Human resources group shoots at Obama overtime rule but misses

This will be the first in a series of blog posts examining some of the comments submitted to the U.S. Department of Labor (DOL) in response to its notice of proposed rulemaking (NPRM) on overtime pay for salaried employees. Approximately 300,000 comments have been acknowledged by DOL; I want to call attention to a few of the most salient comments, both pro and con.

I’ll start with the Human Resources Policy Association (HRPA), which claims to represent “the most senior human resource executives in more than 360 of the largest companies in the United States.” HRPA’s comment addresses both what DOL actually proposed as well as ideas it was merely considering. Three of HRPA’s criticisms are worth considering, though each is deeply flawed:

  1. The proposed salary level is too high because it “would effectively nullify the statutory exemption for a significant number of employees Congress meant to exempt.”
  2. The proposed rule would limit “workplace flexibility.”
  3. The rule should not index the salary level test.

The salary level proposed by DOL is modest and meets the congressional intent

HRPA’s argument that the salary level is too high begins with a misstatement of the role of the salary level test. It very clearly is not intended to set a “level at which the employees below it clearly would not meet any [executive, administrative, or professional (EAP)] duties test.” The salary level test would be redundant if the employees covered by it clearly would not meet any EAP duties test. In fact, DOL has long expressed the exact opposite intent. In the words of DOL’s 1949 report and recommendations, “the salary level must be high enough to include only those persons about whose exemption there is normally no question” (Weiss, 23).

For employees such as typists and receptionists, who are obviously not executives, administrators, or professionals, it doesn’t matter how much they are paid—they must be paid for their overtime. On the other hand, it is precisely those employees where the duties tests suggest the possibility of EAP status that the salary level test plays its role. The level is intended to separate employees with similar duties, such as bookkeepers and head bookkeepers, or secretaries and executive secretaries. As DOL has recognized since it issued its first regulations in 1938, the salary level is the clearest measure of whether an employee is an executive, an administrator, or a professional employee. Someone important enough not to be covered by the statute’s minimum wage and overtime protections must be valued by the employer, and her salary will reflect it. A bookkeeper or even an accountant paid $40,000 does not have much bargaining power and needs overtime protection. Such employees earning $50,000 or more are arguably sufficiently valued by the employer that they do not need the government’s protection.

HRPA fails to understand that Congress intended the overtime exemption to be a narrow one, limited to the bosses and a small group of technical experts. A group of 57 legal scholars submitted a comment on the NPRM that perfectly captures the congressional intent:

Congress’ intent was to allow exemptions from the Fair Labor Standards Act’s overtime and minimum wage protections for a relatively small group of high-paid employees who were effectively already being compensated for the extra hours that they worked by their high level of compensation. Congress understood that these workers had sufficient individual bargaining power in the labor market and workplace to protect themselves, and so did not need the government to intervene to protect them from employers who might impose low wages and excessive over-work. One very strong indication of a worker’s individual bargaining power is the salary that he or she can negotiate with an employer. More individual bargaining power generally produces a higher salary. Bona fide executive, administrative, and professional employees are able to negotiate high salaries because of their skills, knowledge, close association with powerful corporate leaders and, in many cases, limited availability in the labor market. For this reason, we agree with the Wage & Hour Division that an employee’s salary level should be the most important factor in determining whether he or she is an exempt bona fide executive, administrative, or professional employee.

HRPA argues that the salary test would exclude a wide range of employees from the exemption (which means that they would be entitled to overtime pay), “regardless of their location or job duties.” The examples HRPA gives are full of mistakes: chiropractors, veterinarians, dentists, physicians, and surgeons are all exempt regardless of their salary under both the current rule and the proposed rule. HRPA’s “senior human resources executives” ought to know this.

HRPA claims there is something wrong with denying employers an exemption with respect to “employees with four year college degrees,” but it has always been the case that a B.A. degree is not enough, by itself, to qualify an employee for exemption (even the Bush administration’s 2004 regulation reasserted this principle). Historically, the Department of Labor has set the salary test high enough to exclude most recent college graduates. In 1949, for example, the department’s Report and Recommendations declared that” when the average college graduate starting work receives a salary of $240 a month, it is clear that the salary tests for bona fide administrative and professional employees must be considerably higher in order to restore their effectiveness” (Weiss, 19). The department therefore set the salary level 25 percent higher, at $300 per month.

Likewise, the fact that 25 percent of accountants and auditors are paid less than the proposed salary level is in no way problematic. When the Department of Labor set the salary level for administrative and professional employees at $75 per week in 1950, it was on the basis of finding that “the middle 50 percent of accountants received between $69 and $93 a week.” Necessarily, the bottom 25 percent of accountants earned less than $69 per week, so the salary test excluded more than 25 percent of accountants from exemption. The current proposal fits the historical pattern.

In truth, the NPRM’s salary thresholds are not high; they are barely adequate to support a modest standard of living for an American family. Today, an employee with a B.A. in biology earning a salary of $40,000 would not be able to support a family and maintain a decent standard of living in any community in the United States. The lowest cost community’s basic family budget for two adults and two children is $49,114, using 2014 data—more than the salary threshold for 2014 in the NPRM.

Salaried workers earning less than $50,000 won’t lose the little workplace flexibility they have

Research by Prof. Lonnie Golden of Pennsylvania State University reveals that salaried employees paid less than $50,000 a year generally have little workplace flexibility, and what they do have is not significantly greater than that of hourly workers in the same pay range. Thus, even if the rule led employers to reclassify salaried employees as hourly, they would lose nothing significant in terms of workplace flexibility. If, as HRPA suggests, employers want their employees to telecommute or work from home late at night, they can pay them $50,440 or more and not worry about keeping track of their hours, they can trust the employees to accurately report their work time, or they can keep track of their employees’ time by requiring the employees to log in on a device (a cellphone or laptop, for example) whenever they work away from the office. This is not a big deal.

DOL has the authority to index the salary level and should use that authority

To maintain the effectiveness of the salary level test, the salary level should be adjusted annually. Ad hoc adjustments in the past have allowed the test to be rendered obsolete and useless. At one point, the level was not adjusted for 29 years and was less than the minimum wage. Today, it is less than the poverty line for a family of four, instead of reflecting a reasonable salary that one might expect a bona fide executive to earn.

HRPA claims that the fact that Congress has repeatedly amended the FLSA to raise the minimum wage but has never amended it “to permit the Department to index the salary level” somehow indicates that indexing is inappropriate. It’s a silly argument. The power to define and delimit the EAP exemptions is given to the Secretary of Labor in the statute. When Congress has wanted to restrict the Secretary’s authority it has done so by amending the FLSA, but it has never limited the department’s authority to index the salary level. Congress has limited DOL’s authority to restrict the amount of non-exempt time certain employees can work while still qualifying for exemption. Congress took away DOL’s authority to set the salary level for certain “computer professionals.” But Congress has never limited DOL’s authority to index the salary level.

HRPA is right that the proposed rule allows future nominal adjustments of the salary level without having to go through a notice and comment process, but that is a virtue, not a vice. The NPRM proposes setting the salary test once and for all time at the 40th percentile salary for full-time salaried employees. In the future, DOL will only have to announce what the 40th percentile salary is, a process that is purely ministerial and will not require or benefit in any way from public comment.

It is true that there will be an initial upward surge in the salary level if employers convert lower-paid salaried employees to hourly. The 40th percentile salary in 2017 could be significantly higher than in 2016. But that effect will diminish over time, and because the initial salary level DOL has proposed is so modest, there would be no harm if the level rose for the first couple of years. In the past, the share of salaried employees protected by the salary level test was much greater than it would be under the proposed rule, even after a year or two of upward adjustments.