oversight

Fair Labor Standards Act: White-Collar Exemptions in the Modern Work Place

Published by the Government Accountability Office on 1999-09-30.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                  United States General Accounting Office

GAO               Report to the Subcommittee on
                  Workforce Protections, Committee on
                  Education and the Workforce, U.S.
                  House of Representatives

September 1999
                  FAIR LABOR
                  STANDARDS ACT
                  White-Collar
                  Exemptions in the
                  Modern Work Place




GAO/HEHS-99-164
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Health, Education, and
      Human Services Division

      B-283016

      September 30, 1999

      The Honorable Cass Ballenger
      Chairman
      The Honorable Major R. Owens
      Ranking Minority Member
      Subcommittee on Workforce Protections
      Committee on Education and the Workforce
      House of Representatives

      The Honorable Bill Goodling
      Chairman
      The Honorable William Clay
      Ranking Minority Member
      Committee on Education and the Workforce
      House of Representatives

      After more than 60 years, the Fair Labor Standards Act (FLSA) remains the
      primary federal statute setting the minimum wage and hour standards
      applicable to most American workers. Since its enactment in 1938, the
      industrial profile of the American economy has shifted dramatically,
      changing from predominantly manufacturing to increasingly
      service-oriented. Critics of the FLSA claim that this shift, as well as the
      increased use of sophisticated technology, have left the FLSA and its
      regulations outdated and in need of revision.

      One area of concern involves the so-called “white-collar” exemptions of
      the FLSA. The Act limits the normal work-week to 40 hours, requiring most
      employers to pay hourly overtime wages to employees who work longer
      than 40 hours. However, under section 13(a)(1) of the Act, employees
      working in a “bona fide executive, administrative, or professional
      capacity” are exempted from the wage and hour standards. These
      white-collar employees need not be paid overtime premium pay for a
      work-week longer than 40 hours.

      Employers from both the private sector and state and local governments
      have focused their criticisms on Department of Labor (DOL) regulations
      that define the “exempt” white-collar employees. Under the FLSA, DOL is
      responsible for setting the criteria for these exemptions, and historically it
      has formulated specific regulatory tests based on the accumulated
      experience of employers, employees, and its own field staff with
      work-place issues. Currently, employees must meet each of three tests to




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                   be classified as exempt white-collar workers: (1) the employee must be
                   paid a salary, not an hourly wage (the salary-basis test); (2) the amount of
                   the employee’s salary must indicate managerial or professional status (the
                   salary-level tests); and (3) the employee’s job duties and responsibilities
                   must involve managerial or professional skills (the duties tests).

                   In response to your request for information on employer compliance with
                   the white-collar exemptions under the FLSA, this report focuses on five
                   questions: (1) How many employees are covered by the white-collar
                   exemptions and how have the demographic characteristics of these
                   employees changed in recent years? (2) How have the statutory and
                   regulatory requirements changed since the enactment of the FLSA?
                   (3) What are the major concerns of employers regarding the white-collar
                   exemptions? (4) What are the major concerns of employees regarding the
                   white-collar exemptions? (5) What are possible solutions to the issues of
                   concern raised by employers and employees? We performed our work in
                   accordance with generally accepted governmental auditing standards from
                   November 1998 through June 1999. Our scope and methodology are
                   presented in appendix I.


                   In 1998, between 20 and 27 percent of the full-time U. S. workforce—or 19
Results in Brief   to 26 million workers—were executive, administrative, or professional
                   employees covered by white-collar exemptions of the FLSA.1 In recent years
                   the percentage of employees covered by these exemptions has been
                   increasing. The number of employees working in certain service industries2
                   nearly doubled between 1983 and 1998, and there is a higher percentage of
                   white-collar employees in the service sector than in other sectors of the
                   economy, such as manufacturing. Overall, the workforce covered by the
                   exemptions also became increasingly female—the proportion of women
                   increased from 33 percent in 1983 to 42 percent in 1998. In addition, in
                   1998, workers subject to the white-collar exemptions were more than
                   twice as likely as nonexempt workers to work overtime—44 percent of
                   exempt employees worked more than 40 hours in a work-week, and about
                   one-third of those worked more than 50 hours in a work-week.



                   1
                   Our estimate includes only those employees who would most likely be properly classified as exempt
                   workers under the DOL regulations. It may not include all employees who are classified as exempt
                   workers by their employers.
                   2
                    These industries included four types of service occupations from the Current Population Survey
                   (CPS) industry codes: business and repair, personal, entertainment and recreation, and professional
                   and related services. For definitions of other industries discussed in this report, see app. I.



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    In the 16 years following the 1938 enactment of the FLSA, DOL established
    the key regulatory tests defining whether an employee can be classified as
    an exempt white-collar worker. These tests included the salary-basis
    test—the requirement that exempt white-collar workers be paid a salary,
    not an hourly wage—as well as the various salary-level and duties tests.
    Since 1954, major statutory and regulatory changes to the white-collar
    exemptions have been few, and primarily limited to increases in the
    salary-test levels and to changes to coverage of specific types of
    employees. In recent years, for example, the salary-basis test has been
    adjusted for state and local government employees, and higher-wage
    computer programmers were included in the exemption.

    In general, employers we contacted were concerned that the regulatory
    tests were too complicated and outdated. Specifically, their concerns
    included the following:

•   Employers worried about potential liability for violations of the
    salary-basis test. While DOL viewed the test as being a highly accurate
    indicator of managerial and professional status, in recent years it has been
    the focus of legal suits brought collectively by groups of managerial and
    professional employees against their employers. Our review of federal
    cases and discussions with employers showed continuing uncertainties
    and difficulties with the test.
•   Employers also believed that the regulations limiting the exemptions to
    white-collar nonproduction employees did not take into account the effect
    of modern technology on employment. For example, they pointed to
    highly skilled and well-paid technicians who did not qualify as exempt
    professionals, but who performed essentially the same job as exempt
    engineers with the required academic degrees.
•   Finally, employers complained that the parts of regulatory duties tests that
    call for independent judgment and discretion on the part of those
    classified as administrators and professionals led to confusing and
    inconsistent results in classifications of similarly situated employees. Our
    discussions with DOL investigators and review of compliance cases
    indicated that this part of the duties test involved difficult and sometimes
    subjective determinations, and that it was a source of contention in DOL
    audits.

    Employee representatives, on the other hand, were most concerned about
    preserving work-hour limitations for employees, and believed that the
    regulatory tests, as applied today, were not sufficient to adequately restrict




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    the use of the exemptions by employers. Specifically, they cited the
    following concerns:

•   Employee representatives believed that inflation has severely eroded the
    salary-level limitations originally envisioned by the DOL regulations. The
    regulations create three levels of regulatory duties tests, depending on
    employees’ salaries. Under the regulations, the lower the employee’s
    salary, the greater the limitations on the use of the exemptions. However,
    the regulations do not provide for automatic or periodic adjustments of
    the salary levels, and the levels have not been changed since 1975. To fully
    account for inflation between 1975 and 1988, the salary levels would have
    to be increased about threefold. As a result of the increase in salaries over
    that period, almost all full-time employees in 1998 were covered by the
    least-restrictive regulatory duties test—leaving more people than ever who
    potentially fall under the white-collar exemptions.
•   The representatives contended that the duties test for executive
    employees has been oversimplified, leading to inadequate protection of
    low-income supervisory employees. Our review of federal case law and
    DOL compliance cases indicated that it is, in fact, difficult to challenge
    exempt classifications if employees supervise two or more full-time
    employees and spend some time—even if minimal—on management tasks.

    Although various proposals have been advanced to address the concerns
    raised in this report, the conflicting interests of employers and employees
    have made resolution difficult. Some proposals would, for example,
    eliminate the salary-basis test or raise the salary-test levels. However, for
    every proposal—even those with consensus, such as increasing the
    salary-test levels—there are competing interests to be considered. To
    resolve these issues, the desire of employers for clear and unambiguous
    regulatory standards must be balanced with that of employees for fair and
    equitable treatment in the work place. Although DOL established the
    regulatory tests by balancing these competing interests, these same
    interests have made DOL reluctant to alter the current regulatory structure.
    In the last 45 years, DOL has adjusted the FLSA regulations only in a
    piecemeal fashion to meet the needs of particular types of employers and
    employees. Given the economic and work place changes over this period,
    a more comprehensive look at these regulations is necessary to determine
    whether a consensus could be achieved on how to amend the regulations
    to better suit the modern work place. This report recommends that the
    Secretary of Labor comprehensively review current regulations and
    restructure white-collar exemptions to better accommodate today’s work
    place and to anticipate future work place trends.



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             The FLSA sets the minimum wage most employers must pay their
Background   employees and the maximum hours—40 per week—most employees can
             work without receiving extra, overtime premium pay (at time-and-one-half
             the regular rate). In addition, the FLSA specifies which workers are exempt
             from these requirements. Although numerous categories of workers are
             exempt from these requirements,3 the largest group of exempt workers
             includes employees classified as executives, administrators, or
             professionals under section 13(a)(1) of the Act. These are sometimes
             called the white-collar exemptions, although not all white-collar
             employees are exempt.

             The FLSA was enacted to address problems associated with substandard
             working conditions by establishing a floor on wages and a ceiling on
             hours, beyond which the employer was required to pay extra wages. The
             purpose of the overtime provision was to shorten the work-week to a
             more reasonable 40 hours. This was expected to result in less employee
             fatigue, fewer accidents, higher productivity and efficiency, and more
             employee time for education and family duties. By requiring overtime
             premium pay, it was expected that employers would hire more workers to
             avoid the extra wage costs, and that workers would be assured additional
             pay to compensate them for the burden of a work-week in excess of 40
             hours. The Minimum Wage Study Commission of 19814 justified the
             exemption of executives, administrators, and professionals from the
             protections of the FLSA in part because these employees were associated
             with higher base pay, higher promotion potential, and greater job security,
             making them different from other employees. Moreover, the nature of their
             jobs—managerial and professional—precluded the potential for the job
             expansion desired in other types of employment (that is, hiring more
             workers to perform the additional hours of work).

             For employers and employees, the practical consequences of the exempt
             worker classification can be very important. An exempt employee may be
             required to work as many hours as it takes to complete a task. Although
             this may be more than 40 hours per week, the employee will not be
             entitled to overtime premium pay for the hours exceeding 40. Thus, an
             exempt financial manager may be required to work 60 hours a week and
             be paid a set weekly salary. On the other hand, a nonexempt bookkeeper


             3
              Currently, section 13(a) lists 10 other categories of workers (in addition to managers and
             professionals) as exempt from both the minimum wage and maximum hours provisions of the FLSA.
             These include diverse groups of employees, such as babysitters and those working at recreational
             establishments.
             4
              The legislative history for the FLSA contains no explanation for the exemption.



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    may also be required to work 60 hours per week, but must be paid at a
    premium hourly wage for 20 hours (the number exceeding 40 per week) in
    addition to a set weekly salary.5

    Ever since the FLSA was enacted, the interests of employers in expanding
    the white-collar exemptions as broadly as possible have competed with
    those of employees in limiting use of the exemptions. In 1940, for example,
    DOL reported that groups representing employers argued for broader use of
    the exemptions to allow management training, to increase flexibility in
    work-hour scheduling, and to ensure a stable weekly pay for employees.
    At the same time, employee representatives argued against broader use of
    the exemptions, trying to reduce the potential for abuse and exploitation
    of workers.

    Balancing the competing interests of employers and employees, DOL
    established specific regulatory tests that must be met before an employee
    can be classified as an exempt white-collar6 worker. In general, there are
    three major parts to these tests:

•   First, the employee must be paid on a salary basis, not at an hourly rate.
    This means that the employee must be paid a guaranteed amount each pay
    period, independent of the number of hours that the employee has actually
    worked and the quality and quantity of work performed.
•   Second, the employee must be paid at least a specified base salary level
    that indicates managerial or professional status. DOL regulations include
    different salary levels. One is a base level for each type of exempt
    white-collar worker—executive, administrative, or professional—below
    which workers are assumed to be nonexempt and covered by the FLSA
    minimum wage and overtime requirements. The other is a higher salary
    level, above which employees will likely be exempt if their primary duties
    are managerial or professional.
•   Third, the employee must have duties and responsibilities associated with
    managerial or professional work. Generally, such duties must include
    appropriate independent judgment and discretion. However, depending
    upon the employee’s salary level—whether it is above or below the highest
    salary level—DOL regulations call for either closer scrutiny (with a long,
    detailed test) or not as much scrutiny (with a short, limited test) of the
    nature of the employee’s duties.


    5
     Salaried workers may be either exempt or nonexempt; being paid a salary is not determinative of
    exempt status.
    6
     DOL does not refer to a white-collar exemption; the exemption is referred to routinely as covering
    executive, administrative, and professional employees.



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                                          The regulatory tests vary among the three categories of
                                          employees—executive, administrative, and professional. Table 1
                                          summarizes the major tests required for each type of exemption. For each
                                          category of employee, we identify the salary levels included in the
                                          regulations and the associated duties test. We refer to the lower salary as
                                          the base salary, and the applicable duties test as the long test. The higher
                                          salary level is referred to as the upset test, and the applicable duties test as
                                          the short test.



Table 1: Summary of Current Regulatory Tests for Executive, Administrative, and Professional FLSA Exemptions
                                    Base salary                                  Upset salary
                                    (triggers long                               (triggers short
Employee type        Paid a salary  duties test)        Long duties test         duties test)    Short duties test
Executive            Yes             $155 per week        Various indicators,          $250 per week   (1) Must supervise two or
                                                          including a primary                          more employees, and (2)
                                                          duties test and a                            primary duty must be
                                                          requirement that no                          management
                                                          more than 20 percent of
                                                          work (or 40 percent if in
                                                          retail or service) involve
                                                          nonmanagerial work
Administrative       Yes; also may   $155 per week        Primary duties test          $250 per week   (1) Primary duty must involve
                     be paid on a                         including the                                office or nonmanual (or staff)
                     fee basis                            percentage limitations                       work directly related to
                                                          on nonexempt work,                           management, and (2) work
                                                          plus other indicators of                     must require discretion and
                                                          administrative                               independent judgment
                                                          responsibilities
Professional         Yes; also may   $170 per week        Primary duties test          $250 per week   Either (1) must have requisite
                     be paid on a                         including the                                academic degree and job
                     fee basis                            percentage limitations                       must require consistent
                                                          on nonexempt work,                           exercise of discretion and
                                                          plus other indicators of                     independent judgment, or (2)
                                                          professional                                 must involve original and
                                                          responsibilities                             creative work requiring
                                                                                                       invention, imagination, or
                                                                                                       talent in recognized field
                                          Source: GAO analysis of DOL regulations.




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                                           We estimate that between 19 and 26 million full-time wage and salary
Number of                                  workers7 were covered by the white-collar exemptions in 1998.8,9 This
White-Collar                               amounts to 20 to 27 percent of the full-time labor force. Based on the high
Exemptions Increases                       estimate of 26 million, our estimate represents an increase of 9 million
                                           workers over our 1983 estimate of 17 million exempt full-time wage and
With Growth of                             salary workers (see table 2). For a detailed description of the methods
Service Sector                             used to obtain these estimates, see appendix I.


Table 2: Estimates of Full-Time White-Collar Workers Exempt in 1983 and 1998
                                                                  Covered by white-collar exemptions
                                                               High estimate                                        Low estimate
                      Total full-time wage              Number of               Percentage of               Number of                Percentage of
                      and salary workers                employees         full-time wage and                employees          full-time wage and
Year                             (millions)a             (millions)            salary workers                (millions)             salary workers

1983                                     71                       17                         24%                       12                          17%

1998                                     96                       26                         27%                       19                          20%
                                           Notes: Includes employees exempt under sec. 13(a)(1) of the FLSA. 29 C.F.R. 541 defines those
                                           employees classified as executive, administrative, professional, or outside sales workers. Outside
                                           sales workers are not included in this analysis. Please see app. I for a discussion of these
                                           estimates.
                                           a
                                            Wage and salary employment numbers are from the CPS Outgoing Rotations Data analysis and
                                           match the Bureau of Labor Statistics (BLS)-published Employment and Earnings annual
                                           averages.

                                           Source: CPS Outgoing Rotations Data for 1983 and 1998.



                                           Much of the growth in exempt workers can be attributed to the growth in
                                           the service sector of the economy. In 1998, the service industries
                                           employed 24 million full-time workers—nearly doubling from 13 million
                                           workers in 1983. All sectors of the labor market saw some growth in the
                                           number of workers between 1983 and 1998;10 however, no other sector has

                                           7
                                               Full-time wage and salary workers exclude self-employed workers and workers under age 16.
                                           8
                                            For each of 257 job titles, DOL provided us with a range estimate—for example, 10-50 percent—of the
                                           employees in that job category who would probably be exempt. We arrived at our low estimate
                                           (19 million) by using the lower ends of DOL’s individual job category range estimates, and at the high
                                           estimate (26 million) by using the upper ends of those individual estimates.
                                           9
                                             Our work is not an attempt to count the actual number of people classified as exempt by American
                                           employers, but rather to estimate how many full-time workers are covered by the white-collar
                                           exemptions.
                                           10
                                             The number of full-time wage and salary workers grew between 1983 and 1998 as follows: services,
                                           13 to 24 million; retail trade, 8 to 13 million; manufacturing, 18 to 19 million; finance, insurance, and
                                           real estate, 5 to 7 million; other, 14 to 18 million; and public sector, 13 to 16 million.



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                                          grown as rapidly in the last 15 years. As figure 1 shows, in 1998 one-quarter
                                          of all full-time workers held jobs in the service sector, which makes it the
                                          largest employment sector.



Figure 1: Percentage of Full-Time Wage and Salary Workers in 1983 and 1998 by Industry




                                          Notes: The sampling errors for the estimates in this figure do not exceed plus or minus
                                          0.5 percentage points at the 95% significance level.

                                          Service industries included four types of service occupations from the Current Population Survey
                                          (CPS) industry codes: business and repair, personal, entertainment and recreation, and
                                          professional and related services. For definitions of other industries discussed in this report, see
                                          app. I.

                                          Source: CPS Outgoing Rotations Data for 1983 and 1998.




                                          In addition to growing rapidly, the service sector also has a higher
                                          proportion of exempt workers than other sectors and is responsible for
                                          much of the growth in the exempt population. Not only has the service
                                          sector grown by 11 million full-time workers in the last 15 years, but the
                                          number of exempt workers in the service sector has increased by




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                                          3.6 million.11 Over the last 15 years, the increase in the number of full-time
                                          workers covered by the white-collar exemptions has been about 8 million.
                                          The increase of 3.6 million exempt workers in the service sector over this
                                          same time represents about 46 percent of the overall growth in exempt
                                          workers. As a result of this rapid growth, 29 percent of all exempt workers
                                          worked in the service sector in 1998—up from 19 percent in 1983 (see
                                          figure 2).



Figure 2: Percentage of Full-Time White-Collar Workers Exempt in 1983 and 1998 by Industry




                                          Notes: The percentage estimates represent the average of the high and low estimates. See app. I
                                          for a discussion of these estimates.

                                          Service industries included four types of service occupations from the Current Population Survey
                                          (CPS) industry codes: business and repair, personal, entertainment and recreation, and
                                          professional and related services. For definitions of other industries discussed in this report, see
                                          app. I.

                                          Source: CPS Outgoing Rotations Data for 1983 and 1998.




                                          The demographic composition of the exempt population has significantly
                                          changed in the last 15 years. In 1998, 42 percent of exempt workers were

                                          11
                                           This estimate and those that follow represent the average of the high and low estimates. Please see
                                          app. I for a discussion of these estimates.



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                                       women, compared to 33 percent in 1983 (see figure 3). On the other hand,
                                       the gender distribution of nonexempt workers has not changed in the last
                                       15 years. About 40 percent of nonexempt workers were women in both
                                       1983 and in 1998. These data indicate that more women than men entered
                                       full-time white-collar positions over this period.


Figure 3: Percentage of Full-Time
White-Collar Exempt and Nonexempt
Workforce in 1983 and 1998 by Gender




                                       Note: The percentage estimates represent the average of the high and low estimates. See app. I
                                       for a discussion of these estimates.

                                       Source: CPS Outgoing Rotations Data for 1983 and 1998.




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                                        Full-time workers covered by the white-collar exemptions are much more
                                        likely to work overtime—that is, more than 40 hours per week—than
                                        nonexempt workers (see figure 4). As figure 4 shows, in 1998, nearly
                                        half—44 percent—of the 19 to 26 million full-time workers covered by the
                                        exemptions said they worked overtime at their primary job. In 1983, about
                                        one-third—35 percent—of full-time exempt workers worked more than 40
                                        hours per week. In fact, exempt workers were more than twice as likely to
                                        work overtime in both 1983 and 1998 as nonexempt workers. In general,
                                        the amount of overtime hours worked by both exempt and nonexempt
                                        workers was greater in 1998 than in 1983. In this regard, in 1998, about
                                        15 percent of exempt workers worked more than 50 hours per week and
                                        3 percent worked more than 60 hours per week at their main job. This
                                        compares to 10 percent working more than 50 hours per week and
                                        2 percent working more than 60 hours in 1983.



Figure 4: Percentage of Full-Time Exempt and Nonexempt White-Collar Workers Who Worked Overtime in 1983 and 1998




                                        Note: The percentage estimates represent the average of the high and low estimates. See app. I
                                        for a discussion of these estimates.

                                        Source: CPS Outgoing Rotations Data for 1983 and 1998.




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                                        As figures 5 and 6 show, exempt workers earned substantially more than
                                        nonexempt workers in 1998. In figure 5, 40 percent of exempt workers
                                        earned $1,000 or more per week, compared to only 7 percent of
                                        nonexempt workers. Conversely, 57 percent of nonexempt workers
                                        earned less than $500 per week, compared to only 10 percent of exempt
                                        workers.

                                        Figure 6 illustrates that there are many fewer exempt workers than
                                        nonexempt workers.



Figure 5: Percentage of Full-Time Exempt and Nonexempt White-Collar Workers in 1998 by Weekly Income




                                        Note: The percentage estimates represent the average of the high and low estimates. See app. I
                                        for a discussion of these estimates. The zero percentages in this table are the result of rounding
                                        and represent a number between 0 and 0.5 percent.

                                        Source: CPS Outgoing Rotations Data for 1998.




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Figure 6: Number of Full-Time Exempt and Nonexempt White-Collar Workers in 1998 by Weekly Income (in Millions)




                                         Note: The numerical estimates represent the average of the high and low estimates. See app. I for
                                         a discussion of these estimates. The zeros in this table are the result of rounding to the nearest
                                         million and represent a number between 0 and 500,000 people.

                                         Source: CPS Outgoing Rotations Data for 1998.




                                         In 1998, the average weekly earnings of full-time exempt workers were
                                         nearly twice those of nonexempt workers—$1,01812 weekly compared to
                                         $526 for nonexempt workers. The difference in earnings between exempt
                                         and nonexempt workers was similar in 1983.


                                         In the 61 years since the enactment of the FLSA, there have been few major
Few Major Changes in                     changes to the statutory and regulatory provisions for the white-collar
Exemption Laws and                       exemptions. Between 1938 and 1954, DOL established its basic set of
Regulations Since                        regulatory tests—the salary-basis test, the salary-level tests, and the
                                         various duties tests. Although DOL made a public request for views on
1954                                     restructuring the regulations in 1985, it has not acted to alter the general

                                         12
                                          The earnings figures reported here are earnings from the respondent’s main job before taxes or other
                                         deductions including earnings from overtime pay, commissions, or tips from that job.



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way the regulatory tests work since 1954. Changes after 1954 have
primarily involved adjustments to the salary-test levels and to the tests
applicable to specific types of workers, such as retail workers, state and
local government employees, and computer programmers.

In the 16 years following the enactment of the FLSA in 1938, DOL established
the regulatory tests used to determine whether an employee should be
classified as an exempt white-collar worker. These tests evolved as DOL’s
experience with administering the tests grew. For example, the first set of
regulations in 1938 included a single test for executives and
administrators. Two years later, responding to numerous criticisms, DOL
drafted two separate definitions—one for “executives,” to apply to people
who are bosses, and another for “administrative” employees, to apply to
people who carry out management policies but who do not supervise other
employees. DOL made its final change to the structure of the basic tests in
1954, when it adjusted the exceptions to the salary-basis requirement.

Since 1954, statutory and regulatory revisions have, in general, either
(1) adjusted the salary levels upward or (2) modified the coverage of the
exemption, extending or reducing coverage for a particular type of
worker. The salary levels were adjusted in 1958, 1963, 1970, and 1975. DOL
last attempted to increase these levels in 1981; a Presidential order,
however, indefinitely postponed these increases. In 1961, statutory and
regulatory revisions eliminated a separate exemption covering most retail
workers and specifically included these workers under the white-collar
exemptions. Other statutory and regulatory changes expanded coverage of
the exemptions to teachers (1967)13 and certain higher-wage computer
professionals (1992). A regulatory revision in 1992 limited the effect of the
salary-basis requirement for state and local governments.

All statutory and regulatory revisions on white-collar exemptions are
presented in appendix II. The major changes are summarized in table 3.




13
  As pointed out in table 3, public educational institutions were not covered by the FLSA until 1967.



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Table 3: Summary of Major Statutory
and Regulatory Revisions to the           Year of revision                    Summary of revision
White-Collar Exemptions                   1938 through 1954                   Basic regulatory tests set forth in regulations
                                          1961                                Separate retail trade exemption repealed but retail
                                                                              employees were included, with a limitation, under the
                                                                              general coverage of the white-collar exemption
                                          1967                                FLSA was applied to public educational institutions but
                                                                              teachers and school administrators were included under
                                                                              the exemption
                                          1973                                The equal pay provision of the FLSA was made
                                                                              applicable to all those included under the white-collar
                                                                              exemption
                                          1992                                Under certain circumstances, state and local government
                                                                              workers were excepted from selected aspects of the
                                                                              salary-basis requirement

                                                                              Certain computer professionals earning over 6-1/2 times
                                                                              the minimum wage were exempted from the FLSA, even
                                                                              though they were paid an hourly wage
                                          Source: GAO analysis of statutory and regulatory provisions.




                                          From our reviews of 166 federal court cases14 involving litigation on this
Employers Believe the                     subject and 66 DOL compliance cases,15 as well as our discussions with
Regulatory Tests Are                      employers, DOL officials, and various legal and economic experts, the
Too Complicated and                       following three issues stood out as being of particular concern to
                                          employers:
Outdated for the
Modern Work Place                     •   First, the complex requirements of the salary-basis test or the so-called
                                          “no-docking” rule presented possibly the greatest potential liability for
                                          employers and made it difficult to account for employees’ time and
                                          actions.
                                      •   Second, the traditional limits of the white-collar exemptions between the
                                          highly paid, very skilled nonexempt technical workers and the exempt
                                          professional and administrative employees have been blurred in the
                                          modern work place.
                                      •   Third, the requirement for independent judgment and discretion on the
                                          part of administrative and professional employees was a major area of
                                          contention in DOL audits involving the white-collar exemptions.



                                          14
                                            We reviewed 5 years of judicial opinions (1994 through 1998) for both federal district court and
                                          federal appellate court cases.
                                          15
                                            We reviewed 66 compliance cases closed in the past 2 years in four DOL field offices.



                                          Page 16                                    GAO/HEHS-99-164 FSLA and White-Collar Exemptions
                               B-283016




Employers Cite Perceived       The salary-basis test requires that exempt white-collar employees be paid
Difficulties of Salary-Basis   a set salary each pay period, rather than an hourly wage. The test appears
Test                           to rest upon the assumption that employers would pay managerial and
                               professional employees who are key to their business operations a
                               guaranteed salary regardless of the number of hours worked. In the DOL
                               enforcement program, this test is viewed as an accurate indication of
                               managerial and professional status. The test, however, effectively limits
                               the ability of employers to “dock” exempt employees’ pay for such things
                               as part-day personal absences and disciplinary violations (hence, the
                               so-called no-docking rule). Employers object to the test because in their
                               opinion (1) compliance requires exacting adherence to the no-docking
                               requirements, leaving them vulnerable to private lawsuits by multiple,
                               well-paid employees; and (2) it limits their ability to hold their exempt
                               employees accountable for their time and actions.

                               In general, DOL regulations specify that employees can be exempt
                               executives, administrators, and professionals only if they are paid on a
                               salary basis—that is, employers must pay them a full salary for any week
                               worked “without regard to the number of days or hours worked.” Although
                               there are exceptions to this rule,16 a private employer17 may not dock an
                               exempt employee’s pay for absences of less than a full day—for whatever
                               reason—without violating the salary-basis test. In addition, neither public
                               nor private employers can dock an exempt employee’s pay for periods of
                               less than a week to enforce disciplinary rules except for a violation of a
                               safety rule of major significance. Employers, therefore, must pay exempt
                               employees a full weekly salary even though the employees may, for
                               example, take time off during the day for an extended lunch or a visit to
                               the dentist. Further, employers cannot suspend exempt employees without
                               pay for less than 1 week for such things as tardiness or unexplained
                               absenteeism.

                               In our interviews, employers and their representatives discussed the
                               complex requirements of the salary-basis test, and their concerns that if
                               they should not comply with the requirements, they may face lawsuits
                               brought by multiple (and possibly highly paid) employees for back wages
                               and other damages. Under the FLSA, employees may sue their employer
                               either individually or collectively for up to 2, and in some cases 3, years of


                               16
                                Exceptions to the rule include deductions of a day or more for personal reasons other than sickness
                               and accident, deductions of a day or more for sickness if in accordance with company policy, and
                               deductions for violation of safety rules of major significance.
                               17
                                 A 1992 amendment to the regulations allowed state and local governments to dock employees’ pay
                               for part-day absences under certain circumstances.



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back wages plus other damages. In our review of federal court cases, we
found that the salary-basis test has been the central focus of cases brought
by employees against their employers. Our review of 166 federal cases
involving the white-collar exemptions litigated in the past 5 years showed
that about 50 percent involved employee suits alleging that employers
improperly claimed exemptions for employees who did not meet the
salary-basis test.

For the most part, the salary-basis cases involved groups of supervisory or
professional employees collectively suing their employers. However, the
large majority of cases were initiated by groups of managerial public
employees (such as police and fire chiefs, senior corrections officers)
against state and local governments,18 most often because the government
could suspend or had suspended the pay of exempt employees as a
penalty for disciplinary infractions. Overall, over 70 percent of the
salary-basis cases were collective actions, and about 70 percent were
lawsuits against state and local governments.

A 1997 Supreme Court case, Auer v. Robbins, reduced employers’ potential
for liability from these lawsuits.19 In this case, a large group of senior
police officers sued a city government because its disciplinary suspensions
appeared to apply to exempt officers even though the city had only
suspended one police sergeant. The court ruled in favor of the city, and
effectively limited employers’ liability for improper pay docking to cases
where there is an “actual practice” or a “significant likelihood” of such
action. Prior to this decision, some federal cases had ruled that an
employer did not meet the salary-basis test if there were only a possibility
that the employer might improperly dock an exempt employee’s pay. The
result of this ruling is that fewer cases have resulted in liability for
employers—our review of 42 federal cases following Auer showed that 30
were decided in favor of the employers. However, the full effect of the
Auer ruling has yet to be determined.

Our discussions with employers and review of other federal cases showed
a variety of circumstances in which employers were uncertain about the




18
   In a recent decision, Alden v. Maine, 119 S.Ct. 2240 (1990), the Supreme Court ruled that state
employees cannot sue a state in state courts for overtime wages under the FLSA if the state has not
waived its sovereign immunity. A previous Supreme Court decision, Seminole Tribe of Fla. v. Florida,
517 U.S. 44 (1996), precluded such suits in federal courts.
19
  519 U.S. 452.



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    limits of the test. Some examples20 of questions concerning these
    circumstances include the following:

•   What constitutes an “actual practice” of pay docking? When does one
    instance connote an actual practice?
•   When can employers correct instances of improper pay docking and not
    incur liability?
•   What happens when an employee has no accrued leave? Can an employer
    deduct from accrued compensatory time?
•   The Family and Medical Leave Act requires employers to give employees
    unpaid leave for serious medical conditions; if such leave is taken in
    partial-day increments, does it violate the salary-basis test?
•   Under what circumstances can employers pay hourly overtime to exempt
    workers and maintain time sheets or set work hours?
•   Can an employee be disciplined for failure to complete a work shift?
•   An employer cannot suspend an exempt employee for less than a week; if
    the suspension is for more than a week, must the employer suspend the
    employee only in weekly increments?

    In Auer, the Supreme Court expressly deferred to the Secretary of Labor
    as the expert on regulatory interpretation of the salary-basis test.
    According to legal experts we talked to, clear guidance to employers from
    DOL on the technical requirements of the test may resolve some
    uncertainties. However, they indicated that it can be difficult for the public
    to locate published legal advice from DOL. As one solution, they suggested
    that DOL make its “opinion letters”—legal guidance it routinely provides to
    individual employers—more widely available to the general public, for
    example, by putting them on the Internet.

    However, even where the requirements of the salary-basis test were
    relatively clear, employers argued that the effects on their operations
    created anomalies. In the retail industry, for example, employers cannot
    dock an exempt employee’s pay to recoup losses from cash shortages or
    employee theft. If they do so, the employee is considered nonexempt and
    entitled to overtime wages. Employers complained that this rule unduly
    limits their ability to recover losses where responsibility clearly rests with
    one employee, such as when an employee delivering cash receipts to a
    bank loses the cash or an employee uses a corporate credit card for
    personal items.

    20
      In commenting on this report, DOL stated that it believes some of the legal issues raised by
    employers have been authoritatively addressed in either the case law or the law itself. Our review of
    the case law indicates that legal conclusions on issues related to the salary-basis test can vary
    depending upon the factual circumstances of individual cases.



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Officials from three large local governments21 told us that the salary-basis
test made it difficult to penalize employees with systematic disciplinary
steps. All three local governments are heavily unionized and to satisfy the
union contracts they must use “progressive discipline.” This means that
before harsh disciplinary actions—such as long-term suspensions or
termination—can be used to discipline an employee, less severe
disciplinary measures—such as part-day suspensions without pay—must
be taken to alert the employee to performance problems. However, the
officials contend that the salary-basis test prevented them from taking
such lesser measures.

DOL officials told us that they believe that payment on a salary basis
remains one of the best indicators of managerial and professional status.
This belief is longstanding. As a 1940 DOL report explained:

. . . The term “executive” implies a certain prestige, status, and importance. Employees who
qualify under the definition are denied the protection of the act. It must be assumed that
they enjoy compensatory privileges and this presumption will clearly fail if they are not
paid a salary substantially higher than the wages guaranteed as a mere minimum under
section 6 of the act. In no other way can there be assurance that section 13 (a) (1) will not
invite evasion of section 6 and section 7 for large numbers of workers to whom the
wage-and-hour provisions should apply. Indeed, if an employer states that a particular
employee is of sufficient importance to his firm to be classified as an “executive” employee
and thereby exempt from the protection of the act, the best single test of the employer’s
good faith in attributing importance to the employee’s services is the amount he pays for
them. The reasonableness and soundness of this conclusion is sustained by the record.


A 1949 DOL report rejected proposals to eliminate the salary-basis test,
commenting that “[C]ompensation on a salary basis appears to have been
almost universally recognized as the only method of payment consistent
with the status of the ‘bona fide’ executive . . . [and] is one of the
recognized attributes of administrative and professional employment.”
These principles were again reaffirmed in the report and
recommendations of a 1958 hearing report on proposed revisions to the
regulations.

Compliance investigators in DOL’s Wage and Hour Division said that the
salary-basis test is a key enforcement test. Investigators told us that the


21
  Because it is clear that local governments (and other employers) violate the salary-basis test when
they discipline their management officials by suspensions without pay, all three local governments we
talked to have made large groups of their employees nonexempt rather than give up their disciplinary
systems. One now pays its senior police officials overtime, another has limited its exempt workers to
those paid over $73,000 per year, and the third has made nearly all union workers nonexempt
(90 percent of its employees are unionized).



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                             first review they routinely undertake involves determining whether the
                             exempt employees are paid on a salary basis. However, as one investigator
                             explained to us, testing for compliance can be difficult because most often
                             exempt employees have worked in excess of 40 hours and have been paid
                             for at least 40 hours, making it hard to prove that employers have made
                             improper deductions to the salaries of exempt workers. Although we
                             found that the salary-basis test was not the central issue in most
                             compliance cases we reviewed, it was critical to some cases. In one case,
                             for example, a gas service station owner paid managers and assistant
                             managers a salary of $400 per week and required them to work 60 hours
                             per week. Although the owner claimed the employees to be exempt
                             executives, the investigator successfully challenged their executive status
                             because the owner reduced their pay if they worked less than 60 hours per
                             week.


Employers Say Some           Nonsupervisory employees may be exempt from the FLSA if they can be
Production Workers Are       classified as either administrative or professional employees. However, the
Equivalent to White-Collar   administrative exemption is limited to those employees who perform
                             nonmanual (or nonproduction) work “directly related to the management
Employees                    policies or general business operations” using independent judgment and
                             discretion, and the professional exemption is generally limited to
                             occupations requiring advanced academic degrees.22 Thus, as interpreted
                             for the past 60 years, these exemptions do not apply to many technical
                             workers—nonsupervisory line workers who work to produce the
                             employer’s goods and who do not have the requisite academic degree for a
                             recognized profession in which they are employed.

                             In our discussions with employers and state and local government
                             representatives, both groups argued that the traditional limits of the
                             white-collar exemptions are outdated in the modern work place. They
                             believed that certain highly skilled, well-paid line workers should be
                             treated as exempt workers because they have the knowledge equivalent to
                             an exempt professional. Officials from manufacturing employers pointed
                             to new technology used in factory work places, which they said required
                             advanced technical skills but required far less traditional “manual” labor.
                             Moreover, they told us that while these workers may have to follow
                             precise written guidelines to perform their work, prescribed procedures
                             were key to modern quality control. State and local representatives
                             pointed to job classifications within their organizations which involved

                             22
                              There are, however, exceptions for certain specific occupations such as computer programming,
                             based on a 1990 congressional enactment, and work of an artistic nature.



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    line work but which required the knowledge and experience of a civil
    service professional.

    To illustrate the point, one company official described the job of
    technicians who maintain unmanned factories around the country. In her
    company, one technician, relying upon standardized instruments, monitors
    each automated factory. The official compared the nonexempt line jobs of
    these well-paid (about $70,000 per year) technicians with those of her
    company’s engineers. Both groups held similar jobs and earned
    comparable pay, but because the engineers had professional degrees and
    the technicians did not, only the engineers could be classified as exempt
    professional employees.

    In general, employers pointed to the differences between exempt and
    nonexempt employee status as creating difficulties in managing the
    workforce, particularly in what they referred to as crossover positions like
    the technicians described above. According to the employers, nonexempt
    employees have less flexibility in work shifts—any work over 40 hours
    must be paid at overtime rates, even if the employee is planning on
    working less than 40 hours in the next work-week. Further, employers
    claim that workers look on exempt status as prestigious, allowing greater
    possibility of management promotion. In addition, employers also believed
    that adherence to strict written guidelines—one major distinction between
    exempt and nonexempt workers—is necessary in a modern, efficient work
    place.

    In recent years, the distinctions between production and nonproduction
    workers, and between professional and technical production workers,
    have been increasingly blurred. The federal court cases and DOL
    compliance cases we reviewed provided illustrations of recent distinctions
    made between exempt and nonexempt nonsupervisory workers. These
    cases included the following:

•   A large publishing firm employed about 50 production editors, each of
    whom managed the final publication processing of the company’s books.
    One of these production editors sued the company, claiming that she was
    improperly classified as an exempt employee. A federal appellate court
    ruled that, although her job involved production work, she was an exempt
    employee. It found that her work was a major assignment of the company
    and, therefore, that it was directly related to the management policies or
    business operations of the company.23

    23
      Shaw v. Prentice Hall Computer Publishing, Inc., 151 F.3d 640 (7th Cir. 1998).



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                             •   An insurance company employed automobile damage appraisers to
                                 determine the amount to be paid on auto insurance claims. A federal
                                 district court found the appraisers to be nonexempt production workers
                                 because they did not do work related to the management policies or
                                 business operations of the firm. Rather than administratively running the
                                 business, they carried out the daily affairs of the company.24
                             •   A title insurance company used escrow closers to conduct final property
                                 settlements. A federal district court held that these were nonexempt
                                 employees who were carrying out the day-to-day operations of the
                                 company25 and that it was irrelevant that they were not part of the
                                 company’s production department.
                             •   One southern state’s Department of Agriculture employed dairy inspectors
                                 and food safety inspectors. The dairy inspectors had academic training
                                 and experience in the specific area of dairy or animal sciences, while the
                                 food safety inspectors had more generalized academic training in
                                 biological sciences. DOL compliance review determined that only the dairy
                                 inspectors met the educational requirement of the professional exemption.


The Requirement for              To be classified as either an exempt administrative or professional
Independent Judgment and         employee, each employee must exercise independent judgment and
Discretion Is Difficult to       discretion in carrying out his or her job duties. In general, the requirement
                                 for exercising independent judgment and discretion means that employees
Apply                            have the freedom to make choices about matters of significance to their
                                 employers, without immediate supervision or detailed guidelines. Factors
                                 which are taken into account include (1) the amount of supervision,
                                 (2) the amount of written guidelines, and (3) whether the work involves
                                 routine matters. For example, a newly hired accountant may be given
                                 work that is closely supervised, involving rote work with set procedures.
                                 In that case, the accountant would be nonexempt, even though he or she
                                 may have full professional certification.

                                 Our discussions with employers and DOL investigators indicated that this
                                 aspect of the regulations is particularly difficult to apply for both the
                                 employers and the investigators. Employers complained that the standards
                                 for the independent judgment requirement were confusing and applied in
                                 an inconsistent manner by DOL. Thus, employers were unsure of how to
                                 properly classify administrative personnel. According to DOL investigators,
                                 determinations about independent judgment and discretion can be the
                                 most difficult part of a compliance review. To assess this requirement, an

                                 24
                                   Reich v. American International Adjustment Co., Inc., 902 F. Supp. 321 (D. Conn. 1994).
                                 25
                                   Reich v. Chicago Title Insurance Co., 853 F. Supp. 1325 (D. Kan. 1994).



                                 Page 23                                    GAO/HEHS-99-164 FSLA and White-Collar Exemptions
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    investigator must review both the general duties of the position and the
    specific duties of the employee. Further, the determination may hinge
    upon how an individual employee views his or her own duties. For
    instance, one administrative assistant may look at his job as answering
    telephone calls and following orders, while another person in the same
    position might describe the job as involving the independence to establish
    office procedures and respond to incoming client inquiries.

    The compliance cases we reviewed included a number of instances where
    the standard for independent judgment and discretion was key to
    determining the employee’s status. Situations where this question arose
    included the following:

•   A trucking company employed dispatchers to organize and schedule truck
    routes. Two of the dispatchers negotiated with other companies to obtain
    contracts for truck loads, as well as scheduling truck routes. The DOL
    compliance investigator allowed the administrative exemption for the two
    senior dispatchers, but not for the other dispatchers.
•   A firm provided library services to professional firms. Firm officials
    claimed that certain librarians were exempt as either administrative or
    professional employees. The DOL investigator disagreed, finding the
    librarians were nonexempt because their work—filing and updating
    loose-leaf volumes—was “routine and not dependent on a professional
    degree.”
•   An architectural firm hired professional architects and engineers. The firm
    classified its employees according to experience, but considered them all
    exempt. The DOL investigator found that architects and engineers at the
    entry level were nonexempt, because they did not exercise discretion and
    independent judgment in their jobs.

    In our review, we noted certain cases in which an employer conducted its
    own self-audit and used this to negotiate a final settlement with DOL. One
    large accounting firm agreed to conduct a self-audit of all of its entry-level
    tax reporting accountants, and DOL agreed to not question the application
    of the professional exemptions to second- and third-year accountants. In
    another example, DOL investigators found certain job titles at a commercial
    bank that appeared to involve nonexempt work. To settle the compliance
    questions, the bank hired a law firm to conduct an audit of individual
    employee classifications. The lawyers examined the bank’s FLSA
    classifications and recommended that changes be made. With the approval
    of DOL, the bank accepted the reclassifications suggested by the audit and
    agreed to pay the necessary back wages.



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                                Employee representatives and other experts were particularly concerned
Employees Say That              that the use of the exemptions be limited, maintaining the 40-hour
Inflation and                   work-week standard for as many employees as possible. To do this, they
Oversimplification              were of the opinion that the regulatory tests should provide the type of
                                protection originally intended. In this regard, the following two issues
Have Undermined                 seemed particularly important to employees:
Exemption Limits
                            •   The salary-test levels that underpin the regulatory framework have been
                                unchanged since 1975. Because of inflation, the current salary-test levels
                                are now near the minimum-wage level, rendering the application of certain
                                regulatory tests to the current workforce virtually meaningless.
                            •   The duties test that determines who can be classified as an exempt
                                executive has been increasingly simplified by judicial opinions. When
                                combined with the low salary-test levels, employees believe that few
                                protections remain for lower-income supervisors.


Inflation Has Effectively       In determining whether an employee is exempt from the FLSA as an
Eliminated Important            executive, administrator, or professional, the first consideration is the
Aspects of the Regulatory       employee’s salary. Since 1949, employees have been divided into three
                                groups according to their weekly earnings. As described earlier in table 2,
Tests                           the standards vary depending on whether an employee is to be classified
                                as an executive, administrator, or professional. For the executive
                                exemption, the three groups currently are as follows:

                            •   Employees earning less than $155 per week are automatically nonexempt
                                (or subject to the FLSA requirements).
                            •   Employees making at least $155 but less than $250 per week are
                                nonexempt unless their duties meet the rigorous standards of the so-called
                                long duties test. The long duties test for executives requires that
                                employees’ duties include such things as the authority to hire or fire other
                                employees and the ability to exercise discretion; most significantly,
                                though, it sets percentage limitations on the amount of nonmanagerial
                                work an exempt employee can perform in a work-week. Specifically,
                                employees qualify as exempt employees only if no more than 20 percent
                                (or less than 40 percent for retail and service employees) of their jobs
                                involve nonmanagerial or nonprofessional work.
                            •   Employees earning at least $250 per week are exempt as long as their
                                duties meet the less strict standards of the so-called short duties test, an
                                abbreviated version of the long duties test. The short duties test does not
                                specify percentage limitations on the amount of nonmanagerial work an
                                exempt employee can perform. For executives, the test is limited to



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requiring that employees supervise two or more workers and that their
primary duty is managerial.

The practical differences between the long and short duties tests are
significant. To illustrate, consider a cook who supervises a crew of other
workers. If the cook’s salary was $200 per week, and he was thus subject
to the long duties test, he would be nonexempt (and entitled to overtime
wages) if he spent more than 40 percent of his time on nonmanagerial
tasks—work such as cooking food or cleaning the kitchen. If, however, the
cook’s salary was $250 per week, the cook would be an exempt executive
as long as his primary duty was management and included the customary
and regular direction of at least two other employees, even though he may
spend a lot of time cooking food or cleaning the kitchen.

The salary levels used to determine into which of the three salary
categories an employee falls have not been changed since 1975. During
that time period, salaries in the nation have risen considerably. As a result,
the salary levels used by DOL for this purpose, which in 1975 were
considered fairly high, are now below the level of the federal minimum
wage in the instances of the base salary levels. Even the higher level, $250
per week, is equivalent to an hourly wage that is only $1.10 per hour higher
than the current minimum federal hourly wage of $5.15 for a 40-hour
work-week. For the salary levels used in this determination to represent
the same level of purchasing power now as they did in 1975, they would
need to be considerably higher than their current levels. For example, the
highest of levels, $250 per week, would have to be $757 per week, for an
annual salary of about $39,400. In figure 7, we examine the highest salary
level over the 49-year period between 1949 and 1998, and we compare the
actual level included in the regulations with the level necessary to keep
pace with inflation.




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                                           B-283016




Figure 7: Actual and Inflation-Adjusted Highest Salary Test, or Upset Test, for Weekly Income, 1949-1998




                                           Note: Upset test numbers are adjusted for inflation using the Consumer Price Index for all Urban
                                           Consumers (CPI-U), with 1975 as the base year.

                                           Source: Data for the actual upset test are from 29 C.F.R. chap. V, part 541; inflation-adjusted
                                           upset test calculated by GAO.




                                           To see the effect of inflation on the application of the regulatory tests,
                                           consider again the example of the supervisory cook. Today, the cook
                                           would be automatically nonexempt only if his salary was less than $8,060
                                           per year—the equivalent of $3.88 per hour, $1.27 less than the current
                                           federal minimum wage. The strict long duties test would apply only if he
                                           made less than $13,000 (equivalent to an hourly rate not much higher than




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                                the minimum wage for a 40-hour work-week). And, as long as he made
                                $13,000, he would be presumed to be an executive if his primary duty was
                                management—for example, if he can hire and fire workers.

                                However, if the cook’s salary was adjusted to include the inflation
                                occurring between 1975 and 1998, the application of the regulatory tests
                                would be very different. Using salary figures adjusted for inflation, the
                                cook would be automatically nonexempt as long as he earned less than
                                $24,400. If he earned between about $24,400 and $39,400, he would be
                                exempt only if his work met the long duties test. And, if he earned more
                                than $39,400, he would be an exempt executive if his primary duty were
                                management.

                                Because of inflation, the percentage of full-time workers who potentially
                                fell into each of the three salary level categories was far different in 1975
                                than in 199826—specifically,

                            •   In 1975, about 30 percent of the full-time workforce would have been
                                automatically nonexempt workers; in 1998, only 1 percent of the full-time
                                workforce were automatically nonexempt.27
                            •   In 1975, about 30 percent of the full-time workforce would have been
                                nonexempt unless they met the percentage limitation on performing
                                nonexempt work; in 1998, the long duties test would apply to only
                                8 percent of the full-time workforce.
                            •   In 1975, about 40 percent of the full-time workers could have qualified as
                                exempt workers with the application of the short duties test; in 1998,
                                91 percent of the workers were under the short duties test.


Employees Say That Duties       During the past 20 years, it has become increasingly easy to classify a
Test Offers Little              supervisory employee as an exempt executive. If an employee makes over
Protection for                  $250 per week ($13,000 per year), the employee may be an exempt
                                executive if he or she meets two criteria. First, the employee must
Lower-Income Supervisors        customarily and regularly direct the work of two or more employees; and
                                second, the employee’s primary duty must involve management. Unlike
                                the administrative and professional exemptions, there is no express

                                26
                                  The data we used for these estimates include full-time wage workers as well as full-time salaried
                                workers age 16 years and over. The data were provided by BLS and are unpublished tabulations from
                                the CPS. The data for 1998 are annual averages while the data for 1975 are for the month of May, when
                                annual averages were not available. Self-employed workers are excluded.
                                27
                                 These percentages are approximate; the CPS data provide the percentage of workers who earn under
                                $150 per week, rather than under $155 per week, the base salary for exempt executive and
                                administrative employees.



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requirement for independent judgment and discretion. However, the
regulations specify that, “as a rule of thumb,” an employee who spends
more than 50 percent of his or her time on management tasks would have
management as a primary duty.

Two federal court decisions in 1982 clarified the test for determining
whether an employee earning over $250 per week has management as a
primary duty. The cases, involving litigation between DOL and the Burger
King Corporation,28 applied the executive exemption to assistant managers
at the fast-food restaurants. First, one decision held that the duties of
Burger King assistant managers were primarily managerial, even though
the company provided them detailed instructions on how they were to
perform their work. Second, both courts found that the 50-percent “rule of
thumb” limitation on nonmanagerial work was only one factor to consider
when determining employees’ primary duty, and that their managerial
duties could be carried out at the same time they were performing manual
work. Thus, assistant managers could be exempt executives even if they
spent most of the day cooking hamburgers—as long as they were in charge
of the restaurants during their shifts.

While employers appreciate the simplicity and the clarity of the executive
duties test, union representatives complained that the judicial rulings
following the Burger King decisions have oversimplified the executive test.
Under the regulations, as currently interpreted, almost any employee who
is assigned to supervise two or more employees in a particular
“department” of the company can be classified as an exempt employee.
According to the union officials, employers have adjusted their work
places to include many new levels of supervision in order to create exempt
executive positions. Thus, where a grocery store originally had one or two
store managers, it now has many different departments—the meat
department, the produce department, and others—headed by exempt
executives.

Federal case law in the 5-year period from 1994 through 1998 included
hardly any instances in which a court overturned an employer’s
classification of a lower-income supervisor as an exempt executive. In the
32 cases we identified as relating to the executive exemption duties test,
about one-third (12 cases) involved employees whose salaries were $500
per week (or $26,000 per year) or less. Of these 12 cases, only 1 resulted in



28
   Donovan v. Burger King Corp., 672 F.2d 221 (1st Cir. 1982), and Donovan v. Burger King Corp., 675
F.2d 516 (2d Cir. 1982).



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                                 a favorable ruling for the employee. These cases included a wide range of
                                 employees, such as:

                             •   an aquatics director of a community swimming pool paid $376 per week,
                             •   a produce department manager of a grocery store paid $450 per week,
                             •   a dietary manager of a nursing home paid $341 per week, and
                             •   a loss-prevention manager of a department store paid $423 per week.

                                 All of these employees claimed that their jobs consisted primarily of
                                 nonmanagerial work—for example, life guarding, stocking shelves, and
                                 cooking. Despite evidence of large proportions of nonmanagerial work,
                                 the courts found all but one employee to be exempt executives.

                                 Discussions with DOL investigators and attorneys suggested that the Burger
                                 King decisions and the low salary-test levels have had a major effect on
                                 their investigation of cases involving exempt executives. Since the
                                 decisions, their policy manual has been revised to require that
                                 investigators consider percentage limitations as only one factor when
                                 assessing the employee’s primary duty. One attorney noted that in recent
                                 years little litigation had been initiated by DOL over the executive status of
                                 supervisory employees. He indicated that, although there may be
                                 situations in which the exempt executive classification of an employee
                                 supervising two or more workers could be challenged, those situations are
                                 very limited.


                                 Legal and economic experts have proposed various ways to deal with the
Conflicting Interests            concerns raised by employers and employees, ranging from tinkering with
of Employers and                 particular provisions of the regulations to a major overhaul of the FLSA.
Employees Make                   However, proposals to change the present law or regulations all affect the
                                 regulatory balance between the desires of employers and those of
Resolution of                    employees, and there are competing interests that must be carefully
Concerns Difficult               weighed before any changes can be made. For a number of years, DOL has
                                 been reluctant to alter the existing tests in view of these competing
                                 interests. To illustrate some of these considerations, we discuss four
                                 proposals that have been made by experts to revise the current
                                 regulations, and summarize the general views of employers and employees
                                 on each.


Eliminate the Salary-Basis       From the employer’s point of view, the salary-basis test presents complex
Test                             regulatory requirements—for example, the limitations on the use of pay



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                        suspensions to sanction employees’ actions—that have nothing to do with
                        managerial or professional status but that can be the source of potential
                        legal liability for unwary employers. However, if the test were eliminated,
                        the exemption could be applied to both hourly-wage and salaried workers
                        and only the other two tests—the salary levels and the duties test—would
                        remain as indicators of managerial and professional status. DOL contends
                        that salary remains the general method of compensation for key
                        managerial and professional employees. From the standpoint of
                        employees, the salary-basis test is a key enforcement tool to protect
                        workers from employers who do not comply with the law because it is an
                        objective measure of managerial and professional status. For employees, it
                        is particularly important today because the salary-test levels are so low,
                        and without the salary-basis test, DOL would be left only with the
                        difficult-to-apply duties test as the single test of employer compliance.

                        In commenting on this report, DOL further explained the rationale for the
                        salary tests. According to DOL, the salary tests have been an integral part of
                        the definitions for the exemptions since 1940. It believes that the statutory
                        terms “executive, administrative, or professional” imply a certain prestige,
                        status, and importance, and an employee’s salary serves as one indicator
                        of his or her status in management or the recognized professions. It is an
                        index that distinguishes the bona fide executive from the working squad
                        leader, or distinguishes the clerk or technician from one who performs
                        true administrative or professional duties. DOL said that salary remains a
                        good indicator of the degree of importance attached to a particular
                        employee’s job, which provides a practical guide, particularly in borderline
                        cases, for distinguishing bona fide executive, administrative, and
                        professional employees from those who were not intended by the
                        Congress to come within the categories of this exemption. In its years of
                        experience in administering the regulations, DOL said it has found no
                        satisfactory substitute for the salary test. The arguments that the salary
                        test is not needed or that it does not help draw the proper line between
                        exempt and nonexempt employees have been offered before, including as
                        part of the hearings and deliberations over amending the regulations in
                        1940, 1949, and 1958. As then, the DOL sees no new or more valid reasons
                        that have been offered for eliminating the salary test from the regulations
                        than were considered as part of the previous hearings on this question.


Raise the Salary-Test   If the salary-test levels were raised, the regulatory structure could
Levels                  incorporate the effects of inflation and function as originally envisioned.
                        With a higher salary test, both the long and short duties tests would be



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                          applied once again to segments of potentially exempt workers. Nearly
                          everyone we talked to—employers, employees, and experts—agreed that
                          the current salary-test levels are too low and should be increased to
                          higher, more reasonable levels. However, they disagreed sharply on
                          whether the duties tests should remain the same after the salary-test levels
                          were raised.

                          Employers, particularly retail employers, were opposed to reviving the
                          long duties test and, with it, the percentage limitation on the amount of
                          nonmanagerial work that an exempt employee would be allowed to do.
                          Retail employers argued that the percentage limitations are outdated in
                          modern store management. They said that, in recent decades, store
                          management has changed dramatically. In the 1960s, stores were open for
                          far fewer hours than today and employed one store manager and a
                          full-time workforce. Now, stores are open as much as 24 hours per day,
                          and many part-time workers and managers work each shift. Under these
                          conditions, employers contended that managers must pitch in and work
                          the cash register or stock the shelves, while at the same time managing the
                          store operations.

                          Union representatives, on the other hand, believe that the long duties test,
                          with its percentage limitations, contains critical criteria for assessing
                          managerial and professional status. They contend that the amount of
                          nonexempt work is a basic indicator of managerial status. They argue that
                          if a worker is engaged in primarily nonexempt work, the worker should be
                          classified as a nonexempt employee, regardless of how his or her
                          employer categorizes the employee’s position. Moreover, they argue that
                          the long duties test still allows retail employers to designate the manager
                          in charge of a store as exempt, notwithstanding how much nonexempt
                          work he or she performs, under the so-called “sole charge” exception to
                          the requirement for a limit on nonexempt work.


Add a Category of         This proposal would add a new category of exemption—the knowledge
Knowledge Worker to the   worker—to the executive, administrative, and professional exemptions.
Exemptions                This category would include well-paid, highly skilled, nonsupervisory
                          workers who are currently not covered by the exemptions. It would
                          require a new definition of exempt employees, with new criteria and
                          separate salary-test levels.

                          Employers believe that the current exemptions leave a gap by not
                          including workers who are not engaged in traditional manual labor but



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                           who follow detailed procedures to perform their jobs. Because these
                           workers can be both highly skilled and well paid, employers think that
                           they should be classified similarly to exempt professionals. This would
                           allow both the worker and management more flexibility in scheduling and
                           offer the worker what employers consider prestigious jobs in management
                           positions.

                           Employee representatives argue against the expansion of the exemptions
                           to include these technical workers. They believe that today’s
                           computer-assisted technicians are the modern equivalents of traditional
                           factory workers, and the employee representatives said that there always
                           have been workers who could have been classified as knowledge workers.
                           They think that the same principles underlying the historical limitations on
                           work hours and requirements for overtime pay should apply to the modern
                           workforce. They assert that while everyone would like more flexibility in
                           the work place, in reality exempt status means that employees work
                           longer hours for less pay. And, although they agreed that there are some
                           workers who view working longer hours as a way to management
                           promotion, they think that the majority of workers still would like to have
                           restrictions on the number of hours they can be required to work without
                           additional compensation. Finally, they told us that discretion and
                           independent judgment remain the key indicators of professional and
                           managerial status—rote work, however well paid, shows that a worker is
                           only a “cog in the wheel,” not a key managerial employee.


Adjust Salary Levels and   Finally, another proposal would adjust the salary-basis test, the salary-test
Duties, Applying an        levels, the duties tests, and the categories of workers in a new regulatory
Income Ceiling to          framework. One basic framework would be similar to that already in the
                           regulations—there would be an income floor below which all workers
Nonexempt Status           would be nonexempt, combined with an income ceiling above which
                           workers would be presumed exempt.

                           As we noted above, although there is nearly universal agreement that the
                           salary levels should be raised, adding an income ceiling is much more
                           controversial. Employers and employees disagree on whether there should
                           be a ceiling, and if so, how high it should be, and what, if any, duties tests
                           should apply to the different income levels.

                           Issues regarding the ceiling income level include the geographic and
                           industry differences in average salary levels and the possibility of indexing
                           the salary level to increases in average compensation. The questions



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              related to the duties test involve whether there should be any duties test at
              all above the ceiling—if not, there would be a conclusive presumption that
              employees with incomes higher than the ceiling are exempt managerial or
              professional employees. Alternatively, if some duties test were retained, an
              employee’s exemption could be challenged if his or her duties did not
              include sufficient managerial or professional responsibilities.

              For employers, adding an income ceiling would bring more certainty into
              the classification of higher-paid workers. Depending on how the duties
              test for those above the income ceiling was applied, a ceiling could reduce
              employers’ potential liability for violations of the salary-basis test by
              eliminating the need for the test among the highest-paid workers.

              For employees, assuming that there was no applicable duties test, an
              income ceiling would eliminate the requirement for a 40-hour work-week
              for higher paid workers. Union representatives believe that, in effect, it
              would penalize workers for being relatively highly paid. As our data
              indicated, exempt workers are more likely than nonexempt workers to
              work more than 40 hours. Employee representatives suggest that the
              increase in hours of work for exempt employees presents special
              challenges for the increasing numbers of dual-earner households with
              middle or upper-middle levels of income. They argue that regardless of
              income level, it continues to be important that workers have control over
              both the number and timing of work hours to better balance the
              competing demands of work and family.

              These proposals show how the divergent interests of employers and
              employees require tradeoffs to resolve the underlying issues with the
              white-collar exemptions.


              The concerns of employers and employees about the operation of the
Conclusions   white-collar exemptions in today’s work place involve all aspects of the
              regulatory tests—the salary-basis test, the salary-test levels, and the duties
              requirements. DOL has not updated these tests in decades, with the result
              that the salary-level tests are virtually meaningless and there are mounting
              complaints by employers about ambiguity in the requirements. Although
              DOL made some efforts to revise the tests in the 1980s, it has not acted
              because of the difficulty of getting consensus on the changes. Recent
              attempts to correct the regulatory tests for specific groups—state and
              local governments and computer professionals—have done little to
              alleviate the general problems.



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                  Given the economic changes in the 60 years since the passage of the FLSA,
                  it is increasingly important to readjust these tests to meet the needs of the
                  modern work place. However, the different regulatory tests interact with
                  one another, and a change to one test can undermine or strengthen the
                  operation of other regulatory provisions. For example, elimination of the
                  salary-basis test could further weaken the protection offered to the
                  lower-income supervisor who is required to work a 60-hour work-week.
                  Raising the salary levels, on the other hand, adds more complexity to the
                  regulatory tests for executive employees by making the long duties test
                  applicable to at least some workers. Resolution of these concerns requires
                  a careful balancing of the needs of the employers for clear and
                  unambiguous regulatory standards with those of employees for fair and
                  equitable treatment in the work place.


                  We recommend that the Secretary of Labor comprehensively review the
Recommendation    regulations for the white-collar exemptions and make necessary changes
                  to better meet the needs of both employers and employees in the modern
                  work place. Some key areas of review are (1) the salary levels used to
                  trigger the regulatory tests, and (2) the categories of employees covered by
                  the exemptions.


                  We provided a draft of this report to the Department of Labor for its
Agency Comments   review and comments. In its comments, DOL stated that the report was well
                  balanced and accurate in presenting the issues addressed. With respect to
                  the report’s recommendation, DOL noted that the white-collar exemption
                  regulations are on its agenda to be reviewed in the future. The Department
                  noted that any change in the current regulatory structure requires
                  balancing the diametrically opposed, conflicting interests of the many and
                  differing constituencies that would be affected, and that the views of
                  interested parties are intractably held on opposite sides of the various
                  issues under these regulations. DOL added that, given the current
                  regulatory environment, the prospects that it could successfully
                  implement consensus changes as we recommended are greatly
                  diminished. In addition, the agency provided other technical comments,
                  which we incorporated in the report as appropriate. (See appendix III for a
                  copy of DOL’s written comments.)

                  We are sending copies of this report to the Honorable Alexis M. Herman,
                  Secretary of Labor; the Honorable Bernard E. Anderson, Assistant
                  Secretary for Employment Standards; the Honorable Katherine G.



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Abraham, Commissioner of the Bureau of Labor Statistics; appropriate
congressional committees; and other interested parties.

Please call me or Larry Horinko at (202) 512-7001 if you or your staff have
any questions about this report. Other major contributors to this report are
listed in appendix IV.




Cynthia M. Fagnoni
Director, Education, Workforce, and
  Income Security Issues




Page 36                        GAO/HEHS-99-164 FSLA and White-Collar Exemptions
Page 37   GAO/HEHS-99-164 FSLA and White-Collar Exemptions
Contents



Letter                                                                                              1


Appendix I                                                                                         40
                        Estimating the Number and Demographics of Workers Covered                  40
Scope and                 by the White-Collar Exemptions
Methodology             Identification of Statutory and Regulatory Changes                         43
                        Determination of the Major Concerns of Employers and                       43
                          Employees

Appendix II                                                                                        45

Statutory and
Regulatory History of
FLSA White-Collar
Exemptions
Appendix III                                                                                       50

Comments From the
Department of Labor
Appendix IV                                                                                        54

GAO Contacts and
Staff
Acknowledgments
Tables                  Table 1: Summary of Current Regulatory Tests for Executive,                 7
                          Administrative, and Professional FLSA Exemptions
                        Table 2: Estimates of Full-Time White-Collar Workers Exempt in              8
                          1983 and 1998
                        Table 3: Summary of Major Statutory and Regulatory Revisions to            16
                          the White-Collar Exemptions
                        Table II.1: Statutory History of FLSA Section 13 on White-Collar           45
                          Exemptions, 1938-1998
                        Table II.2: Regulatory History of 29 CFR Part 541, Defining FLSA           46
                          White-Collar Exemptions, 1938-1998




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          Contents




Figures   Figure 1: Percentage of Full-Time Wage and Salary Workers in                9
            1983 and 1998 by Industry
          Figure 2: Percentage of Full-Time White-Collar Workers Exempt              10
            in 1983 and 1998 by Industry
          Figure 3: Percentage of Full-Time White-Collar Exempt and                  11
            Nonexempt Workforce in 1983 and 1998 by Gender
          Figure 4: Percentage of Full-Time Exempt and Nonexempt                     12
            White-Collar Workers Who Worked Overtime in 1983 and 1998
          Figure 5: Percentage of Full-Time Exempt and Nonexempt                     13
            White-Collar Workers in 1998 by Weekly Income
          Figure 6: Number of Full-Time Exempt and Nonexempt                         14
            White-Collar Workers in 1998 by Weekly Income
          Figure 7: Actual and Inflation-Adjusted Highest Salary Test, or            27
            Upset Test, for Weekly Income, 1949-1998




          Abbreviations

          BLS        Bureau of Labor Statistics
          CPS        Current Population Survey
          DOL        Department of Labor
          FLSA       Fair Labor Standards Act


          Page 39                       GAO/HEHS-99-164 FSLA and White-Collar Exemptions
Appendix I

Scope and Methodology


                      We used a variety of data sources to develop and provide updated
                      information on the white-collar exemptions. To estimate the number and
                      demographic characteristics of the portion of the American workforce
                      who were executive, administrative, and professional employees covered
                      by the white-collar exemptions in 1998 and 1983, we used the Bureau of
                      the Census’ Current Population Survey (CPS) Outgoing Rotations data. To
                      identify statutory and regulatory changes since 1938, we reviewed various
                      legal reports and publications. To determine the major concerns of
                      employers and employees regarding the white-collar exemptions, we
                      reviewed 166 federal court cases on this subject and 66 Department of
                      Labor (DOL) compliance cases, and held discussions with employers,
                      unions, DOL officials, and various legal and economic experts. We
                      performed our work between November 1998 and June 1999 in
                      accordance with generally accepted government auditing standards.


                      To estimate the number and demographic characteristics of exempt
Estimating the        white-collar workers, we did not attempt to count the number of
Number and            employees actually classified as exempt by employers but, rather, to
Demographics of       determine how many employees were covered by the regulatory tests for
                      the white-collar exemptions in 1983 and 1998. We reviewed several Bureau
Workers Covered by    of Labor Statistics (BLS) and DOL reports to determine whether any data
the White-Collar      sources could be used for our purposes. After discussions with DOL and
                      experts, we decided that the CPS Outgoing Rotations was the best available
Exemptions            data source to estimate both the proportion of the labor force that is
                      covered by the white-collar exemptions and the demographic
                      characteristics of this population. The CPS is conducted by the Bureau of
                      the Census for the BLS. The Outgoing Rotations data are collected as part
                      of the basic CPS labor-force interview and provide data on weekly earnings
                      along with the demographic information such as age, gender, and race.
                      The CPS is a survey of households collected each month from a probability
                      sample of approximately 50,000 households. The CPS provides
                      self-reported information on the labor-force status of the civilian
                      noninstitutional population 16 years of age and over. Our analysis covered
                      calendar years 1998 and 1983.


General Methodology   To estimate the number of workers covered by the white-collar
                      exemptions using the CPS data, our primary focus was on two questions:
                      (1) Was the worker paid a salary? (2) What was the worker’s primary job
                      classification? The CPS data include 905 occupational classifications.
                      Respondents are asked to describe the kind of work they are doing, and



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Appendix I
Scope and Methodology




CPS coders classify these duties into one of the 905 job titles. To determine
which of the 905 job titles would likely include exempt white-collar
workers, we asked the DOL officials to assess the likelihood of exemption
for each occupation. DOL officials responded by classifying each of the 905
occupations individually by its likelihood of exemption. Overall, DOL
officials determined that 257 of the 905 job titles would likely include
exempt workers. For each of these 257 job titles, DOL officials provided us
with one of four ranges of likelihood that workers would be covered by
the white-collar exemptions: 90-100 percent, 50-90 percent, 10-50 percent,
and 0-10 percent.29

To develop our estimate, we analyzed each of the 257 job titles likely to
include exempt workers. In determining which of the workers in the
sample would likely be exempt and therefore included in our estimate, we
applied the percentage ranges provided by the officials at DOL. To better
refine the application of these percentage ranges (which were estimates of
the likelihood that the positions would include managerial or professional
duties), we made the following assumption: duties that make an employee
more likely to be covered by the white-collar exemptions are duties that,
generally speaking, elicit a higher salary. Under this assumption, as
workers have more exempt duties and responsibilities, their incomes
increase—as does the likelihood of being exempt. Therefore, we applied
the percentage ranges provided by DOL officials to give increasing weight
to workers with higher incomes. All workers, except physicians, lawyers,
and teachers, earning less than $250 per week were considered nonexempt
and were eliminated from our calculation of the exempt population. The
exemption for physicians, lawyers, and teachers does not depend on the
income of the employee.

Using this method for each of the 257 occupations, we generated our
estimates for the low and high estimates of the potentially exempt
population for both 1983 and 1998. After we estimated the population
covered by the white-collar exemptions, we determined its demographic
characteristics. Our analysis included information on gender, industry,
weekly earnings, and overtime hours worked.

Our work presents data for six industry groupings: (1) services; (2) retail
trade; (3) manufacturing; (4) finance, insurance, and real estate; (5) public
sector; and (6) other. We developed these groups by combining 932
detailed CPS industry codes. The service sector includes four types of
service occupations: business and repair, entertainment and recreation,

29
  These ranges were not overlapping since each occupation is assigned a different range.



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                              Appendix I
                              Scope and Methodology




                              professional and related services, and personal services. Retail trade
                              includes all types of retail stores. Manufacturing includes durable and
                              nondurable goods. The finance, insurance, and real estate category
                              includes banking, credit agencies, security companies, and insurance and
                              real estate offices. Public sector includes federal, state, and local
                              government workers. The final category, other industries, includes
                              agriculture, forestry, fishery, mining, construction, wholesale trade,
                              transportation, communications, public utilities, and public
                              administration.


Data Limitations Related to   There are two major limitations on the use of CPS data. First, the CPS
the Use of the CPS            occupational classifications do not distinguish between supervisory and
                              nonsupervisory employees, which is important for the long and short
                              duties tests under the Fair Labor Standards Act (FLSA). Therefore, one job
                              title, “managers and administrators,” could include the President of
                              General Motors, but it may also include an office assistant. Second, CPS
                              respondents self-identify their duties and some may tend to exaggerate
                              them. This may result in overestimates of the number of management
                              employees and, consequently, may overestimate the number of exempt
                              employees.

                              We corrected for these data limitations by giving increasing weight to
                              workers with higher incomes and by applying the percentage ranges
                              provided by DOL officials.


Sources of Uncertainty        There are two sources of uncertainty in our estimation of the potentially
                              exempt population.

                              The first source of uncertainty is methodological and related to the
                              probability of exemption for each occupation. DOL officials provided us
                              with one of four ranges of likelihood of exemption for each occupation.
                              Our low estimate is based on the lowest likelihood of exemption in each of
                              the four ranges and our high estimate is based on the highest likelihood in
                              each range.

                              The second source of uncertainty is sampling error, due to our use of the
                              CPS survey of households. Rather than counting the number of employees
                              actually classified as exempt by employers, we estimated how many
                              employees are likely to be classified as exempt, based on the occupational
                              classifications and income reported in the CPS sample.



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                          Appendix I
                          Scope and Methodology




                          The high and low estimates we report reflect the methodological
                          uncertainty, which is much larger than the sampling error. For example,
                          consider table 2. The table shows that the high estimate of workers
                          covered by the white-collar exemptions in 1983 is 17 million. For the same
                          year, our low estimate is 12 million workers. The difference between the
                          high and low estimate—5 million workers—is the amount of uncertainty
                          due to methodological process we describe as our first source of
                          uncertainty. On the other hand, the sampling error—the second source of
                          uncertainty—involves an estimated error of plus or minus 700,000 people.


                          We reviewed legislative references to identify changes to the FLSA. For the
Identification of         regulatory changes, we reviewed annual publications of the Code of
Statutory and             Federal Regulations for the period 1959 to the present; for the period 1938
Regulatory Changes        to 1959, we relied on three DOL hearing reports provided to us by DOL.

                          To obtain information on the major concerns of employers and employees
Determination of the      about the white-collar exemptions, we used four sources: (1) review of
Major Concerns of         federal court decisions involving white-collar exemption issues over the
Employers and             5-year period from January 1994 through December 1998; (2) review of DOL
                          compliance cases related to white-collar exemptions that were closed in
Employees                 the 2-year period between January 1997 through December 1998 in four
                          DOL field offices; (3) interviews with individuals and groups representing
                          the interests of employers; and (4) interviews with individuals and groups
                          with knowledge about the interests of employees. In the paragraphs
                          below, we present more detail on each of these sources.


Review of Federal Court   We reviewed 166 judicial opinions from federal appellate and district
Cases                     courts involving litigation related to the white-collar exemptions during
                          the 5-year period from 1994 through 1998. To identify these cases, we
                          conducted a computer search of federal opinions in this period.30 We
                          categorized each of the 166 cases as being related to one of four issues: the
                          salary-basis test, the executive classification, the administrative
                          classification, or the professional classification. For cases involving more
                          than one white-collar exemption issue, we selected one issue to be the
                          primary issue. In addition to the primary issue, we also collected data on
                          other circumstances of each case, such as who prevailed on the issue and
                          whether the case involved multiple employees suing their employer.


                          30
                           To avoid double counting, we eliminated district court cases that were later heard by an appellate
                          court, and we only used the appellate decision in our sample.



                          Page 43                                   GAO/HEHS-99-164 FSLA and White-Collar Exemptions
                        Appendix I
                        Scope and Methodology




Review of DOL           We supplemented our review of federal court decisions with a review of 66
Compliance Cases        DOL compliance cases from 4 of its 57 District Offices. At our request, the
                        four District Offices—in the Northeast (Boston), South (Richmond),
                        Midwest (Chicago), and West (Los Angeles)—identified compliance cases
                        closed in the 2-year period between January 1997 and December 1998 that
                        involved white-collar issues. Each office identified cases that we reviewed
                        and discussed with district managers and investigators who were familiar
                        with the cases. As with the federal court decisions, we categorized each of
                        the cases as being related to one of four issues: the salary-basis test, the
                        executive classification, the administrative classification, or the
                        professional classification.


Employer Perspectives   To identify the key concerns of employers related to the white-collar
                        exemptions, we met with private and public employers, trade associations,
                        DOL officials, and various legal and economics experts. The Society for
                        Human Resource Management, a group of human resource managers from
                        companies with over 100 employees, organized two group sessions—one
                        with banking and insurance human resource managers, and the other with
                        manufacturing human resource managers. We also met with the Labor
                        Policy Association—a group representing companies with business
                        operations in the United States and with more than 2,500 employees each.
                        In addition to these company managers, we met with attorneys and
                        associations representing manufacturing companies, retail companies, and
                        small businesses. On the public employment side, we met with
                        representatives from various cities and public employer groups, as well as
                        separately with four legal experts representing public employers across
                        the country. Finally, we met with DOL officials in the Wage and Hour
                        Division and the Office of the Solicitor.


Employee Perspectives   To identify the concerns of employees, we met with union representatives
                        and officials, DOL officials, and legal and economic experts. We met with
                        the American Federation of Labor-Congress of Industrial Organizations
                        and officials from nine different unions and trade union representatives.
                        We also interviewed several legal and economic experts who specialize in
                        issues relating to the FLSA and, in particular, white-collar exemptions.




                        Page 44                        GAO/HEHS-99-164 FSLA and White-Collar Exemptions
Appendix II

Statutory and Regulatory History of FLSA
White-Collar Exemptions

                                             The Fair Labor Standards Act at sec. 13(a)(1) established the so-called
                                             white-collar exemptions: any employee in a “bona fide executive,
                                             administrative, or professional capacity” is exempted from the minimum
                                             wage and overtime requirements of the FLSA. After the original enactment
                                             of the FLSA in 1938, the Department promulgated regulations (at 24 C.F.R.
                                             part 541) defining the terms included in section 13(a)(1). Since 1938, there
                                             have been changes to both the statute and the regulations. In the following
                                             tables, we outline these changes.


Table II.1: Statutory History of FLSA Section 13(a)(1) on White-Collar Exemptions, 1938-1998
Year         Legislation         Summary of change
1938       Fair Labor           As originally enacted in 1938, sec. 13(a)(1) provided that the minimum wage (section 6) and overtime
           Standards Act of     provisions (section 7) of the FLSA did not apply to “any employee employed in a bona fide executive,
           1938 (P.L. 75-718)   administrative, professional, or local retailing capacity.”
1961       Fair Labor           This amendment limited the exemption for retail employees. It eliminated the separate exemption
           Standards            category for workers employed in a “local retailing capacity.” This separate exemption was replaced
           Amendments of        with a proviso that an employee of a retail or service establishment could not be excluded from the
           1961 (P.L. 87-30)    definition of executive or administrative capacity because of the amount of time devoted to other than
                                executive or administrative activities if less than 40 percent of his or her work hours included such
                                activities.
1966       Fair Labor           In 1966, public educational institutions were made subject to the requirements of the FLSA. However,
           Standards            this amendment exempted academic administrative personnel and teachers in elementary and
           Amendments of        secondary schools from these requirements by expressly including them under sec. 13(a)(1).
           1966 (P.L. 89-601)
1972       Education            This amendment made the equal-pay provision of the FLSA at sec. 6(d) applicable to employees who
           Amendments of        were otherwise exempt from the FLSA under sec. 13(a)(1).
           1972 (P.L. 92-318)
1996       Small Business       This amendment, enacted into law at sec. 13(a)(17) of the FLSA, contians the description of computer
           Job Protection Act   professionals who are exempt employees. By its terms, employees who meet the duties test of the
           of 1996 (P.L.        exemption are exempt from the FLSA as long as they earn not less than $27.63 per hour.
           104-188)
                                             Source: GAO analysis of applicable laws and legislative history.




                                             Page 45                                  GAO/HEHS-99-164 FSLA and White-Collar Exemptions
                                          Appendix II
                                          Statutory and Regulatory History of FLSA
                                          White-Collar Exemptions




Table II.2: Regulatory History of 29 CFR Part 541, Defining FLSA White-Collar Exemptions, 1938-1998
           Federal Register notice Part 541 subsections
Year       of regulation change      affected                Summary of change
1938     3 Fed. Reg. 2518,        Regulation included       The Fair Labor Standards Act of 1938 in sec. 13(a)(1) exempted “any
         Oct. 20, 1938            subsec. 1-5               employee employed in a bona fide executive, administrative,
                                                            professional or local retailing capacity” from the requirements of the
                                                            Act. To define these terms, part 541 was added to the Department
                                                            regulations in 29 C.F.R. chapter V. The new regulations defined these
                                                            exempt employees, as follows:
                                                            —The new regulation combined executive and administrative at sec.
                                                            541.1 to include any employee whose primary duty is the “management
                                                            of the establishment, or a customarily recognized department thereof”
                                                            and who “customarily and regularly directs the work of other employees
                                                            therein.” It also set a salary level—to be exempted, an employee had to
                                                            be compensated at not less than $30 per week.
                                                            —Separate definitions were included for professional employees (sec.
                                                            541.2: “customarily and regularly engaged in work predominantly
                                                            intellectual and varied in character as opposed to routine mental,
                                                            manual, mechanical or physical work”) and retail employees (sec.
                                                            541.3: “customarily and regularly engaged in making retail sales”).
                                                            There was no salary limit for either professional or retail employees.
1940     5 Fed. Reg. 4077,        Regulation revised      In accommodating the views of interested employers, employees, trade
         Oct. 15, 1940            subsec. 1-5, adding new associations, and unions, the Department revised the definitions of
                                  sec. 2                  executive, administrative, and professional to include separate duties
                                                          and salary tests for each type of exempt employee. These revisions
                                                          included the following:
                                                          —For executive employees, the revised regulations at sec. 541.1
                                                          retained much of the original language, but specified that the employee
                                                          could not spend more than 20 percent of the work-week on “work of the
                                                          same nature as performed by nonexempt employees” unless in “sole
                                                          charge” of an independent establishment. The executive was to be
                                                          paid on a salary basis at least $30 per week.
                                                          —Administrative employees were newly defined in sec. 541.2 as those
                                                          employees who performed nonmanual work that required the exercise
                                                          of discretion and independent judgment. The administrative employee
                                                          was to be paid on a salary or fee basis at least $200 per month.
                                                          —For professional employees, the regulations in sec. 541.3 added a
                                                          new requirement that they either had knowledge of an advanced type
                                                          in a field of science or learning or performed work predominantly
                                                          original and creative in character. They also had to be paid on a salary
                                                          or fee basis at least $200 month unless they were licensed doctors or
                                                          lawyers.
1942     7 Fed. Reg. 332,         Revised subsec. 2         This revision added para. (b)(4) to the definition of administrative
         Jan. 17, 1942                                      employees, specifically exempting employees engaged in transporting
                                                            goods or passengers for hire. According to a 1949 DOL report, this
                                                            provision was intended to exempt employees engaged in ferrying
                                                            airplanes. (This provision was eliminated in 1949.)
                                                                                                                       (continued)




                                          Page 46                             GAO/HEHS-99-164 FSLA and White-Collar Exemptions
                                         Appendix II
                                         Statutory and Regulatory History of FLSA
                                         White-Collar Exemptions




       Federal Register notice Part 541 subsections
Year   of regulation change    affected                   Summary of change
1949   14 Fed. Reg. 7705,        Revised subsec. 1-6      After 10 years of administrative experience, the Department once again
       Dec. 24, 1949                                      revised the regulations. For the most part, these changes resulted from
                                                          recommendations from the DOL’s regional directors and field staff.
                                                          Among other things, the changes included the following:
                                                          —A special “upset” test was added to the tests determining
                                                          administrative, executive, or professional employees: if the employee
                                                          made at least $100 per week (a “high-salaried” employee), then he or
                                                          she only had to meet a “short-cut” version of the original long duties
                                                          test.
                                                          —The basic salary test was increased: executives had to make at least
                                                          $55 per week; administrators, at least $75 per week; and professionals,
                                                          at least $75 per week.
                                                          —For executives, the regulations specified that they must supervise
                                                          two or more employees.
1949   14 Fed. Reg. 7730,        Added new Subpart        To respond to requests from its field staff for explanatory material on
       Dec. 28, 1949             B—Interpretations        the 541 regulations, the DOL published an explanatory bulletin. This
                                                          bulletin, added to the regulation as Subpart B, contained statements of
                                                          general policy directly related to the 541 regulations. Among other
                                                          things, the bulletin:
                                                          —Elaborated upon the terms included in subsec. 1-6; such terms
                                                          included primary duty (541.103), sole charge (541.113) and salary
                                                          basis (541.118).
                                                          —Added new terms to the regulations, such as working foremen
                                                          (541.115) and combination exemptions (541.600).
                                                          —Applied the regulations to specific professions, such as newspaper
                                                          reporters (541.303f) and radio announcers (541.303e).
1953   18 Fed. Reg. 3930,       Added subsec. 5(a) and    Subsec. 5a made the requirement that exempt employees be paid on a
       July 7, 1953;            601                       salary basis not applicable to employees in the
       error in original notice                           motion-picture-producing industry who were compensated at certain
       corrected by 18 Fed.                               minimum rate, and subsec. 601 explained how to apply this provision.
       Reg. 4098, July 14, 1953
1954   19 Fed. Reg. 4405,        Revised subsec. 118      Subsec. 118, which explains the salary-basis test, was revised, in
       July 17, 1954                                      principal part, as follows:
                                                          —Subsec. 118(a) specified that an employee must receive a full salary
                                                          “without regard to the number of days or hours worked.” This revision
                                                          explained the application of this rule to different pay deductions; for
                                                          example, an employer cannot deduct pay for a lack of work
                                                          (541.118(a)(1)) or for personal absences of less than 1 day
                                                          (541.118(a)(2)) or for jury duty (541.118(a)(4)).
                                                          —In addition, a new subsec. 118(a)(6) allowed an employer, under
                                                          certain circumstances, to correct improper pay deductions if the
                                                          employer reimbursed the employee and promised to comply in the
                                                          future (the so-called window of correction).
1958   23 Fed. Reg. 8962, Nov.   Revised subsec. 1, 2,    This revision increased the salary tests for exempt employees:
       18, 1958                  and 3                    —Executive employees had to be paid at least $80 per week;
                                                          administrative employees, at least $95 per week; and professional
                                                          employees, at least $95 per week.
                                                          —The so-called “upset test” for high-salaried employees was also
                                                          increased to $125 per week for all three types of exempt workers.
                                                                                                                      (continued)




                                         Page 47                             GAO/HEHS-99-164 FSLA and White-Collar Exemptions
                                           Appendix II
                                           Statutory and Regulatory History of FLSA
                                           White-Collar Exemptions




       Federal Register notice Part 541 subsections
Year   of regulation change    affected                       Summary of change
1959   24 Fed. Reg. 581,           Revised subsec. 100,       This revision adjusted the provisions in Subpart B—Interpretations to
       Jan. 27, 1959               117, 118, 119, 200, 211,   match the salary test increases published in November 1958.
                                   300, 311, 313, 315, 600
1961   26 Fed. Reg. 8635,          Revised subsec. 1, 2, 3,   This revision implemented the Fair Labor Standards Amendments of
       Sept. 15, 1961              99, 100, 101, 105, 109,    1961, which eliminated the exemption for employees in a “local retailing
                                   112, 113, 114, 200, 209,   capacity.” The amendments replaced it with a proviso that retail
                                   300, 308; revoked          employees could not be excluded from the executive or administrative
                                   subsec. 4, 400, 401,       exemptions because of the amount of time they spent performing
                                   402, 403                   activities that are not managerial or administrative if less than 40
                                                              percent of the employee’s time was devoted to such activities.
1963   28 Fed. Reg. 9505, Aug.     Revised subsec.            This revision updated Subpart B—Interpretations to include illustrative
       30, 1963, typographical     included 1, 2, 3, 100,     examples relating to retail work. It also increased the salary test for
       error in original notice    105, 108, 109, 112, 113,   exempt employees:
       corrected by 28 Fed.        117, 118, 119, 200, 201,   —Executive employees had to be paid a salary of at least $100 per
       Reg. 14423, Dec. 28,        202, 205, 207, 209, 211,   week; administrative employees, at least $100 per week; and
       1963                        300, 311, 315, 600;        professional employees, at least $115 per week.
                                   added subsec. 5b           —The upset test triggering the short duties test was increased to $150
                                                              per week for all three types of exempt employees.
                                                              —The increased salary test was not effective for retail employees until
                                                              September 3, 1965.
1967   32 Fed. Reg. 7823,          Revised subsec.            This revision was made to implement the changes in the law made by
       May 30, 1967                included 1, 2, 3, 112,     the Fair Labor Standards Amendments of 1966, which made public
                                   200, 201, 202, 300, 302,   educational institutions subject to the FLSA for the first time. It also
                                   304, 307, 314, 315, 602    amended the Act to specifically include academic administrative
                                                              personnel and teachers in elementary and secondary schools in sec.
                                                              13(a)(1). The regulatory changes pursuant to this amendment included,
                                                              among other things:
                                                              —Subsec. 2 was expanded to specify an administrative exemption for
                                                              performance of administrative functions in a school system.
                                                              —Subsec. 3 included a professional exemption for teachers in a school
                                                              system or educational establishment.
                                                              —Teachers, as well as doctors and lawyers, were excepted from the
                                                              requirement for a minimum salary level.
1970   35 Fed. Reg. 883,           Revised subsec. 1, 2, 3,   These revisions increased the salary test for exempt employees:
       Jan. 22, 1970               5b, 100, 117, 118, 119,    —Executive employees had to be paid at least $125 per week;
       (35 Fed. Reg. 3220,         200, 211, 214, 300, 311,   administrative employees, at least $125 per week; and professional
       Feb. 20, 1970, extended     313, 315, 600; revoked     employees, at least $140 per week.
       the effective date of the   subsec. 200 and 300        —The upset test triggering the short duties test was increased for all
       salary increase)                                       three types of employees to $200 per week.
1971   36 Fed. Reg. 22976,         Revised subsec.            These revisions to Subpart B included additional explanatory
       Dec. 2, 1971                included 103, 207, 302     guidelines for paramedical and data-processing employees, as well as
                                                              for the professional exemption.
1973   38 Fed. Reg. 11390,         Revised subsec.            These revisions reflect the changes made in the law by the Education
       May 7, 1973                 included 1, 2, 3, 52, 117, Amendments of 1972, which made the equal-pay provision of the FLSA
                                   118, 119, 214, 311, 313, applicable to otherwise-exempt employees.
                                   315, 601
                                                                                                                           (continued)




                                           Page 48                               GAO/HEHS-99-164 FSLA and White-Collar Exemptions
                                            Appendix II
                                            Statutory and Regulatory History of FLSA
                                            White-Collar Exemptions




        Federal Register notice Part 541 subsections
Year    of regulation change    affected                       Summary of change
1975    40 Fed. Reg. 7092,          Revised subsec. 1, 2, 3,   These revisions increased the salary test for exempt employees:
        Feb. 19, 1975               117, 118, 119, 211, 214,   —Executive employees had to be paid at least $155 per week;
                                    311, 313, 315, 601         administrative employees, at least $155 per week; and professional
                                                               employees, at least $170 per week.
                                                               —The upset test triggering the short duties test was increased for all
                                                               three types of employment to $250 per week.
1981    46 Fed. Reg. 3010,          Revised subsec. 1, 2, 3,   These revisions, which were indefinitely postponed by Presidential
        Jan. 13, 1981               117, 118, 119, 211, 214,   memorandum of Jan. 29, 1981, would have increased the salary test
        (postponed indefinitely);   311, 313, 315, 601;        for exempt employees:
        46 Fed. Reg. 11972,         revoked subsec. 52         —Executive employees would have had to be paid at least $225 per
        Feb. 12, 1981; and 46                                  week; administrative employees, at least $225 per week; and
        Fed. Reg. 11972, Feb.                                  professional employees, at least $250 per week. In 2 years, these base
        12, 1981                                               salaries would have been raised to $250 per week for executive and
                                                               administrative employees, and to $280 per week for professional
                                                               employees.
                                                               —The upset test triggering the short duties test would have increased
                                                               for all three types of employment to $320 per week. In 2 years, this test
                                                               would have been raised to $345 per week.
1991,   56 Fed. Reg. 45824,       Added subsec. 5d             This new subsection was added in response to conflicting court
1992    Sept. 6, 1991, as revised                              decisions and the accompanying confusion, and the need to treat
        and finalized at 57 Fed.                               public employees differently than private employees because of the
        Reg. 37666,                                            requirement for public accountability. It made the requirement of
        Aug. 19, 1992                                          payment on a salary basis generally, but not completely, inapplicable
                                                               to exempt state and local employees.
1992    56 Fed. Reg. 8250, Feb. Revised subsec. 3, 5c,         This revision implemented sec. 2 of P.L. 101-583 which directed the
        27, 1991, as finalized at 302, 312; added subsec.      Secretary of Labor to promulgate regulations that permitted computer
        57 Fed. Reg. 46742, Oct. 303                           systems analysts, computer programmers, software engineers, and
        9, 1992 (corrected by 57                               other similarly skilled workers to be classified as exempt employees. As
        Fed. Reg. 47163,                                       specified by the law, these revisions exempted workers whose duties
        Oct. 14, 1992)                                         met the new test set forth in the regulation and, if they were paid on a
                                                               salary basis, their pay met the specified salary test levels; or, if they
                                                               were paid on an hourly basis, their regular rate of pay exceeded 6-1/2
                                                               times the minimum wage.a

                                            Source: GAO analysis of applicable regulations.
                                            a
                                             P.L. 104-188 subsequently set the hourly wage that would allow employers to claim an
                                            exemption for computer workers at $27.63 per hour, but no corresponding change was made in
                                            the regulations.




                                            Page 49                                 GAO/HEHS-99-164 FSLA and White-Collar Exemptions
Appendix III

Comments From the Department of Labor




Now on p. 7.



Now on p. 9.




Now on p. 12.




Now on p. 13.



Now on pp. 17-19.




                    Page 50   GAO/HEHS-99-164 FSLA and White-Collar Exemptions
                Appendix III
                Comments From the Department of Labor




Now on p. 18.




Now on p. 19.




Now on p. 20.




                Page 51                          GAO/HEHS-99-164 FSLA and White-Collar Exemptions
                Appendix III
                Comments From the Department of Labor




Now on p. 20.




Now on p. 31.




                Page 52                          GAO/HEHS-99-164 FSLA and White-Collar Exemptions
Appendix III
Comments From the Department of Labor




Page 53                          GAO/HEHS-99-164 FSLA and White-Collar Exemptions
Appendix IV

GAO Contacts and Staff Acknowledgments


                  Larry Horinko, (202) 512-7001
GAO Contacts      Nancy Peters, (202) 512-9065


                  In addition to those mentioned above, Carol Patey, Bill Hansbury, Rich
Staff             Kelley, Kelly Mikelson, Charlie Jeszeck, and Robert Crystal made key
Acknowledgments   contributions to this report.




(205387)          Page 54                         GAO/HEHS-99-164 FSLA and White-Collar Exemptions
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