OPENING STATEMENT OF THE HONORABLE CASS BALLENGER, CHAIRMAN, SUBCOMMITTEE ON WORKFORCE PROTECTIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE, U.S. HOUSE OF REPRESENTATIVES *

OPENING STATEMENT OF THE HONORABLE MAJOR R. OWENS, RANKING MINORITY MEMBER, SUBCOMMITTEE ON WORKFORCE PROTECTIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE, U.S. HOUSE OF REPRESENTATIVES *

STATEMENT OF MS. CYNTHIA M. FAGNONI, DIRECTOR, EDUCATION, WORKFORCE, AND INCOME SECURITY ISSUES, U.S. GENERAL ACCOUNTING OFFICE, WASHINGTON, D.C. *

STATEMENT OF MR. T. MICHAEL KERR, ADMINISTRATOR, WAGE AND HOUR DIVISION, EMPLOYMENT STANDARDS ADMINISTRATION, U.S. DEPARTMENT OF LABOR, WASHINGTON, D.C. *

STATEMENT OF MR. WILLIAM J. KILBERG, SENIOR PARTNER, GIBSON, DUNN & CRUTCHER, LLP, WASHINGTON, D.C., TESTIFYING ON BEHALF OF THE U.S. CHAMBER OF COMMERCE *

STATEMENT OF MR. DENNIS SUTPHEN, PRESIDENT, H.R. CONSULTING, PARKERSBURG, WEST VIRGINIA, TESTIFYING ON BEHALF OF THE SOCIETY FOR HUMAN RESOURCE MANAGEMENT *

STATEMENT OF MR. NICHOLAS CLARK, ASSISTANT GENERAL COUNSEL, UNITED FOOD AND COMMERCIAL WORKERS INTERNATIONAL UNION, AFL-CIO, WASHINGTON, D.C. *

APPENDIX A - WRITTEN OPENING STATEMENT OF THE HONORABLE CASS BALLENGER, CHAIRMAN, SUBCOMMITTEE ON WORKFORCE PROTECTIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE *

APPENDIX B - WRITTEN OPENING STATEMENT OF THE HONORABLE MAJOR R. OWENS, RANKING MINORITY MEMBER, SUBCOMMITTEE ON WORKFORCE PROTECTIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE *

APPENDIX C - WRITTEN STATEMENT OF MS. CYNTHIA M. FAGNONI, DIRECTOR, EDUCATION, WORKFORCE, AND INCOME SECURITY ISSUES, U.S. GENERAL ACCOUNTING OFFICE, WASHINGTON, D.C. *

The Subcommittee met, pursuant to call, at 10:35 a.m., in Room 2175 Rayburn House Office Building, The Honorable Cass Ballenger, Chairman of the Subcommittee, presiding.

Present: Chairman Ballenger, Representatives Isakson, Owens and Kucinich.

Staff Present: Molly M. Salmi, Professional Staff Member; Robert Borden, Professional Staff Member; Rob Green, Workforce Policy Coordinator; Heather Oellermann, Staff Assistant; Deborah Samantar, Office Manager; Becky Campoverde, Communications Director; Patrick Lyden, Professional Staff Member; and Michael Reynard, Media Assistant; Peter Rutledge, Senior Legislative Associate; Maria Cuprill, Legislative Associate; Brian Campagnone, Staff Assistant.

Chairman Ballenger. A quorum being present, the Subcommittee on Workforce Protections will come to order.

The Committee is meeting today to hear testimony on white-collar exemptions in the modern workplace under the Fair Labor Standards Act.

Under Rule 12(b) of the Committee's rules, any oral opening statements at the hearing are limited to the Chairman and the ranking minority member. This will allow us

to hear from the witnesses sooner and help members keep to their schedules. Therefore,

if other members have statements, they will be included in the hearing record. Without objection, I ask that the record be held open for 14 days to allow member statements and material referenced during the hearing to be submitted for the record.

The Subcommittee today is meeting to examine the criteria under the Fair Labor Standards Act that define those employees who are eligible for overtime pay and those who are not. We will review the findings of the recent General Accounting Office report on the so-called "white-collar" or professional, administrative, and executive exemptions, and hear from the Department of Labor, which has the responsibility for revising and updating the white-collar regulations. In addition, we will hear testimony from the employer and employee representatives who are directly impacted by the Department's regulations.

I would like to take a moment to welcome our witnesses. We appreciate them taking time out of their busy schedules to share their expertise on this issue with members of the Subcommittee. One of the key questions under the Fair Labor Standards Act is whether or not an individual worker is covered by the Act. Covered or nonexempt workers are generally paid on an hourly basis and must be paid according to the minimum wage and overtime requirements under the Act. Exempt workers, who are generally paid on a salary basis, do not have to be paid overtime. While it should be relatively easy to determine who is covered and who is not covered by the Act, in fact, the criteria are quite complex.

Undoubtedly, the most difficult, but also the most important, issue involving the Fair Labor Standards Act is the reform of the white-collar exemptions. The distinctions between employees who are exempt from overtime and those who are not exempt are essentially those that were established in 1938 when the Act was passed, overlaid with layers of regulations, interpretations and court decisions.

Furthermore the current tests, the "duties" test, and the "salary basis" test are viewed as outdated, unpredictable, and complex. For example, an employee must satisfy certain minimum tests related to his or her job duties and responsibilities, which demonstrate that the individual is indeed an executive, administrative or professional employee.

One specific problem with these tests is the lack of clarity with regard to the test criteria. The tests may have been clear and easy to apply in the business environment that existed in 1938. However, they are almost impossible to apply fairly and consistently in today's workplace. Both employers and the Department, in trying to apply and define and specify these criteria, expend a tremendous amount of time.

While the need for reform of the white-collar regulations is generally accepted, the difficulty of finding agreement on appropriate and useful changes to the law is also recognized. Legal and economic experts suggest a change to the laws to address the concerns raised by employers and employees. But as GAO noted in their report, there are competing interests that must be weighed before any changes can be made. It is my hope that these hearings can promote the cause of consensus so sorely lacking in that area.

And, again, I want to thank the witnesses for coming today, and I now turn to Congressman Owens for his opening statement.

WRITTEN OPENING STATEMENT OF THE HONORABLE CASS BALLENGER, CHAIRMAN, SUBCOMMITTEE ON WORKFORCE PROTECTIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE - SEE APPENDIX A

Mr. Owens. Thank you, Mr. Chairman. This is not the first time that this Subcommittee has looked at the issue of overtime generally, or the issue of the white-collar exemptions specifically. It is the first time that we have had the benefit of GAO's views on the subject.

I want to commend the agency for what I feel is a very balanced and informative report that they have given us on the subject. GAO's report makes clear a number of interesting facts. First, more Americans are working longer hours. Second, while overtime hours have increased for nonexempt workers as well as exempt workers, overtime still affords workers important protection.

White-collar workers are more than twice as likely to be required to work more than 40 hours a week than nonexempt workers. Approximately four million exempt workers are now typically working 50 or more hours a week.

Third, an important aspect of the overtime provision has been severely eroded, including the duties test for getting this, and especially the minimum salary levels for determining exempt status. To contend that workers making as little as $250 a week--the equivalent of less than $6.20 an hour--should be exempt from overtime is obscene. Yet today that is the case.

The primary reason for this is the fact that the problems with labor--they have been determining white-collar status for 25 years. The overtime provisions under the Fair Labor Standards Act play a more important role in workers' lives and have more merit than any other provision of labor law. These provisions help to ensure that workers are not required to work unreasonable hours, that they will have the time that they need to meet family and personal responsibilities, and that they will be fairly compensated in those situations where they are required to work excessive hours.

As women have increasingly entered the workforce, the overtime provisions have become even more vital to the health of American families. It is also important to note that by ensuring that some workers are not required to work excessive hours, the overtime provisions help to guarantee that employment opportunities are more fairly distributed across the population.

Yet, while the GAO report made clear that while the overtime provisions of the law are as vital as they have ever been, more and more workers are falling behind in exemption protection.

One other fact seems clear from the GAO report, and that should be reflected in this one--that the policies on overtime issues have not changed in 60 years. Employers are still seeking to exempt as many workers as possible from the overtime law, while those who represent workers are seeking to include as many workers as possible in those protections.

Despite this, I am very interested to hear what our witnesses have to say today. I do not believe that we can withstand further changes in the overtime law without significant deterioration in the quality of life of many workers. Yet to the extent that overtime determinations are made exclusively on the basis of the duties test and whether the workers are paid a salary, I think further erosion is inevitable.

I am, therefore, interested in how the overtime law can be improved, and I am especially interested in what the Department of Labor thinks that it can do to update the law. I look forward to today's testimony.

Thank you, Mr. Chairman.

WRITTEN OPENING STATEMENT OF MAJOR R. OWENS, RANKING MINORITY MEMBER OF THE SUBCOMMITTEE ON WORKFORCE PROTECTIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE – SEE APPENDIX B

Chairman Ballenger. Thank you, Mr. Owens.

Now I would like to introduce our panel of witnesses. From left to right, first, Ms. Cynthia--and pardon my pronunciation--Fagnoni?

Ms. Fagnoni. Fonyoney (phonetic).

Chairman. Ballenger. Fagyoney (phonetic). Okay. U.S. General Accounting Office; Mr. Michael Kerr, Wage and Hour Division of the U.S. Department of Labor; Mr. William J. Kilberg, Gibson, Dunn & Crutcher, LLP; Mr. Dennis Sutphen, H.R. Consulting; and Mr. Nicholas Clark, United Food and Commercial Workers International Union, AFL-CIO.

Let me remind the witnesses that under our committee rules they should limit their oral statements to five minutes, but their entire written statements will appear in the record. We will allow the entire panel to testify before questioning the witnesses.

With that said, Ms. Fagnoni--forgive me; southern accents sometimes screw up names.

[Laughter.]

Anyhow, you may begin your testimony.

Ms. Fagnoni. Thank you, Mr. Chairman, and members of the Subcommittee. I am pleased to be here today to discuss the white-collar exemptions to the Fair Labor Standards Act. As you have noted, for more 60 years, these exemptions have defined the largest group of American workers exempt from the minimum wage and overtime standards of the FLSA--executive, administrative, and professional employees.

However, today's workplace is vastly different from the one that existed in 1938 when the exceptions were first established. In my remarks, I will discuss how shifts in the American economy have affected these exemptions. I will also describe the concerns of employers and employees about these exemptions, as well as some of the conflicting issues that make resolution of the concerns difficult. This information is based on our report issued to the Subcommittee in September of 1999.

In recent years, American workers are increasingly likely to be employed in jobs at a salaried white-collar position exempt from the overtime requirements of the FLSA. We estimate that in 1998 between 19 and 26 million workers were covered by the white-collar exemption; that is, between 20 and 27 percent of the full-time workforce.

Most of the increase in the exempt positions has been in certain rapidly growing service industries, particularly those related to business and professional services. During this 15-year period, from 1983 to 1998, these service industries expanded much faster than other industry sectors, nearly doubling their employees.

As you can see from the chart we have here on the left, the percentage of exempt white-collar workers in these service industries jumped from 19 percent in 1983 to 29 percent in 1998, far higher than any other industry sector.

Likewise, women were increasingly more likely to be part of the exempt workforce. In 1998, 42 percent of the exempt workers were women, compared to 33 percent in 1983.

For most employees, the regulatory tests to define who can be classified as exempt executive, administrative, and professional employees have been largely unchanged in 46 years. Since 1954, the only regulatory changes applicable to most employees have involved upward adjustments of the salary levels, indicating managerial or professional status.

From very different points of view, both employers and employee representatives agree that the white-collar regulations need adjustment. Employers argue that the regulations are too complicated and outdated for the modern workplace, and were particularly concerned about the rigidity and ambiguity of various regulatory tests.

On the other hand, employee representatives were more concerned about maintaining work hour limitations for employees. They believe that the regulatory tests, as applied today, are not sufficient to adequately restrict the use of exemptions by employers.

Turning, first, to employer concerns, three issues stood out. First, they believe that the complex requirements of the salary basis test, or the so-called no-docking rule, presented the greatest potential liability for them and made it difficult to account for the employees' time and actions.

Second, the employers contend that traditional distinctions in the application of white-collar exemptions to two groups--highly paid, very skilled, nonexempt production workers, and exempt professional and administrative employees--are no longer valid in today's workplace.

Finally, the requirement for independent judgment and discretion on the part of administrative and professional employees was a major area of contention for the Department of Labor and employers as a result of compliance audits conducted by DOL.

Turning now to the standpoint of employees, employees' salaries have been severely eroded by the salary level limitations originally envisioned by the DOL regulations, and this is a cause for concern.

Let us take a look at our second chart, the chart on the right. The chart depicts that to fully account for inflation between 1975 and 1988, the salary levels would have to be increased three-fold. In addition, employee representatives contend that the application of the tests for the exempt executives have been oversimplified.

Under the regulations, any employee supervising two or more employees, who spends some time, even if minimal, on management tasks, can be classified as an exempt executive.

Of the various proposals that have been advanced to address these concerns, the conflicting interests of employers and employees have made resolution difficult. Some of the proposals would, for example, eliminate the salary basis test or raise the salary test levels. However, for every proposal there are competing interests that need to be considered.

For example, even though nearly everyone we spoke with agreed that the salary test levels were far too low, there was sharp disagreement on what should happen once the levels were raised. Some employers were strongly opposed to revising time limitations on the amount of non-managerial work exempt employees could perform, while the union representatives believe that these same limitations are critical for assessing managerial status.

In conclusion, the concerns of the employers and employees about the operation of the white-collar exemptions in today's workplace involve all aspects of the regulations. DOL has been reluctant to revise them because of the difficulty in getting a consensus. However, given the major economic changes in the decades since the exemptions were defined, it is becoming increasingly important to readjust the regulations to better meet the needs of the modern workplace.

To avoid a piecemeal approach to reform, we have recommended that the Secretary of Labor undertake a comprehensive review of the regulations to make adjustments where needed.

That concludes my oral presentation. I have submitted a full statement for the record. I would be happy to answer any questions you may have.

Thank you, Mr. Chairman.

WRITTEN STATEMENT OF CYNTHIA M. FAGNONI, DIRECTOR, EDUCATION, WORKFORCE, AND INCOME SECURITY ISSUES, U.S. GENERAL ACCOUNTING OFFICE, WASHINGTON, D.C. – SEE APPENDIX C

Chairman Ballenger. Thank you.

And now, Mr. Kerr?

Mr. Kerr. Thank you, Mr. Chairman for the opportunity to appear today to discuss the Fair Labor Standards Act minimum wage and overtime exemption for executive, administrative, and professional employees under Section 13(a)(1) of the Act, and to address GAO's recent very exceptional report on this matter.

The broadest-reaching of the Act's exemptions covers an estimated 32 million workers, more than one-quarter of the total workforce, and this number has been increasing with the continuing growth of the service sector. As GAO points out, this group is increasing, and the assignment of overtime to this group of employees is increasing.

In today's Washington Post, it is reported that about half of all employees work more than 40 hours per week, and about one-fifth of these employees said they worked 50 hours or more per week. Nonetheless, the regulatory boundaries defining this exemption, which are described in my written testimony and by other witnesses today, continue to play an instrumental role in protecting the rights of American workers.

We, at the Department of Labor, have seen employers claim this exemption and not pay overtime to a wide variety of workers for whom the exemption was clearly not intended, simply based on job title, without regard to whether the work actually meets the requirements of the regulations. For example, in the recent past, we have had misclassifications involving a cook/dishwasher who worked an average of 60 hours per week at an annual salary of $24,000 for a hotel restaurant, denied overtime simply because he or she was called a kitchen supervisor.

Employees of a national food manufacturer who delivered and stocked the company's products in retail outlets, working 43 to 45 hours each week, for an annual salary of between $20- and $24,000, denied overtime simply because they were called retail representatives.

A health care worker in a group home for developmentally-disabled individuals, who worked as a caregiver, paid an annual salary of $12,500 for 47 hours of work per week--an hourly equivalent rate less than the minimum wage was denied overtime simply because the worker is called a residential assistant manager.

Millions of workers earn overtime in both the new and the old economy. Many of these people rely on this overtime for their modest standard of living.

Let me now turn to GAO's recent review of the 541 regulations and their recommendations. GAO recommends a comprehensive review of the current regulations and a restructuring of the exemption to better reflect today's workforce. As we have told GAO, and as you, Mr. Chairman, noted in your opening remarks, the scope and complexity of the issues that must be addressed and resolved through such an undertaking, and the contentiousness surrounding these issues, will require a major investment of resources and take time.

Given the huge scope of the exemption, there are a large number and variety of stakeholders to be consulted and involved in any review and rulemaking process that we would undertake. This depth and diversity may warrant using the full range of regulatory tools available to the Department to address various aspects of these rules.

For example, some issues may justify a series of regional public hearings and perhaps a negotiated rulemaking approach, both of which require substantial resources and considerable lead-time to set up and carry out. Other issues may warrant proceeding through publication of advance notice of proposed rulemaking before a regulatory proposal could be formulated.

With regard to the substance of such proceedings, the kinds of questions that have been raised here, and, over the years, particularly in your hearing in 1995, by the public, and within successive administrations, that might need to be addressed and resolved could include: should we retain or modify the basic three-test structure of the regulations, or should we start from an entirely new premise? Should the salary tests be eliminated or retained? And, if so, at what levels?

Should separate salary tests apply in retail and in service industries? Should salary basis exceptions adopted for public sector employment in 1992 be extended to the

private sector? Should further changes be made to the salary basis test, or should it be abandoned altogether? How precisely has the lack of change in the regulations over the last 25 to 60 years contributed to the difficulties that have been described here, elsewhere, and in your hearings in 1995?

To what extent should the duties and responsibilities tests be recast or revised? In updating the criteria for the professional exemption, should the traditional concepts that limited the exemption to learned and artistic professions be modified?

These complex and interrelated issues come to us with no easy answers. And given the scope of the exemption, the stakes are high. The 541 regulations, even in their current form, provide many American workers with key workplace protections.

In large part, the complexity and broad scope of this exemption accounts for the obstacles faced by four successive administrations that have struggled unsuccessfully through repeated efforts to achieve the kind of comprehensive reform that the GAO recommends.

As the GAO report acknowledges, changing the current regulatory structure will require balancing the often diametrically opposed interests of the many and differing constituencies that would be affected. Given that the views of interested parties can be intractably held on opposite sides of many of the issues under these regulations, achieving such balance is a daunting task.

While it appears that implementing comprehensive 541 changes, as the GAO recommends, is extremely unlikely in the short term, especially given the lack of consensus on many issues, it is a goal we must all continue to work towards. I welcome the contributions that both the GAO report and today's hearing can make to that process.

I also plan to work with the Department's Office of Policy to identify how best to lay the groundwork for developing approaches that might provide a framework for consensus among affected parties, including areas in which additional information or research could assist us in framing these issues.

This concludes my prepared statement. I would be glad to respond to any questions later. Thank you very much.

WRITTEN STATEMENT OF MR. T. MICHAEL KERR, ADMINISTRATOR, WAGE AND HOUR DIVISION, EMPLOYMENT STANDARDS ADMINISTRATION, U.S. DEPARTMENT OF LABOR, WASHINGTON, D.C. – SEE APPENDIX D

Chairman Ballenger. Thank you, Mr. Kerr.

Mr. Kilberg?

Mr. Kilberg. Thank you, Mr. Chairman, and members of the Subcommittee. I am pleased to appear on behalf of the United States Chamber of Commerce to address the white-collar exemption structure of the Fair Labor Standards Act. In speaking on the Chamber's behalf, I bring to bear a perspective that comes not only from 30 years of advising and litigating FLSA issues, but also from having served from 1973 through 1976 as Solicitor for the United States Department of Labor.

In the latter capacity, I functioned as chief legal officer for the agency charged with interpretation and enforcement of the FLSA.

The excellent General Accounting Office report recommends a comprehensive review of FLSA exemption regulations by the Department of Labor. Few would dispute the need for such an overhaul, which would be the first since the regulations were codified in their present form in 1954.

The 46-year old exemption regulations, however, are only part of the problem. Much of the current difficulty stems from an underlying statute that has never been thoroughly reexamined. The situation has been exacerbated by the Department itself, which, under both Republican and Democratic administrations, has tended toward inflexible and sometimes inconsistent interpretations of the law.

In that regard, Mr. Chairman, I would offer to present to the committee for the record a paper I recently wrote for the Washington Legal Foundation on the Department's opinion letter on stock option plans.

LEGAL OPINION LETTER SUBMITTED BY MR. WILLIAM J. KILBERG, P.C., "LABOR DEPARTMENT RULING THREATEN’S EMPLOYEES STOCK OPTIONS", APRIL 28, 1999 – SEE APPENDIX K

In exempting individuals employed in a bona fide executive, administrative, or professional capacity from the FLSA, Congress made a judgment that such individuals are not, in the language of the FLSA's 1937 legislative history, helpless victims of their own bargaining weakness who need Federal intervention to obtain fair pay and working conditions. These workers are better served by a system that allows them to negotiate their own pay arrangements rather than having a rigid hourly wage structure dictated to them.

The philosophy of 1937 remains sound today, but the execution is sorely lacking. Over time, the line between blue-collar and white-collar workers, which seemed so clear

then, has become blurred as radical changes have redefined America's workforce. A large class of highly skilled and compensated technical workers has emerged. These workers are more akin to exempt professionals than nonexempt blue-collar employees, but they are often unable, at least in the Department of Labor's narrow view, to satisfy antiquated FLSA exemption standards.

The cornerstone of the FLSA's exemption scheme is its so-called duties test structure. In order to determine whether or not an employee falls within the white-collar exemption, the FLSA regulations require an evaluation of the duties of the particular worker. These outdated and amorphous duties standards have spawned much litigation. Many of these cases have created anomalous results not in keeping with the fundamental purpose of the FLSA.

Examples of this confusion abound for each of the three basic duties categories: executive, administrative, and professional. For instance, the first prong of the administrative duties' so-called short test focuses on whether the employee's primary duty consists of either the performance of office or non-manual work directly related to management policies or general business operations of his employer or his employer's customers. This element of the test is an attempt to distinguish between administration and production.

There is little reason to believe, in the modern economy, that a worker who brings experience, judgment, and discretion to bear in performing his duties should be treated differently depending upon whether the subject of that expertise is the product on which the employer's economic success is built. Yet, this distinction has become the driving force behind a substantial portion of the Department's recent enforcement activity.

For example, in Reich v. John Alden Life Insurance Company, the Department argued that insurance marketing representatives were nonexempt production workers, since the representatives produced sales of insurance. The First Circuit ultimately rejected the Department's contention.

Nonetheless, the Department's pursuit of this case through the appellate process is symptomatic of its restrictive view of the production/administration distinction, to the disadvantage both of employers and employees who are forced to cope with this uncertain and confusing standard.

The duties test for professionals is an equally dense minefield. Professionals are divided into two subcategories, learned professionals and artistic professionals. In the learned professionals area, the regulations have been interpreted so as to deny an exemption to instructors who train NASA's space shuttle ground personnel.

The court found that shuttle instructors did not exercise the requisite degree of discretion to meet the professional exemption because they followed certain scripts that no one short of a degreed engineer could possibly have comprehended.

A further source of controversy revolves around the salary basis test, and I have written extensively about that in my prepared testimony and won't repeat it here.

The fact is that for the better part of two decades, the Department of Labor has been promising a comprehensive review of the exemption regulations, pledging each time that relief will be forthcoming in a matter of months.

Ever since 1985, the Department has semiannually published statements of regulatory priority prominently featuring reform of the exemption regulations, the most recent of which appeared in the Federal Register just last week. Each of these priority

statements, if compared side by side, is nearly identical. They include a verbatim repetition acknowledging the need for review of the duties and responsibilities tests, due at least in part to recent case law development.

The statements likewise acknowledge that recent court rulings have caused confusion as to what constitutes compliance with the regulation's salary basis criteria. Yet this regulatory item remains perennially entrenched on the Department's long-term actions list. Every six months, like clockwork, the Department moves the projected date for a notice of proposed rulemaking approximately six months further into the future.

Meanwhile, employers still contend with the conflicting pressures of the FLSA's increasingly obsolete requirements. The layers of complexity and potential liability embedded in the current system not only pose a compliance headache for employers, but also present the possibility of massive damages and distortions as a single classification error ripples throughout the employer's workforce, his labor cost projections, pension plans, and employment decisions.

I suggest that procrastination is not an appropriate response to these imperatives. Without corrective action, the problem will only worsen as the economic world continues to evolve. It is time for decisive action to bring the FLSA back into some semblance of compatibility with the contemporary economy and with the modern worker.

Thank you, Mr. Chairman. I would be delighted to answer any questions the Subcommittee may have.

WRITTEN STATEMENT OF MR. WILLIAM J. KILBERG, SENIOR PARTNER, GIBSON, DUNN & CRUTCHER, LLP, WASHINGTON, D.C., TESTIFYING ON BEHALF OF THE U.S. CHAMBER OF COMMERCE- SEE APPENDIX E

Chairman Ballenger. Thank you, Mr. Kilberg.

Mr. Sutphen, you may begin.

Mr. Sutphen. Thank you, Chairman Ballenger, and members of the Subcommittee. I appreciate the opportunity and thank the Subcommittee for inviting me to appear before you today.

I am here on behalf of the Society for Human Resource Management, the leading voice of the human resource profession, representing more than 130,000 professional and student members.

I wish to highlight the concerns we have with the current status of the so-called white-collar exemptions under the Fair Labor Standards Act.

I am a certified senior professional in human resources, and I am the owner of H.R. Consulting located in Parkersburg, West Virginia. Prior to setting up my own consulting company, I gained extensive experience in the human resource profession, most of which was focused on compensation.

Mr. Chairman, the 1930s represented an era in which the workforce was subjected to substandard working conditions, and at the same time expected to meet high productivity demands. For those purposes, the FLSA was enacted in 1938.

Today, management and employee relations are noticeably different, working conditions have dramatically improved, and there are numerous ways to compensate employees for their hard work. The issue is further complicated by the uncertainties employers face between classifying exempt and nonexempt employees.

Classification has a profound impact on the nonexempt workers' ability to receive certain stock options, performance-based bonuses, and even compensatory time off. Unfortunately, a class distinction has been created within the workforce, and, regardless of the intent of the FLSA, a two-tiered workforce is its byproduct.

The 1999 GAO report on white-collar exemptions in the modern workplace recommended that the Department of Labor take a comprehensive review of the FLSA. Mr. Chairman, we strongly concur with their recommendation, and recommend to Subcommittee that appropriate changes be made to the Act.

In 1998, it is estimated that between 20 and 27 percent of U.S. workers were classified as exempt. To be considered an exempt employee, two conditions must be met. First, employees must be paid on a salary basis, which is known as the salary basis test. And, second, their job duties must equate to high-level executive, administrative, or professional positions. This is known as the duties test. Employees must satisfy both tests.

The salary basis test has two requirements. First, the employee is paid the same wage each week; and, second, the employee's remuneration is not based on quantity or quality of work. Each exemption category was given a minimum salary level, which have not been adjusted for inflation, meaning that employers are only required by the FLSA to pay their exempt employees minimum wage.

Individuals meet the duties test if they are routinely involved in discretionary decision-making at a policy level. Their executive exemptions are applied to those in managerial positions. In today's work environment, it is not uncommon to have a supervisor performing administrative functions such as accounting or customer service who is responsible for other employees and who spends more than 50 percent of their time doing administrative work.

Is this position exempt or nonexempt? Or what about the manager of McDonald's or Burger King who has to actively produce product or provide service to maintain customer satisfaction?

High-level support staff or personnel within a company or organization performing office or non-manual work are exempted under the administrative classification. This is the most difficult requirement for employers. What are the objective criteria that tilt the scale in favor of the employer, or vice versa?

Let me offer one example. My previous employer has two groups of customer service representatives, both doing very similar duties, using judgment and discretion, which we feel meets the requirements for the administrative classification. The only difference between the two is that one group performs inside sales activities. The Act specifically excludes inside sales from exemption; thus, we have two classes of employees performing similar work.

The professional exemption is used to classify some of those in the learned profession, such as physicians, engineers, and accountants. One would think that employees such as these are easily classified. But what about equivalency? I have dealt with situations where an individual working in a technical environment for many years has every qualification required to perform an engineering function but lacks the degree, and, therefore, would be subject to the scrutiny of the DOL under investigation.

The problem with clarity of the Act is not limited to the private sector. On April 5, 2000, the U.S. Court of Federal Claims awarded liquidated damages to three employees who were improperly classified by the Federal Government. The case was Adams v. The United States. When you look at case law, a majority of the cases coming before the courts involve Government employment.

The bottom line is this: the Act needs to be rewritten to reflect the true nature and scope of today's workplace. The salary basis test was meant to establish a floor on wages and a ceiling on hours worked to prevent substandard working conditions. This test is outdated and is treated more like a formality. Moreover, the GAO indicated that employers and DOL investigators alike have difficulty applying aspects of the duties test, which further supports the need for revision of the Act.

At a bare minimum, both tests need to be rewritten to reflect the intricacies of the millions of new jobs that have been created in this country in the last 62 years.

Additionally, an area we feel could and should find unanimous support is the need for the DOL's Wage and Hour Division to allow for better access to their opinion letters. For example, in February 1999, DOL issued an opinion letter on stock options, stating that the gain realized on the exercise of the option should be counted in an employee's regular rate. Not until January 2000 was it publicly known that the DOL had issued this opinion letter.

In today's world, with Internet access, there is no reason that a Federal agency should impair the public's right to know how an agency interprets the law. Such opinion letters should be posted on the web immediately as is currently done by other federal agencies.

Mr. Chairman, we need to recognize the technological advances that this country has made, and create or recreate common-sense legislation that reflects the true spirit of

today's workplace and the relationship between employers and employees in the 21st century. Mr. Chairman, it is time to pull the FLSA and the treatment of employees out of the past and send it into the future.

Thank you for the opportunity to testify here before you today, and I would be pleased to answer any questions you may have for me later.

WRITTEN STATEMENT OF MR. DENNIS SUTPHEN, PRESIDENT, H.R. CONSULTING, PARKERSBURG, WEST VIRGINIA, TESTIFYING ON BEHALF OF THE SOCIETY FOR HUMAN RESOURCE MANAGEMENT – SEE APPENDIX F

Chairman Ballenger. Thank you, Mr. Sutphen.

Mr. Clark, you may proceed.

Mr. Clark. Thank you, Mr. Chairman, members of the Subcommittee. I am here on behalf of the AFL-CIO on the important issue of Fair Labor Standards Act protections

for working Americans. We too would like to compliment the General Accounting Office on the thorough and well-written report. While we might disagree with some of the report's assertions and recommendations, overall we are comforted by the candor with which the agency reports three fundamental problems with Fair Labor Standards Act enforcement.

One, employers are exempting more workers than ever from the protections of the Act. Two, the Government has failed to adjust salary levels to keep pace with inflation, a fact that seriously undermines FLSA enforcement. And, third, Americans are working longer hours than ever before, a fact which we believe is exacerbated by the over exemption of workers from statutory overtime requirements.

Without the FLSA's overtime protections, there is no 40-hour workweek, there is no weekend, and there is not enough time for workers to spend with their families. It is that simple. The 40-hour workweek established in 1938 is one of our nation's proudest achievements, and one of organized labors and Congress' finest movements.

We must justly guard it against even the most well-intentioned erosions. We must not move American workers backward at a time when we should be leading the workers of other nations forward.

As is detailed in our written testimony, Americans now work more hours on the average than workers in any other industrialized nation. Two-thirds of American workers say they would like to work fewer hours but cannot--an increase of 17 percent over just five years ago.

Nearly half of young workers today say they experience anxiety over not having enough time to meet both family and work responsibilities. And I noticed in today's Washington Post, the headline on the business page ``Is Family a Priority for Young Workers?'' And this includes males, not just females.

Critically important values, fairness and family, were behind the initial passage of the Fair Labor Standards Act, and these values remain equally relevant to workers in the 21st century.

The last thing American workers need is a Congress that would push legislation on behalf of greedy employers that would make them work more hours for less pay. And that is exactly what we fear from the employer proposals we have seen so far. They are wolves in sheep's clothing, purporting to update outdated regulations when, in fact, they would gut the 40-hour workweek.

The Fair Labor Standards Act is brilliantly simple, both in purpose and in execution. Its goals are to assure that workers are paid for all hours worked and have enough non-work time to care for their families. It accomplishes the first goal through the minimum wage. It accomplishes the second goal through the overtime requirements, which are the subject of this hearing.

And those requirements simply require employers, if they choose to work employees over 40 hours per week, to pay them overtime. Within this simple requirement, employers have infinite freedom to structure their operations in any manner they choose. Of course, this creates huge economic disincentives to work employees over 40 hours. But that is the whole idea of this legislation.

Because of these economic disincentives, employers are encouraged to use additional employees, or enhance the productivity of the workers they already have. And, of course, the overtime premium also creates huge incentives for employers to cheat. An employer that circumvents overtime requirements can reap astounding profits from this effort.

Not surprisingly, employers are constantly coming up with new ideas and schemes to avoid paying overtime. The favorite method is to claim that their employees are covered by the so-called white-collar exemptions for professional, executive, or administrative employees. An exempt employee may be paid a fixed salary, regardless of the number of hours worked. Thus, while nonexempt hourly employees become more expensive when they work over 40 hours, exempt salaried workers become cheaper, creating the incentive to work salaried employees as many hours as possible.

Not surprisingly, the GAO found that exempt salaried employees worked far more hours than hourly nonexempt workers. In fact, salaried workers were nearly twice as likely to work over 40 hours per week than workers entitled to overtime payments. And, in fact, millions of workers worked 50 to 60 hours per week.

Congress clearly intended very limited use of these exemptions. It empowered the Department of Labor to formulate regulations that would protect employees from employer misclassification of workers to circumvent overtime payments. DOL's regulations are detailed because they need to be to prevent cheating, but they are not unduly complicated.

The exemption most often abused is the executive exemption, which some employers use as a loophole to exempt anyone they call a manager. To prevent this type of over exemption, DOL created the three tests, which also apply to administrative and professional exemptions, which were discussed earlier this morning--the salary basis test, the salary level test, and the duties test.

The duties test has two forms. The form that is used depends upon the salary level. Because the duties test is so fact-specific, it is easiest for employers to fudge and the most difficult for the DOL to enforce. Accordingly, effective enforcement turns on the salary level and salary basis tests, which are relatively bright-line tests, and, thus, by intent and nature, easier to administer.

This enforcement scheme worked well for the first 37 years of the Act, in large part because the salary level test alone automatically placed over 30 percent of the workforce outside the reach of these exemptions. The salary test also placed 60 percent of the workforce in the category whereby they could not be exempt executives if more than 20 percent of their work--or 40 percent in the retail service industries involved non-executive functions. This is the so-called long test that has been referred to in testimony.

This crucial regulatory test, along with the salary basis test, was very successful in preventing employers from abusing the exemptions to avoid paying overtime. But in 1975, something insidious happened that severely undermined the enforcement scheme and allowed employers to vastly expand the ranks of their exempt workers, particularly among women.

What happened was this. Since then, the Government has failed to adjust the salary levels for inflation so that today they are below, or close to, minimum wage, and, in GAO's own words, therefore, effectively eliminated.

According to GAO, today only one percent of the full-time workforce is automatically excluded from white-collar status, whereby in 1975 the number was 30 percent. And, today, only nine percent of the workforce qualifies for protection under the so-called more restrictive long test, whereas, in '75, it was 40 percent.

And as we have seen, the short test allows employers to severely over exempt relatively low-income supervisors. Not surprisingly, the Government's inaction on the salary levels has fueled expansion of the exempt employees. And the biggest increase is among working women, from 33 percent salaried in 1983 to over 42 percent in 1998. These workers are choking under the stress, and they need relief.

The single most important proactive step the Government can take, a step that the GAO found had nearly universal agreement, is to raise the salary levels to account for inflation and to better reflect the realities of the modern workplace.

This would mean that more workers would automatically be covered by the FLSA's overtime protections, and more workers would be protected by the long duties test, thereby avoiding the most problematic aspects of the short duties test, which has been identified as a problem by both Labor and employers.

According to GAO, the minimum salary level to qualify for exempt status should be increased to $24,500 if it were to account for inflation over the past 25 years. The minimum salary needed to qualify for the less restrictive short test would be increased to $39,400. If these increases were made, we believe many of the problems identified with enforcing the white-collar exemptions would disappear.

The bottom line is this: at a time when workers in this country are working harder and longer than ever, and struggling to juggle work and family demands, Congress should be enhancing work week protections for workers, not creating incentives for employers to make their employees work longer hours.

Limiting white-collar exemptions to the narrow and defined population for which they were intended will help ensure that working men and women are not deprived of these fundamental protections. Expanding the exemption to discriminate against knowledge or other worker classifications, which are increasingly being populated by women, is not progress. It is simply a bad idea.

That concludes the AFL-CIO's remarks, and I would be glad to answer any questions any member of the Subcommittee may have.

WRITTEN STATEMENT OF MR. NICHOLAS CLARK, ASSISTANT GENERAL COUNSEL, UNITED FOOD AND COMMERCIAL WORKERS INTERNATIONAL UNION, AFL-CIO, WASHINGTON, D.C. – SEE APPENDIX G

Chairman Ballenger. Thank you, Mr. Clark. I think maybe Mr. Kilberg and Mr. Kerr were here in 1995 when somebody decided, you know, Congress was not covered by the FLSA, and wondered what are we going to do about it. And Bill Ford was sitting right here, and I was sitting down there as a member of the minority, and so we changed the law and covered Congress.

And we were sitting there discussing the whole thing with Bill, and he said, ``Well, what does this mean?'' It means that if you are working people in your offices here in Washington for more than 40 hours, then you have to pay them time and a half. And he said, ``Well, what does that mean?'' And then we said, ``Well, you just figure out what they are getting yearly, and you divide it by 2,000 hours, and that gives you how much they are earning. And if they are working more than forty hours a week, then you are going to have to pay them more.''

And he said, ``Well, wait a minute. You can't do that. '' And we said, ``Why not?'' And he said, ``Well, it is not in the budget.'' It was really quite humorous to see people that had never suffered under this law all of a sudden having to live with it themselves.

I would like to toss out about two or three things, because, unlike most Congressmen up here, I have a situation where I have had to deal with this. In the 50’s, I had a supervisor who had been on the clock. Back then, being "on the clock" was kind of a putdown. And he was promoted, and so he went off the clock.

And then, in 1954, they changed the amount of money that put you off the clock or on the clock, and so I went to him and I said, ``You know, I am sorry about this, but because of the Federal law, you are going to have to go back on the clock instead of

getting a salary.'' And he said, ``What?'' He said, ``I have been working for 20 years to get off of the clock, and now you are telling me the Federal Government says I have got to go back?'' He says, ``Before I will do that, I will quit.''

I really had an awful hard time explaining to him what happened. This is a personnel problem that most people don't recognize—union or non-union, it doesn't make any difference. But to a very large extent, getting off the clock is a promotion.

The difficulty the AFL-CIO has and that most businesses have, is that we don't recognize the fact that we have run out of people. In North Carolina where I live, the unemployment rate in my county is 1.4 percent. And so if anybody has a job, and anybody has any business, everybody works overtime.

In our company, we found out that if you bought a $3-1/2 million printing press, you can't afford to run it just 40 hours a week. You have to run it seven days a week, 24 hours a day. And then you end up with people working overtime.

This is a problem. Let me just pose it again. We had supervisors that were making $35,000 a year. We thought, you know, this is a pretty good deal. These guys are now supervising four or five printing presses, and everybody is happy. And then the next thing you know, these other fellows that were making $16 an hour, and were working 48 hours a week some weeks and 36 hours a week the next week, all of a sudden they were making $40,000 a year, and the supervisor was making $35,000 a year. And he said, ``I want to quit being a supervisor. I want to go back to running a printing press.''

I would like to commend GAO for the report on the basis that you brought forth the problems that almost anybody that had to deal with this problem recognizes. But over and over again, I keep saying, ``Isn't there some simplicity somewhere?''

Mr. Kilberg, you mentioned a report which you have written, and I don't think we have it in our folders here. I sure would love to have that. Could you give me a concise statement on that?

Mr. Kilberg. Well, Mr. Chairman, what I was referring to is a paper that I published a week ago, or the Washington Legal Foundation published a week ago, which I wrote, which deals with the Department's stock option opinion letter. In essence, what I argue is that the Department misinterpreted its own regulations, and that there was no need for the Congress to have to pass legislation in order to permit employers to have stock option plans that do not run the additional monies back into regular rates for purposes of computation of overtime.

Chairman Ballenger. Well, I think we can take care of that this afternoon. So you don't need to worry a great deal about that. And I think the President is going to sign it. It is unanimous. Democrats, Republicans, unions, businesses, everybody is in agreement with that. It is too bad we had to solve that problem, but it is a good idea in the long run.

What most people don't recognize, and what really scares everybody, at least as far as the manufacturers or business managers are concerned, are the liquidated damages.

You can be the most honest man in the world and somewhere along the line you run into a problem, like I just mentioned, where your hourly workers are earning more than your supervisors. And you have got a personnel problem. Something has to be done in that situation.

I just wanted to say that I wish there was some way to make this thing simple. It reminds me a little bit of when I went to Brazil as they were working up their constitution, and I said, ``You know, you should keep a constitution``--you know, we give our children a little book on ``The Constitution.'' Keep it simple. Their constitution is that thick. I mean, it regulates everything you could imagine--almost breathing, when you should change clothes, and so forth. I went to Venezuela, when they just redid theirs, and I gave them the little book and said, ``Please keep it simple,'' and they tried to.

But it is so complicated, and there is such a basic animosity between businesses that are basically honest and businesses that are not honest. And I will be frank with you; there are people out there that will try to cheat any way they can. It is just too bad that everybody gets nailed for being a cheater when, in reality, all we are trying to do is follow the law.

And, I guess, Major Owens, that is my sermon for the day. I will turn it back to you. It is your turn.

Mr. Owens. Thank you, Mr. Chairman.

Again, I apologize to the panelists for arriving late, but I have read your testimony. I am concerned, Mr. Clark and Ms. Fagnoni, about the implications of the charts that--the exposure of litigation around overtime pay--when the figures show that there is very little litigation with respect to salary-based cases.

In the entire Federal court, I think there were 25 in 1994 through 1998; 25 salary cases, which involved private employers. And if you consider the millions who have worked for private employers, you start to worry about an excessive amount of litigation. Mr. Clark? Ms. Fagnoni?

Mr. Clark. I will comment on that. I was here five years ago when the Chamber of Commerce testimony referred to a flood of litigation, flood/explosion. Whatever you call it, there were only 166 cases in five years. We have 34 cases a year. That is hardly a trickle, much less a flood.

And then, now, in the year 2000, it is really a slow drift, if anything. Over 50 percent of the cases involved governmental workers, and many of the problems raised in those cases have been solved by recent Supreme Court cases.

So there are actually very few private sector cases. I think that goes to the fact that it's so difficult to administer the duties test as it now stands, which emphasizes the importance of maintaining the salary basis test and increasing the salary levels, so that they are meaningful once again.

Ms. Fagnoni. I would agree that a number of the cases that came forward, particularly from state and local employees dealing with the issue--they are not based on the salary basis test. But once those cases work their way through the court, and the Supreme Court makes the decision in our case, that litigation settles down. We haven't seen any kind of new surge in litigation.

Mr. Owens. So when you surveyed, did you find that workers are aware of the FLSA and the provisions related to overtime with respect to the salary, and that they just don't use this because there's so much harmony between employers and employees, and this did not become a point of contention?

Ms. Fagnoni. We didn't directly conduct a survey of employees. What we did was talk with a broad range of employee and employer representatives. And there was certainly general agreement that the regulations are very complex, and it may very well be that it may be difficult for employees and employers to--

Mr. Owens. Did you find that some workers, employees have just given up? I mean, is that the situation that goes on and how they deal with it?

Ms. Fagnoni. I don't think I would characterize it that way, but I do think that it takes some areas in which an issue surfaced, where there are multiple jurisdictions, where people may get together with employee groups and come forward with litigation. It is probably less likely than the individual employee going forward with--

Mr. Owens. Mr. Kerr, how many enforcement cases does the Department of Labor bring? And what does this do within their enforcement priority?

Mr. Kerr. The Department of Labor, to answer the second part first, has over the last several years begun to direct its enforcement attention more towards low wage workers and away from complaint-based investigation. That is a decision that was made four or five years ago, which is carefully being implemented.

I think that it is still true that about 70 to 75 percent of our investigations are complaint-based and are looking at low wage industries where we know that people don't generally complain and where we know that the majority of the problems with the minimum wage and overtime rules are.

I don't know off the top of my head the answer to your first question, which is how many of our investigations have to do with these issues. I can get that information for the committee.

Mr. Owens. Well, if it is all women workers, then most of them don't have to do with salary-based issues, correct?

Mr. Kerr. The low wage cases do not involve questions about administrators working for managers who are the manager.

Mr. Owens. How many investigators does the Department of Labor have to enforce this?

Mr. Kerr. We have about--

Mr. Owens. In general, and what percentage are devoted to the--

Mr. Kerr. Across the country we have about 900, 920 field investigators, located in five different regions. As I have said before, about 75 percent of their work is directed by complaints that come in the door, and the other 25 to 30 percent is engaged in looking at low wage workers in their regions.

Mr. Owens. Does the problem of updating the salary levels or overtime exemptions--are you working on that?

Mr. Kerr. As I said today, and as GAO has said, and the Chairman has said, and the other panelists have said, we have agreed that the 541 regulations need to be reviewed. We think that it would be useful if there were adjustments made in it. From our point of view as enforcers, and from the various stakeholders that we hear, both through hearings that Congress has held and people who write to us. We think at the moment that, as the Chairman and GAO have indicated, this is a complicated process.

I have said that I will sit down with the Office of Policy and try and figure out what steps might be appropriate. Maybe there is some information that we can gather that can help inform and produce some building blocks for this debate. I make no promises, as I have been accused of doing, of doing it within the next six months. But we think that this is something that ought to be addressed.

We appreciate the fact that everybody in the room thinks that it is extremely difficult. Perhaps over the next several months we could put some ideas or building blocks or thoughts in place that might inform adjusting these rules.

Mr. Owens. Mr. Clark, you represent workers, grocers, among other employees. There is not much difference working in a grocery store about 50 years ago than what it is today. Has there been an increase in the number of grocery workers who are being exempted for overtime? And, if so, how often does this happen?

Mr. Clark. Absolutely. And that is a huge problem. We are seeing that the grocery stores that used to just exempt the manager and the assistant manager are now calling every department in the grocery store as a separate department that must be managed by someone, and then calling that clerk a manager, and then seeking to exempt them from the Fair Labor Standards Act.

It is clearly inappropriate, but it is happening all over, and not just in grocery stores. And the reason it is happening, in large part, is because, as was stated by Mr. Kerr, there is only 990-some-odd investigators to go out and police a workforce of 100 million workers in seven and a half million workplaces. And that number has gone down steadily on average, over the last 10 years. And they really could use an increase in their budget to hire more investigators.

But it is also due, in large part, to the salary levels eroding over the last 25 years. If they were adjusted, many of these department managers could not possibly qualify for exempt status.

Mr. Owens. In relation to salary, one last question, Ms. Fagnoni. The salary that was used to determine whether a worker may be exempt from overtime has not been adjusted since 1975. In your report, you had the year 1983 to the year 1998. However, in the late '70s, this country went through a period of severe inflation. Why did you choose 1983 as your starting point? Is it possible that if you compared 1975 to 1998, rather than 1983, you might see an even greater erosion in the percentage of the workforce protected by overtime?

Ms. Fagnoni. Mr. Owens, we chose 1983 because the comparable data sources didn't go back further than that for the comparability. But the chart that you have shows from 1949 through 1998 how that salary--the actual tests, as compared with the adjustment for inflation. That does give you a picture of how 1998 would be adjusted for inflation.

Mr. Owens. Thank you, Mr. Chairman.

Chairman. Ballenger. Thank you, Mr. Owens.

Mr. Isakson?

Mr. Isakson. Thank you, Mr. Chairman. I apologize also for being late, panel members.

Mr. Clark, I want to ask you a question. You didn't say it per se, but it seemed to me you were saying one of your concerns about reviewing regulations results from the expansion in the number of exempt employees. Would that be a fair statement?

Mr. Clark. I think that is correct.

Mr. Isakson. And then you made a statement about there being a relatively small amount of litigation in this area, is that not correct?

Mr. Clark. Yes, there is a small amount of litigation, and that is because it is so difficult for a worker to enforce this statute on their own. Unlike any other Federal statute affecting workers, such as the Title VII protection for discrimination, there is no class action here. Workers can only sue on behalf of themselves and any other worker they can get to actually sign the paper joining the lawsuit.

Under those circumstances, it is extremely difficult for workers to find low cost or cost-effective legal representation, and that is why we have so few cases and why we are so dependent upon the Federal Government to enforce the law. But it is actually a cruel joke on working men and women to have only 990 investigators for this law. We really need more investigators.

Mr. Isakson. Well, I think I know the answer to this question before I ask it, but I do want to ask it because I think it is reflective of--or at least one of the reasons we ought to look at this. Unlike civil rights laws on discrimination for certification classes, you are saying it is very difficult, under the rules as they exist, for there to be a class action, is that correct?

Mr. Clark. That is correct.

Mr. Isakson. Would you not submit, however, that unlike discrimination, and other types of conspiracies, that modern business is extremely complex and it would be very difficult to apply class action litigation, whether employees are exempt or nonexempt, across any class?

Mr. Clark. We haven't found that. We think it is very appropriate for class action treatment. It is no more different or more difficult than addressing discrimination on the basis of gender or race.

Mr. Isakson. One last question. And, again, I apologize to other members.

Any time there is a minimum of litigation in an area like this, I would submit to you that there is difficulty and complexity. But having been in business for years myself and understanding the climate we have had in this country, particularly the last eight to nine years where employees are so important, and the number of them that are qualified who are not already employed are so few, would not part of the contribution to the lack of litigation be the pretty good treatment business and industry does give to employees?

I know there are exceptions. I know there may be abuse. And I know the court agrees with you. But I think right now, and for a number of years, we have had such a prosperous economy, would that not have contributed some to the minimum number of cases that are litigated?

Mr. Clark. If you go out on highway 495 right now, you will find very good people, decent people, out there speeding, going over the speed limit. And the reason they are doing it is because there is no police out there. We have good, decent employers who are violating the law routinely because there is no cop on the beat. And that is just human nature.

We have not been in the workplace, but we have sought to organize, in the past 10 years where we have not seen blatant and systematic violations of the Federal Labor Standards Act. This law is very old, and it has been around for a long time. It is time for all of us to wake up and give the Department of Labor the tools it needs to enforce this law.

Mr. Kilberg. Mr. Isakson, may I comment on one of your earlier questions?

Mr. Isakson. Yes, sir.

Mr. Kilberg. Thank you, sir.

First, with regard to your question regarding class actions, I think you are absolutely correct that there is a significant distinction between the Fair Labor Standards Act and, say, Title VII. When you have to look at a duties test, that each employee--technically, each employee--each week that you are seeking to recover back wages for that employee, you have to look at that employee's duties during each week in question.

It is very difficult to see how a single personnel policy, practice, or procedure can be targeted and brought and identified for a whole group of employees. You have to identify it for each single employee.

Secondly, I am not aware that the number of cases being brought under the Fair Labor Standards Act has decreased in recent years. The number of cases being brought with regard to the salary basis test has decreased since the Supreme Court's decision in the Auer case.

I would point out, however, that just last week the Ninth Circuit has done it again. In the case which I talk about in my testimony, involving Santa Clara County in California, the Ninth Circuit held that the county was unable to take advantage of the window of correction which exists in the statute, relying on a Labor Department interpretation of its regulations, which many of us believe is wrong, but nonetheless, relying on that interpretation, the Ninth Circuit held that 5,300-some-odd employees are entitled to back pay for two years for all of the overtime that they worked because 53 employees had had some minimal amount of money docked during that period of time for partial-day absences.

So a number of people, a large group of people, have gotten the windfall because the employer--the county employer made a mistake with regard to a small number of employees.

The only other thing I would point out, too, just as a matter of reality, is that while we talk about the number of cases brought, we don't have data with regard to the number of employers who felt compelled to settle. Not understanding how the regulations are to be applied, you were being told by a wage hour investigator that they have applied them incorrectly, or being faced with a lawsuit.

And I would also point out that under the statute attorney's fees are recoverable for plaintiff's counsel, so I don't think there is a disincentive to bring lawsuits on behalf of employees.

Mr. Isakson. Thank you, Mr. Kilberg, Mr. Clark.

Thank you, Mr. Chairman.

Chairman Ballenger. Mr. Kilberg, the case you just mentioned, I heard your testimony, but I am trying to figure out how these employees could be entitled to back pay? What was the situation in that?

Mr. Kilberg. The court held that there was a pattern of pay docking because there had been 53 instances in which pay had been docked. Actually, the number of employees I believe was smaller than that, but in 53 instances some employees had their pay docked for partial-day absences.

The county had said that it was unintentional, but nonetheless.

Chairman Ballenger. This was a local government?

Mr. Kilberg. This was a local government.

Chairman Ballenger. Oh.

Mr. Kilberg. County government. But the same rules would apply in the private sector. And although the Department's regulations allow an employer to exercise the window of correction, that is to say, to go back and to pay the employees who were docked the pay that they were docked, that they were improperly docked, so long as it was either unintentional or was not done because of a lack of work.

The Department has interpreted the ``or'' in its regulations as being an ``and'' and has said that you have to show that it was unintentional.

The court said, since there were 53 instances, that was a significant number of instances; and it will, therefore, assume that the docking was intentional. And, therefore, everyone who was subject to having their pay docked, whether or not it was, loses their exempt status and has to be paid overtime for any hours worked over 40 in any week during the prior two-year period.

Chairman Ballenger. How much did that add up to?

Mr. Kilberg. I don't recall, but it was a substantial--the amount of dots was very, very small, and the back wage recovery was great. I remember in the Malcolm Pirnie case, which was just a few years ago--that you had $800,000 in back wages. So it is in that magnitude.

Chairman Ballenger. Let me ask, Mr. Kerr, recognizing the fact that probably the most atrocious treatment of labor in this country today is the non-citizens, the workers who are hidden in sweatshops in Los Angeles and New York, is there--the fact that they are not citizens, does that give them less likelihood of reporting? They are scared to death. I am sure they are all scared they will get shipped out of the country if they report. Does that have any affect, as far as you know?

Mr. Kerr. Of course it does. They have the same rights under this law that citizens have. One of the things we have worked with the INS on is we have an agreement with the INS, because of this problem, that if somebody complains to us, we have a complaint in one of these kinds of industries, and the complaint is by somebody who is an illegal, we can act on the complaint. We can investigate the facility. Even though we are part of the Government, we are not obligated to tell the INS that we found people who were illegal.

The reason for that discussion with the INS is, of course, if you think you might be deported, or if an employer has said, ``I will turn you in to the INS if you complain,'' this is a very difficult right to exercise. This is a problem.

Chairman Ballenger. One thing I would like to commend the AFL-CIO for, and I would be interested to know if there was reaction on your part. Lately they have come up with the idea of legalizing some of the foreign workers who are here illegally. It is obvious they have to be in the millions.

That would make your job easier, and it would sure make it easier for us not to worry about it. Since the law doesn't allow us to question an employee's paperwork. I know at home we heard that they were--had a profession of making counterfeit driver's licenses and social security cards, and so forth, and you are not allowed, as an employer, to ask, ``Is that a legitimate card?''

Let me quickly ask one more question, Mr. Kerr. Has your department considered making its opinion letters available on the Internet?

Mr. Kerr. We have. What we do now in the Wage and Hour Division is that about every six months the previous--now, remember, opinion letters go to the individuals who ask us the question. So that at that point, they are a public document. That individual has them, or that law firm has them. They can do what they want with them.

About every six months we give the various reporting services the previous six months' worth of opinion letters. So the Bureau of National Affairs has them; Commerce clearinghouse has them. They are public through those organizations.

As part of the Secretary's request that the enforcement agencies at the Department of Labor look at all of their compliance assistance, how they speak to the public, how they review what is said to the public through various forums, whether it be our web sites or whether it be fact sheets, consider other ways of making them available. And the Internet is one place, and the Internet is one place where some people on my staff are very interested in making our opinion letters available.

Of course, any time you put something up on the Internet, you then have to make sure that if anything changes you pull it back down. So if we are going to proceed in this direction, we need to have the front end and the back end. We need to have the review about how things go up, how they are described, and whether they are complete. And then, if a court suggests that something we have done in the past is no longer appropriate, we do have to look at changing the regulations. We need to look to how we monitor our own Internet site.

But as part of Alexis Herman's request to all of us that we look at these possibilities, we are looking at them.

Chairman Ballenger. I am just curious, as Mr. Kilberg mentioned, about the difficulty you had with stock options. Was that on the Internet, that they caught you, or did you just get caught by smart lawyers?

[Laughter.]

Let me just thank you all for participating here. I think we all recognize what a problem this is.

Mr. Sutphen, we didn't give you any questions or anything, but I am sure that your corporation or your business that you are in will profit from the difficulties that we have discussed here this morning.

[Laughter.]

Mr. Sutphen. Very much so.

[Laughter.]

Chairman Ballenger. And if there is no further business, I, again, would like to say the Subcommittee is adjourned.

[Whereupon, at 11:55 a.m., the Subcommittee was adjourned.]