give the practical perspective on how the FLSA impedes the development and operation of variable-pay plans. Because of these effects, LPA fully supports the delinking of the regular-rate and performance bonuses, just as you have done, Mr. Chairman, in H.R. 2710, Rewarding Performance in Compensation Act.
First, a little about Cordant Technologies. With more than 16,500 employees worldwide, Cordant Technologies is a strategically balanced global business with consolidated annual sales of approximately 2.2 billion. Our Thiokol Propulsion business is the leading producer of solid propulsion systems. Our Huck International subsidiary delivers high-performance industrial and aerospace fasteners. Cordant Technologies also holds a majority interest in Howmet International, a global manufacturer of aircraft and industrial gas turbine engine components.
Cordant Technologies' compensation philosophy is to pay our employees competitive base wages and share the profits with them through lump-sum bonus payments. Our goal is that base pay will attract and retain the best employees, while bonuses reward employees for the value they add to the company.
Cordant's incentive-based compensation plans are designed to support the business strategy of each business unit, and therefore differ depending on the business. Due to the complexities associated with the regular-rate recalculation, each of Cordant's plans uses the percentage-of-pay method to calculate the bonus. Under this method, the bonus is calculated as a percentage of total pay for the period in which the bonus is earned. Some plans provide for bonus percentages to vary based on performance, and some plans provide the same bonus percentage to each employee.
While Cordant Technologies and its business units have decided to share gains with employees, several problems do arise with the successful operation of these incentive-based compensation plans, due to the regular-rate recalculation that is required.
The first problems that are encountered are the inequities that it causes among employees. The current regular-rate requirement creates inequities among employees in two areas. First, in the plans designed to allow managers to determine the bonus percentage earned for each employee, based on performance, some managers reduce the amount of bonus for employees who have worked a greater amount of overtime. They do this to anticipate the effect of the regular-rate recalculation on an employee's total earnings to smooth the total compensation among employees and stretch their bonus dollars as far as possible.
When managers try to balance out total compensation, higher-performing employees may receive smaller bonus percentages based on the overtime they worked, instead of a larger bonus percentage based on their higher performance. Likewise, if managers do not carefully monitor employees over time amounts, a lower performing employee who works a greater amount of overtime will receive a higher bonus. This sends a contradictory message to employees.
Second, in the plans that are designed to give every employee the same bonus percentage of base pay, the regular-rate recalculation causes employee relations problems between exempt and non-exempt employees. This is particularly true where non-exempt employees receive larger bonuses than their exempt counterparts who work the same number of overtime hours and contributed equally to the company's success.
By complying with the regular-rate requirements prescribed in the FLSA, companies are compelled to reward employees based on the time they're on the clock, versus their contribution to the organization.
Another area is the potential gaming of the system that occurs. As Cordant Technologies is moving toward self-directed work teams in many of its locations, this creates a situation in which employees are empowered to create their own work schedules. Some employees inflate overtime hours worked to increase the bonus amount received.
And the last area that causes problems are the administrative difficulties encountered. The administration of incentive-based compensation plans is nothing short of a nightmare due to the regular-rate recalculation by the FLSA. Payroll systems are not capable of recalculating the regular rate at a touch of a button. This fact alone causes design limitations when developing an incentive-based compensation plan.
Many companies are forced to state bonuses as a percentage of base pay because they do not have the capability to go back and recalculate the regular rate for all work weeks covered under the plan. In some cases, it would be preferable to give employees the same dollar amount in order to reinforce the teamwork that went into producing the gains in the first place.
In addition, payroll systems are designed to capture earnings for a calendar year and not for a company's fiscal year. Many companies have fiscal years that do not correspond to a calendar year. If a company like Cordant Technologies has incentive-based plans that correspond with their fiscal year, bonus calculations are extremely burdensome, even using the percentage-of-pay method.
Since our payroll system resets January 1 every year to capture the new year's earnings, we must download to a separate database all employee information pertaining to overtime from July through December, and again between January and June. We then must match those earnings to the base-pay earnings before we can even begin to calculate the bonuses for employees.
To fix this problem, Mr. Chairman, LPA believes that bonus awards should be separated from the regular-rate determination, as you have done in H.R. 2710 and as the law already allows for in profit-sharing plans and discretionary bonuses. The current regulations encourage haphazard distribution of bonus awards, detract from strategic business goals, and cause employee-relation problems. We encourage the subcommittee to move this legislation forward.
Thank you for this opportunity to testify, Mr. Chairman. I look forward to answering any questions you may have at the conclusion of all testimony.
[The statement of Ms. Holt follows:]
WRITTEN STATEMENT OF JODI P. HOLT, MANAGER OF COMPENSATION, CORDANT TECHNOLOGIES, OGDEN, UTAH -- SEE APPENDIX E
Chairman Ballenger. Mr. Leibig.
STATEMENT OF MICHAEL T. LEIBIG, ATTORNEY, ZWERDLING, PAUL, LEIBIG, KAHN, THOMPSON, AND WOLLY, FAIRFAX, VIRGINIA
Mr. Leibig. I've submitted some written testimony and, other than making one comment about that, I'm not going to read the testimony. The only comment I wanted to make, which is typical of my testimony, is that there's a quote in the testimony for a Supreme Court decision that deals with this in 1945, and there are two typos in the quote. The name of what is in the last sentence says this, and it should say thus. It makes sense, anyway, but I just like to get things straight.
Secondly, I want to make two points that have not yet been made. First of all, the idea that bonuses should be treated separately for regular-rate purposes other than compensation is neither new nor unusual. Not only that, but the arguments being made in favor of it are neither new nor unusual, nor the economic conditions that would cause the arguments to be made are neither new nor unusual. Almost identical arguments were made during the Second World War, in an economy that for many reasons generated the same problems. That is, there was a lot of work to be done, very low unemployment, a demand for great productivity, and many companies used bonuses and bonus systems exactly as they're being described today as a method of doing it. And therefore the issues came before both Congress and the administrators of the Fair Labor Standards Act in the 1940's with the same kind of proposals.
That issue went to the Supreme Court of the United States. The Supreme Court of the United States pointed out in a decision I cite in my testimony that while bonuses should be encouraged in every way, as other incentive systems should be, if they were
encouraged in such a way to allow the separation of pay for reasons of calculating the overtime rate, any employer that wanted to could easily avoid the overtime provisions altogether. And I've given some examples of how that could be avoided in my testimony.
Once you allow an employer to do that, there may be employers that would design bonus systems that are very effective and very beneficial. But no one has been able to come up with a rule for 60 years that would allow the employers that we want to encourage, that have good motivation and want to have every motive to get a good product, to write a rule that would allow them to do that without allowing other employers to completely avoid the impact of the Fair Labor Standards Act.
It doesn't take much creativity to figure out, under the language of the statute, how anybody could avoid the impact of the Fair Labor Standards Act. I give an example in my paper that if an employee in a given year made $40,000, an employer who was trying to take advantage of the language in the Act could, in the future, designate $20,000 of that as being included in the regular rate, the other $20,000 as an incentive bonus based on productivity, and thereby move the person's regular rate from $10 an hour to less.
And therefore, you could calculate a rate, in order to save your entire overtime budget; it's a very simple computer program to figure exactly where you draw the line on budgets to avoid overtime pay. And while some employers are saying now it's very difficult to recalculate under the system now, I think you would find that a lot of those same employers would find that one line of a computer program in a personnel system that you have to design to do the other; they'd suddenly discover that that type of system can be implemented without gray skies.
Secondly, though, I'd like to comment specifically on the testimony that was given today. The first witness testified about a number of studies about gainsharing and how well it worked. I'd point out that all those plans operated under the current system. They all operated under a system where, if you paid bonuses, the overtime system was still protected. They all operated under the Department of Labor system, and all of the gains made by people taking part in those systems were done under the current law, not other law.
When discussing the possibility of employers who don't give bonuses because they're afraid of the Fair Labor Standards Act, I note that there are no studies mentioned in the testimony at all. There have been no studies that demonstrate that a significant number of employers are not adopting incentive programs because of another. But now there is some testimony. Could I take one minute?
Two witnesses described systems where bonuses are in operation. The bonuses are being paid. But I'll get to that. And they said, there is a problem with the bonuses and I'll get to those problems. Those problems, I would argue, are not in the law.
For example, since you brought that up, the witness who testified just before me testified that they did have a bonus system in operation and that it was working very well and it was going to continue. She did say there were problems with this system, but I'd point out the problem is that some supervisors didn't want to take very good control of overtime.
The first problem was that the incentive system--that some managers were upset by the bonus system because it required them to be very careful about the overtime being worked, and to closely monitor overtime. That's not caused by the law. The law is meant to encourage corporations to be concerned about overtime, and each of the examples given were not examples that were generated by the law, but just generated by good management techniques.
None of those problems are mandatory under the law. The only one that was described as mandatory under the law, and which isn't mandatory under the law, was the idea that the explanation that you had to use couldn't use the fiscal year and you had to use the normal calendar year. But there is nothing in the statute that requires that you use periods and recalculate. But there's nothing in the statute that would prevent you from using a fiscal year, if you preferred.
But more importantly, I think that another example that was given by each of the witnesses was competition and worldwide standards. But I'd point out that France and Germany and Japan and Mexico all have fair labor standards acts and none of them would allow the kind of exceptions from the regular-rate basis that are being talked about here.
So the United States is not at a competitive disadvantage with regard to the hours standard. In fact, France and Germany have lower hour standards than we do, and enforce it more aggressively. And they allow bonus systems in the same way we do, and prevent them in the same way we do. So there's not an issue of being competitive in the worldwide market.
But all of that's not the real problem. The real problem is that the hours of work in America today, because of our economy that's doing very well, and because of the size of the labor force, that the Americans' number of hours of work is increasing very rapidly. The average American today doesn't work 40 hours a week; he works more than 50 hours a week. And allowing bonuses to be done would decrease the Federal incentive to encourage more time for workers to have with their families and at home.
A proposal that would discourage any breaks on limiting the hours of work and allowing even greater hours of work than exist now would undermine the amount of time people have to spend with their families. And I think that's really the policy decision and that's the most important issue.
[The statement of Mr. Leibig follows:]
WRITTEN STATEMENT OF MICHAEL T. LEIBIG, ATTORNEY, ZWERDLING, PAUL, LEIBIG, KAHN, THOMPSON, AND WOLLY, FAIRFAX, VIRGINIA -- SEE APPENDIX F
Chairman Ballenger. First of all, Mr. Leibig has testified before us and, unbelievable to most Democrats, we actually took some of his advice once upon a time. I was just curious, Ms. Fanning. You didn't mention your foreign competition situation. Did you read his testimony before you cut that out, or--I hate to just ask you an embarrassing question, but you didn't go into the competition with the British, the French, and the Germans.
Ms. Fanning. No, I was actually trying to save time, but we do have the same problem. We do compete on a global basis. We have more employees in Brazil than we do in the U.S. The program that I was describing is in effect in both Canada and Puerto Rico, and we don't have the same problems in Canada that we do in the U.S. We have not addressed it in Europe because of some of the pan-European issues. And in Asia, it's such an emerging market that we have not addressed it there. But our intention is that we would actually like to have some of our programs worldwide, based on worldwide performance, but have not been able to do that because of a lot of the regulatory issues. But yes, we do have the worldwide competition issues.
Chairman Ballenger. Let me ask Mr. Leibig. You have got what I would consider two rather super-large firms here.
Mr. Leibig. Right.
Chairman Ballenger. Let us say they are following their legal advice. Now, you're a lawyer and you give them some advice saying that they do not need to worry about this. That they can go ahead and do it.
Mr. Leibig. No.
Chairman Ballenger. But what I was going to say is, they have come up with these ideas they'd like to do, and then they get presented to their lawyers and the lawyers say, well we're not really sure. You know how lawyers are, on the one hand this way, and on the other hand--
Mr. Leibig. Right.
Chairman Ballenger. And so, when you are a corporation that can get sued at the drop of a hat, some lawyer comes along and says, I'm not too sure about this, maybe you'd better leave it alone.
Mr. Leibig. Right.
Chairman Ballenger. Complications are put on them by this Fair Labor Standards Act situation, in spite of the fact that you say it's easy to do and that anybody could accomplish it. Maybe the lawyers are worse in a way than the law itself.
Mr. Leibig. Being one, I would agree with that. I think the problem is that if you put into the Fair Labor Standards Act the language in this amendment, it will not make for application when you look at the legislation. For a large corporation with over 15,000 people, you're going to have to do that whether you pass this amendment or not. I would point out that the thing about amending the profit-sharing plan and the 7(k), I think they'd find if they asked the Department of Labor, the Department of Labor would give them an opinion that they could do that. As it says in their testimony, there's no opinion of the Department of Labor, the regulations, or the statute that says they can't do that. Apparently, their corporate counsel said they couldn't do that.
If I was in that situation as a corporate counsel, I would write to the Department of Labor and say, there's nothing against doing it. We want to do it. And the Department of Labor does have a system to respond to such things. But--
Chairman Ballenger. Just--
Mr. Leibig. But I think. Could I--I'm almost finished. I think the bigger problem is not the very large corporation. I think maybe all the witnesses would agree to that. It's not the large corporation that has maybe 100,000 employees. It's the smaller corporation that, even though they probably would consult a lawyer, they would have more problems with the causes.
Chairman Ballenger. Let me ask a question. Have you written, on behalf of anybody, to the Labor Department and asked for a response?
Mr. Leibig. Yes.
Chairman Ballenger. How long did it take you?
Mr. Leibig. Well, I've got to say--
Chairman Ballenger. You haven't got it yet, in other words.
Mr. Leibig. No, no. I have.
Mr. Leibig. No, I've got to say that the Wage and Hour opinion branch in the last year and a half has been much quicker to give opinions. In fact, we have found that for counsel on the telephone, they'll give you an opinion in a day or two. Now, when you want a letter that you can use for protection against suits, that has to be signed by the Assistant Secretary, it takes six months or so. And it used to take years, I agree with that.
And I think that partly because of the Chairman, the Department of Labor has been quicker, especially the Wage and Hour opinions. I found it amazing that today you can call up the Wage and Hour Division, lay out a question, and I've found that they'll call you back within a week orally. Now, if you want it in writing, then they have a system. It has to be signed by the Administrator, and so forth, and that takes more time.
Chairman Ballenger. I've got a self-serving question. Excuse me, Ms. Fanning. Go ahead.
Ms. Fanning. May I make a comment, Mr. Chairman?
Chairman Ballenger. Yes, ma'am.
Ms. Fanning. We have actually written to the Department of Labor, and we do need something in writing. We cannot just take an opinion over the phone. The advice we received back to us from the Department of Labor through our external counsel and internal counsel, who did the writing of the letter for us, was first, they would not give us a time frame as to when we would be able to get answer. And, secondly, that they were not required to give us an answer at all, ever.
Chairman Ballenger. See, this company doesn't have any friends in the Department of Labor. That what's happened.
Chairman Ballenger. I'd like to raise--
Mr. Leibig. They should be friendlier.
Chairman Ballenger. You were going to arrange to--yes, ma'am. Fire away.
Ms. Hattiangadi. Yes, I just wanted to respond to Mr. Leibig's testimony also. To say that I haven't described stories of firms who didn't implement gainsharing I guess sort of begs the question. Because of these regulations, there are many firms who, when confronted with the option of implementing gainsharing and the current loopholes you have to go through to try to get it to work under the current system, many firms just decide to do away with it, and not do any gainsharing at all. And there is significant evidence, both anecdotal and survey, that show that firms, when confronted with this choice, often do just choose not to implement the gainsharing system.
Chairman Ballenger. Right. One thing I'd like to say. Here we are talking about
monstrous firms that probably have a whole roomful of lawyers upstairs that they can call on anytime they want to.
The poor little businessman that's got, you know, 20 employees, 30 employees, and is really trying to compete on the world market and upgrade his own productivity and so forth. If an employer calls a lawyer, the first thing he thinks about is when will he quit charging me. And if he's going to take two years to get an answer, or six months to get an answer, he probably will make three or four calls in that time. And, really, the employer can't afford the lawyer, much less be able to take on a program that might run into difficulty with the Department of Labor.
Have you got any idea? You've done this before--
Mr. Leibig. Well, no, I agree with that, and that's why when I was first questioned I said that I think I'd be more concerned with employers that have 50 employees, which are workplaces where most people work for.
Chairman Ballenger. Yes, right.
Mr. Leibig. And so I agree with that. But the problem is, there may be ways to make it so that those people can get advice through the Department of Labor or otherwise more quickly. But there's no reason to believe that adding these words, in the place you're putting them, in the Fair Labor Standards Act, is going to solve that problem. I mean, they're still going to have to know. For example, suppose they adopt a program that isn't a real gainsharing program, but it's a sham.
In other words, they do exactly what I said. They currently pay somebody $30,000 and they cut their pay in half. One of the answers that some people say to me are, that it would be a sham and the Department of Labor wouldn't let them do it. Well, how do they know whether it's going to be found to be a sham or not? They're still going to have that problem, and I do think it's a problem. You've mentioned it before, and I have too. I do think that there is a problem with the Wage and Hour Division of the Department of Labor and the amount of resources that they have, and the degree to which trying to achieve a reasonable work week in the Fair Labor Standards Act, or any other statute. The IRS has the same problem.
Chairman Ballenger. Let me interrupt just a second, because my time's going to run out. Do you have any suggestions, or do you think it's feasible, or even possible, to change the wording so that such a thing would no longer be a stumbling block.
Mr. Leibig. I understand. The problem is, I mean, the way you could do it is to say, if the gainsharing plan is actually a method of avoiding the 40-hour work week, first of all, it only applies when people are working over 40 hours. If nobody works over 40 hours, none of this makes any difference.
Chairman Ballenger. Exactly.
Mr. Leibig. So we're only talking about employers that are already working their employees more than 40 hours a week. I could imagine a statute saying that the company has to be able to show that the gainsharing program is not a method of avoiding the normal overtime. But as soon as you put that in, you're back to what the Department of Labor regulations say now.
Chairman Ballenger. Yes.
Mr. Leibig. I mean, my point was about the history. That's what they wanted to do in 1945, and they worked to do it. And there was argument before the Supreme Court with briefs that were not different than what's been said today. If you look at them back then, you can see that the court did struggle with this. Nobody's ever been unsympathetic with workers getting bonuses when they perform well. But a lot of very smart people for 60 years have been trying to figure out how to do that without undermining the overtime pay, and nobody's come up with a way yet. That's the problem.
Chairman Ballenger. Well, one thing I'd like to say, and I'll stop after this, is that I don't think any of you all have employees that were listed. The General Motors strikers seem to be making, what, $80,000 a year, and yet they're under the same regulation, unless I'm mistaken, since their hourly wages are such. Fascinating that the Federal government could then step in. They can't get an agreement on a union contract, but the Federal government probably backs up the idea that they can get that. Let me turn it over to the Major, here.
Mr. Owens. I think the General Motors workers are working a lot of overtime already, and that's how they get up to $80,000.
I notice that the first three speakers stressed the administrative complications and how that's so terrible. And I made a note, especially when Ms. Holt was speaking. Is it more difficult to calculate these things under the current system than it is to calculate the compensation for a CEO? You know, CEOs have very complex packages. They get millions and millions of dollars. Do we need to bring in Bill Gates' 10-year-old nephew to quickly work out this thing for the workers?
Mr. Owens. I mean, I--
Ms. Holt. Payroll systems are not designed to go back and readily recalculate the number of hours an employee works. Labor distribution systems collect the hours an employee works, on a weekly basis, and they feed those aggregate--
Mr. Owens. No, I understand all that. I just want to say I'm not impressed with the complexities and inequities that you list.
Ms. Holt. I mean, we can not go back--
Mr. Owens. I think all those things--
Ms. Holt. And recalculate an employee's regular rate on a weekly basis, and we don't even try. That's why we went to the percentage-of-pay method.
Mr. Owens. Miss Hattiangadi, I'd just like to explore the question that Mr. Leibig raised a little more. Why do you want to change the system if gainsharing works so well under the current system? You cite examples where it's working.
Ms. Hattiangadi. These studies that have been done on gainsharing have been in firms who, through specific measures such as Ms. Holt and Ms. Fanning have used in their own companies, have found a way to reward workers for performance. However, it's not the optimal way of doing so--
Mr. Owens. Well, why is it not the optimal?
Ms. Hattiangadi. For example, by using a rate of pay, rather than a lump-sum bonus--
Mr. Owens. They're getting the results, though. The result is that more productivity--
Ms. Hattiangadi. Well, the goal of gainsharing is to closely link a worker's contribution to productivity to their earnings. Now, when you use the percentage-of-pay method, workers who are paid more on a regular basis automatically get a larger bonus. That disconnects that connection between a worker's effort and his bonus. Also, for example, using a profit-sharing plan, if a worker is working hard to make productivity improvements and the company's profits happen to fall that quarter, it can actually have a disincentive effect. The worker says, hey, I've been working hard, and yet the corporate profits fell. Now I'm getting no payout. Additionally, those types of payouts are deferred until retirement, so it's not something the worker sees anytime soon. Whereas gainsharing, the payouts are frequent, in cash, and occur either monthly or biannually, or whatever.
Mr. Owens. Doesn't that approach also discourage teamwork and set workers against workers, in terms of competition?
Ms. Hattiangadi. Which approach--
Mr. Owens. The gainsharing approach that does not look at the bigger issue of overall profits.
Ms. Hattiangadi. No, gainsharing is based on smaller units, and they can be team units, they can be a plant unit. It's an effort to distribute the gains from the additional productivity of a specific work unit equally among those workers.
Mr. Owens. Ms. Holt, do you have a comment?
Ms. Holt. Another comment, with regards to that, is that one of the things the study doesn't show is that many companies that offer gainsharing programs are not aware of the requirement to go back and recalculate the regular rate of pay, so they aren't doing it because they are unaware of it.
Mr. Owens. So we need an education program. Just, I'd like to know, Miss Hattiangadi, I suppose an economist would not be concerned with these questions, but somebody ought to study the kind of additional workmen's compensation problems that are created in these competitive situations where you have a piece-work kind of atmosphere. Some studies need to be done in the area of family stress and some other things.
But the larger issue I want to go back to, and that is, what's so difficult about the present system if profit sharing is permitted. Somebody mentioned stock options; it gets complicated with stock options. Why is it complicated? If profit-sharing is permitted under the present system, why do these things become so complicated, and why can't you offer stock options as part of a profit-sharing situation? I think you mentioned that Miss Fanning.
Ms. Fanning. We were advised by our legal counsel that any payment other than the method we were using, which is cash, was not allowed under the Fair Labor Standards Act, and that in and of itself would disqualify our plan as a legitimate profit-sharing plan, which it is a bona fide profit-sharing plan right now. Apparently before the profit-sharing plan was put in place, the company did consider a gainsharing plan, but because of the administrative complications decided to go down the path of the specific, bona fide profit-sharing plan.
Mr. Owens. The stock options don't have a specific dollar value attached to them?
Ms. Fanning. Yes, they do have a dollar value attached to them.
Mr. Owens. But the Fair Labor Standards Act said it must be cash?
Ms. Fanning. It doesn't specifically say, but our legal counsel said that because it doesn't say, and because there was no other ruling and no other opinion letter on this, that would allow us specifically to pay in stock options, they said that they felt that we would have our plan disallowed.
Mr. Owens. Would it be fair to say the whole tenure of this discussion is that employers are not enthusiastic about making this thing work under the present rules? Mr. Leibig, you had a comment?
Mr. Leibig. Well, I wasn't sure. Some of the problems with having a stock-option plan, and the tax qualification in it, can also be complicated. I mean, to the degree you have to be sophisticated and go through the regulatory process, any employer that's going to offer a stock-option plan, even if you made this change, they would still have to go through the qualification process and do the same kind of calculations. I do think that's a problem, but I just don't think it's going to be solved by this statute.
And the other problem that we haven't talked much about, and I just want to make sure that it's clear, is that the problems that this amendment creates, even though it would allow more gainsharing, shouldn't be ignored. It creates more problems than it solves, because it would allow any employer in the United States who had his eye only on profits, essentially to get out of the 40-hour workweek. And that's a big problem. I mean, you're making an amendment to the Act that would undermine the whole Act to try to help gainsharing.
And I think Gainsharing is a good thing. That should be encouraged. But your amendment, while it helps it a little, it also does other things that are very detrimental to the Act itself. I think that's--
Mr. Owens. So the motivation of the proponents of this act, do we understand correctly, is to make things simpler administratively? Is that your motivation?
Ms. Holt. Certainly.
Mr. Owens. There's no other motivation. He said that's you're--
Ms. Holt. It would encourage employers--
Mr. Owens. Going to make it more difficult administratively. What is your response to the fact that instead of making it simpler--that's your only goal, you're not trying to get out of paying overtime. If your only goal is to make it simpler, then why do you want to do it this way, which leads to more complications?
Ms. Holt. Well, I disagree that it would lead to more complications, but it's not just to make it simpler. It's to encourage more employers to go out and implement gainsharing plans for their employees--
Mr. Owens. Well, by making it simpler, you remove the obstacle that they have. What other obstacle do they have to be encouraged to do more gainsharing?
Ms. Holt. The administrative complexities, they simply cannot, do not have the ability--
Mr. Owens. That's what we're talking about.
Ms. Holt. To go back and recalculate the regular rate.
Mr. Owens. You want to make it simple. You want to make the administrative complexities not--
Ms. Holt. That is correct. To give the design flexibility so these plans really do support and link the employees to the business. There are inherent design problems when you have to go back and recount the regular rate of pay.
Mr. Owens. And you think that this will remove the complexities and those problems will not be there.
Ms. Holt. Yes, I do.
Mr. Owens. Any other comments, Miss Hattiangadi?
Ms. Hattiangadi. I just wanted to respond that the idea that a firm, using gainsharing, would cut a worker's wages in half and then expect them to make up the remainder in--
Mr. Owens. That's as absurd as slave owners working slaves to death.
Ms. Hattiangadi. It is absurd, because slaves were bound. People in today's work force are not slaves to their employers. They have free will and it is a very competitive labor market. If a worker is unhappy with the current situation, he can easily move to another employer. There are no shackles on today's workers.
Chairman Ballenger. Let's move on to the next one, if we can.
Mr. Owens. Mr. Chairman, I think you had a few extra seconds, there.
Chairman Ballenger. That's okay, fire away.
Mr. Owens. I'll wait until the next round.
Chairman Ballenger. Okay, we'll come back to you. Mr. Barrett.
Mr. Barrett. Thank you, Mr. Chairman. Seems to me that this is a bill which will cut through some of the confusing, burdensome requirements by simply saying, and very simply saying, that when a person gets paid an hourly rate, any bonus is not to be factored into that wage. Perhaps I'll ask Mrs. Fanning this question. Is that correct?
Ms. Fanning. That's correct.
Mr. Barrett. Then, the bill ought to protect employees; I emphasize employees, from having their pay cut when they get a bonus. It's that simple.
Ms. Fanning. Absolutely. And I agree with the previous statement, that I don't know of any employer that would cut wages to put in a program like this, especially the drastic cuts that were in the illustration. You wouldn't have a work force. They would not show up for those types of base wages. Employees have to receive a good, strong, competitive base wage, and that's what we provide. These incentive programs are motivational above that.
We need to attract and retain employees, so we have a strong, competitive base rate. To motivate the employees and to get that competitive edge that we need globally, we need above and beyond the typical productivity. And that doesn't necessarily mean more overtime hours. It just means a more productive workforce.
Mr. Leibig. It may be that the people that have the gainsharing programs wouldn't use this act to cut people's overtime rate, but believe me there are employers who don't have gainsharing programs. This act would allow other employers--not those with gainsharing program--to avoid the Fair Labor Standards Act. It may be that none of these people would do it, but the language in the act would allow any employer to designate whatever part of the wages he wants as profits-sharing or productivity, and therefore do that. And there would no longer be any law that prevents that. And that's the problem.
It isn't those corporations that are best motivated and that are most interested in international competition that are the problem. It's other companies that are under pressure, that are losing money, and that are looking for ways to transfer money that could do that. And this law would allow it. No one would be required any more by the
law to pay overtime if they wanted to take advantage of the way the law was written with this amendment.
Mr. Barrett. Let me go back to Miss Fanning then. If this bill were passed, if this became law, can you think of any situations that would undermine or jeopardize the 40-hour working week?
Ms. Fanning. I cannot.
Mr. Barrett. Nor can I.
Ms. Fanning. I am having a difficult time understanding how this would jeopardize the 40-hour workweek. I think that if that is a concern, that there has to be a way to put some safeguard language into the bill to make sure that what Mr. Leibig is referring to does not happen. Employers would not be in business very long if they treated their employees that way.
Mr. Barrett. Mr. Leibig, I'll defer to you. You're getting ready to burst.
Mr. Leibig. No, I'll just give you an example. If this law were passed, suppose an employer today was paying an employee $40,000. If this law was passed, he could just designate part of the $40,000 as a productivity payment, say $20,000, and then when the person worked some overtime hours, since his base pay was then only $20,000, the overtime rate would be lower than the regular rate. I agree with what's said; maybe it could be amended another way, but under the language of this act, all they'd have to do is cut the line and do the thing the other way.
And by the way, that's not something I made up. The Supreme Court explained that when they originally disallowed this kind of a thing in the first place in 1945. It'd be very easy to do. The employer gets to designate which part of the compensation is the regular rate, and they can designate the other part as gainsharing or profitability. So that anybody could--
Mr. Barrett. Thank you.
Mr. Leibig. They couldn't go below the minimum wage, but other than that, anybody could.
Mr. Barrett. And your rebuttal is now a part of the public record, okay? Miss Fanning, let me go back to you. You mentioned, I think, that one alternative that your company had or would have would be to separate the plans for exempt and non-exempt people, and allow only the exempt employees from participating in the profit sharing. Was that basically what you were saying?
Ms. Fanning. We were talking about allowing the non-exempt employees only cash payments, but allow the exempt employees the alternative of receiving their payments in cash or in stock options, which is what we wanted to do for all of the employees. We wanted to give them the alternative of having their payment either in cash or stock options.
But we absolutely rejected that. I remember sitting in the meeting with the CEO, the general counsel, and about six vice presidents, and I was presenting all the possible alternatives. They absolutely, immediately, rejected that idea because we do not treat our non-exempt employees differently from our exempt employees in pay and benefit programs. And that would absolutely put a different class citizen aura around our workforce, and that is not our culture.
Mr. Barrett. Thank you. I was momentarily distracted when you were giving a reason, or sharing a reason why your company did not go in that direction. So it's a matter of, essentially, a matter of company philosophy?
Ms. Fanning. Yes.
Mr. Barrett. Right? Is that the underlying--
Ms. Fanning. Yes.
Mr. Barrett. Okay. Ms. Holt, how long have you had your incentive-payment programs in place?
Ms. Holt. They've been in place for varying times in our different units. Probably around, anywhere from three to five years.
Mr. Barrett. How do your employees feel about it?
Ms. Holt. They like them. We have had really good payments. Our productivity is up. Our profits are up. We've turned our company around, and we are sharing that with our employees.
Mr. Barrett. Any negative comments that you're aware of?
Ms. Holt. The negative comments come back to the fact that, as Praxair does, our philosophy is that we do not treat our exempt and non-exempt employees differently in the pay and benefit programs. But since we are doing a gainsharing type plan, we have to do it as a percentage of pay and it is causing employee-relations problems between our exempt and non-exempt employees. Because the non-exempt employees have overtime, it is calculated into their bonuses, where the exempt employees do not. And it is creating employee-relations problems between those groups of employees, because they all work equally as hard.
Mr. Barrett. May I ask what level of bonuses you are paying under your gainsharing program?
Ms. Holt. Our levels are running as high as $5,000, but generally somewhere around $1,000. It depends upon a plan and how well the division is doing. But last year, I think some of our highest bonuses were around $5,000.
Mr. Barrett. A range would be from 1,000 to 5,000?
Ms. Holt. Yes, generally.
Mr. Barrett. Okay. Thank you very much. My time is about expired, Mr. Chairman. Thank you very much.
Chairman Ballenger. Ms. Woolsey?
Ms. Woolsey. Thank you, Mr. Chairman. I'd like the panel to know that I relate to your profession. I was a human resources manager for over 20 years before I came here, and a human resources consultant. And, yes, bonuses resulted at the early end, about 20 years ago, in some real challenges for the company I worked for, and for the companies that I consulted with. But as more and more companies of all sizes became automated, their payroll systems went on computers. I mean, all you have to do is program a computer to take this into consideration, and you come up with a lot of your answers. It isn't as difficult as I think some people would portray it.
Now Mr. Chairman, I think and hope that we've gotten the message that what we're concerned about is performance bonuses being paid on top of, not paid instead of, a base rate. And that doesn't seem to be able to be protected here in the language of the bill.
And when we hear from the witnesses that it's the performances based on a team, and it always is very important to have teamwork, we cannot leave out the fact that it's proven that every employee goes to work to do the best job they can. But they really can't do the best job unless the employer provides the equipment, the tools, the training, the supervision, and the plan. I mean there is so much that is still left up to the employer
that the employee is dependent on, that to expect employees on their own to be able to meet performance bonuses without it totally being in cooperation with the employer is a little bit short-sighted, I believe.
So one of my questions would be to you, Ms. Holt. And I think Ms. Fanning could answer this too. How are you training your supervisors, so that they know how to administer these bonus programs? Because one or the other of you has mentioned that it's not fair that the lower-paid, higher-performing employee gets less. I mean, what's happening there that your supervisors can't distinguish?
Ms. Holt. What is happening in our situation is that, because we use the percentage-of-pay method, our supervisors are taking into account the amount of overtime that was earned during the period under the percentage-of-pay method. And when they're applying a percentage, they're trying to even it out.
If you have a higher-performing employee that has more overtime than a lower-performing employee, the percentage that they're giving to the higher-performing employee, say, two percent and maybe four percent to the lower-performing employee, because they're factoring the overtime. And that is sending a contradictory message.
Or the problem is reversed. If they don't look at the amount of overtime, they could give that higher-performing employee, if they had less overtime, say a five-percent bonus, and the lower-performing employee a two-percent bonus. But that actually equates to a higher payment for the lower-performing employee because they worked more overtime.
And employees do talk to one another. They know what their bonus checks are. And it sends a contradictory message that managers try to smooth out. Under a lot of our plans, we would have loved to give all employees the same dollar amount. But we haven't figured out how, without undue burden, to go back and recalculate the regular rate. We can't even try it, because it's too administratively complex, as Praxair has found out. It's just not that easy to do. It's not that easy to program and we haven't even figured out how. A lot of the information to do that is not even housed in a payroll system. It's housed in a labor-distribution system.
Ms. Woolsey. Ms. Fanning, did you want to respond to that?
Ms. Fanning. Yes. One of the things that Ms. Holt was mentioning about the labor-distribution system, we have similar problems. Our payroll is actually handled on a centralized basis, so our supervisors do not have the responsibility for doing the calculations. We do it on a centralized basis. But we do that through collecting labor distribution, through a labor-distribution system. Right now, quite frankly, all of our systems analysts are working full-time for the next two years fixing Year 2000 compliance issues with our labor-distribution system. So we definitely have some problems other than that.
The other reason that ours is handled very centrally, and that the supervisors are not really involved in the calculations, is because we do not have a lot of supervisors. Over the years, since Praxair spun off and became a company in 1992, there has been a significant amount of de-layering and reduction in the number of supervisors and managers. So we have a very large number of technicians who operate air-separation plants, many times from their homes, and they are basically supervising themselves. So that's why we have to do kind of the centralized calculation.
Ms. Woolsey. That doesn't go with what you've been saying. Who decides, then, who has outstanding performance? I mean, who in your organization is evaluating the performance if it isn't the supervisor? How are you coming up with somebody getting more than another person in the first place? That really is contradictory to what you've been talking about.
It actually leads into the question of, are we talking about pay on top of base pay, or are we talking about pay instead of? So you're really going to need to ratchet this down, so that you are clearly evaluating performance and paying for performance.
Ms. Holt. Our bonus pay is on top of base pay. Employees, in addition to this, receive their annual increases into their base pay. It is totally separate payment to our employees.
Ms. Woolsey. Right, but you're telling me that then there's no way to separate from the real performer, somebody that worked a lot of overtime, which is performance in my book. Why would you let somebody work overtime if he wasn't a good performer? You get to tell people to work overtime; they don't choose.
So if we're going to pass this bill, it has to be clear what we're really aiming at. And it cannot be set up so that, because it's too, quote, difficult to do the right thing for the employee, that we take away employee labor rights. Because that won't fly in this country, and won't fly on this committee.
Thank you, Mr. Chairman.
Chairman Ballenger. Mr. Graham.
Mr. Graham. Mr. Chairman. I'm very new to the debate here. An example, we have a good quarter and you give me $1,000 because the company's doing well. Under the law, as I understand it now, that would be a bonus that would change the basic pay forever, or just for a period of time? How would the $1,000 work?
Mr. Leibig. Under the regulations, the company would have some discretion about that. If they gave the bonus for one work period, then it would only change the rate for that period. But normally what would happen in that case is they'd call that an annual bonus, and it would change, if you had no employees that worked overtime, it wouldn't make any difference.
But let's say that your average employee worked 10 hours overtime. At the end of the year, you decide to give a thousand-dollar bonus. There are two things you could do. You could calculate that bonus--and that's what we're talking about, using the computer to do that, so that you could set it out so really the employees only got a $782 bonus, and the rest of it was the additional overtime. But if you just gave the $1,000, with no overtime calculation, you'd have to go back and recalculate the overtime rate of the 10 hours everybody got and give them a little bit more money, so that it was included.
But you don't need to include it for everything. You don't have to make it a permanent increase. It's just for the pay periods to which the bonus applies.
Mr. Graham. So anytime--
Mr. Leibig. And that's what people do.
Mr. Graham. Right. So anytime that we have a good year, or a good period and I want to share some of it with employees, if I've got an overtime component of my workforce, that's what these ladies are saying. They've got to go back and sit down and figure out how exactly how to readjust overtime.
Mr. Leibig. Yes. If you have a small employer with 50 employees, that is not a complicated thing to do. Because you know at the end of the year how much overtime you've paid. It's just a matter of math; it wouldn't require changing anything.
Mr. Graham. Right.
Mr. Leibig. Except to record that that's the way you did it.
Mr. Graham. Well, let's pursue the evil approach of how this law could be misconstrued. The 40-hour workweek is based on working, so when you work over 40 hours, you're entitled to overtime if you're that type of employee. Now, your analogy is if you make $40,000, you could reallocate $20,000 of it--
Mr. Leibig. Because under the current system, if you made 40,000 and you worked 2,000 hours a year--you know, just to make easy--
Mr. Graham. Right.
Mr. Leibig. Then your regular rate would be $20. And if you worked over 40 hours, your overtime rate, time-and-half, would be $30.
Mr. Graham. Right.
Mr. Leibig. But an employer in that situation, if this act passed, could in the next year say I'm only going to pay you 30,000, and we'll call the other 10,000 a productivity increase because we made money last year.
And then under this amendment, your bonus would be $15,000. When you look at the legislation, you would only get time-and-a-half to $15,000, and they could cut it any way they wanted. That's the problem with the Act, with the statute.
Mr. Graham. What would be your guess about how people would take such an event?
Mr. Leibig. Well, it depends on who the people are. In the current job markets, they'd probably go and try to work somewhere else. But you can't permanently assume that the job markets stay as they are now, that would be different. But if you look at what people have done for past amendments in the Act that allowed them to manipulate hours to get the regular rate, there's a lot of evidence from the Department of Labor that many employers, but not all, don't even need to be regulated at all, because they're motivated in every way that we'd want them to be. But there are a lot of employers that already try to avoid the Fair Labor Standards Act in every possible way they can, and they would take advantage of it.
Mr. Graham. Now, Mr. Ballenger's amendment, as I understand it, would take additional payments designed to reward or provide incentives for an employee or a group of employees for meeting productivity, quality, efficiency, or sales goals. It's not just sort of an open-door policy, here. It's fairly well defined.
Mr. Leibig. Well, for example, but if say--any employer could say--let's say at the beginning of a year they say, now your salary, $10,000 of your salary, is because this is a good company and we do it. The employer decides that. Under the amendment, as I understand it, the Department of Labor, Congress, or the courts could never question that, whether the person was being honest or not.
When I first prepared the testimony, I was going to suggest changing the language so you avoided that kind of a sham. But as soon as you change it to avoid a sham, you get rid of the whole purpose: the proponents have wanted to make it so simple that you don't have to do any analysis. So there are ways you could say, however, if the employer does this in order to avoid overtime, then it's not allowed.
But then it would be complicated again, and we'd have the problem the Chairman talked about. They'd have to call their lawyer and say, well, if I do it this way is it a sham or not? You'd be back where you are now.
Mr. Graham. Weekend and holiday premium pay is not included in this formula.
Mr. Leibig. Yes.
Mr. Graham. Why?
Mr. Leibig. Currently, the way it works is vacation, sick day, time off is not overtime pay period.
Mr. Graham. No, if you work on Thanksgiving, then they give you a premium for working on a holiday. Why isn't that in here?
Mr. Leibig. It's just part of the statute, because there was not a history of employers using that to cheat. Also, Christmas bonuses are not included. And also, non-discretionary bonuses, I mean discretionary bonuses, like at the end of the year, if they just give a gift to everybody but there's no contraction, that's not included either. That's because the Department of Labor tried to accommodate employers' giving bonuses to the degree they could without undermining basic hourly rates of the Act.
Mr. Graham. Do you understand what these ladies are saying, that there are real, legitimate problems?
Mr. Leibig. And for most of the companies they're talking about, I'm not questioning their motives.
Mr. Graham. Yes.
Mr. Leibig. I'm just saying other people, not a good company that's doing well, and it would be nice if most people did like they say. No employer would give bad labor quality and pay unfairly because that would undermine their productivity. Unfortunately, the report you just got from the Department of Labor shows there are a lot of employers in the United States that would do that. And they do it all time. That's why there is a Fair Labor Standards Act in the first place.
Mr. Graham. One last question. Does the current law discourage you from sharing things with your employees that you would like to?
Ms. Holt. Yes, it does.
Mr. Graham. Thank you.
Chairman Ballenger. Let me thank everybody. I thank the witnesses for taking the time to testify today before the subcommittee. As you might have heard, the buzzer went off,
and it's two votes, so we'll be gone for a half-hour and I think it would be silly to keep you all waiting here.
I wonder if Mr. Leibig would look at the next-to-the-last line in the bill, where it says, as specified. Is that the weakness that you would want to change?
Mr. Leibig. I would be glad to think about that and talk with the counsels. I'd want to think about it. I think so, but I'm trying to think of what you would do so that you could encourage this but not undermine the other advantage. I'd have to think about it.
Chairman Ballenger. Right. I had a profit-sharing plan once upon a time with my employees, and the stock market went down and that's what we had. And no matter how hard they worked and put in extra hours, what they had in the profit-sharing went down. And there was no way to explain it to them. It's just very difficult.
Let me thank you all for testifying today, and if there's no further business, the subcommittee stands adjourned.
[Whereupon, at 11:51 a.m., the subcommittee adjourned subject to the call of the Chair.]