America's economy and labor force have
changed significantly since the FLSA was passed in 1938, yet few
provisions of the Act have been updated to reflect those changes.
The mix of jobs has shifted away from manufacturing toward
services, and technology has changed the duties and
responsibilities of nearly every job. The old line between workers
and managers has blurred as businesses have reduced management
layers and workers have been given the duties and decisionmaking
responsibilities once reserved for supervisors. More employees are
demanding the opportunity to participate in innovative pay and
benefits plans such as stock options and bonus programs. Outdated
and confusing rules make compliance with the FLSA difficult,
particularly for smaller businesses. FLSA reforms are long
the FLSA debate unfolds , policymakers should keep in mind five
important principles to ensure that both workers and employers
receive the greatest benefit from modernizing the law. The FLSA
should allow for a variety of innovative compensation and benefit
options; the options should be voluntary, not mandated by
government; the options should be flexible and revocable;
compliance should be simplified to the greatest extent possible;
and the legislation should provide reasonable protections for both
workers and employers.
time has come to modernize the FLSA for the 21st century workplace.
The focus should be on removing statutory and regulatory barriers
to private-sector initiatives that will improve the
ability of working parents to balance their work and family life,
increase flexibility, and meet the evolving challenges of competing
in the worldwide marketplace. Specifically, Congress should:
- Enable private-sector employers to offer
flexible credit hour or compensatory time (flex-time or comp-time)
- Give states the flexibility to adapt their
own entry-level wage policies to their specific economic,
demographic, and development needs;
- Remove obstacles that employers face when
they attempt to provide performance bonuses and gainsharing plans
to workers who are paid by the hour;
- Update the FLSA rules that lead to
confusing and inconsistent classifications of similarly
situated workers; and
- Equalize the unfair treatment of inside
and outside sales employees.
Updating the FLSA will make it possible
for employers to create a more family-friendly workplace and make
performance bonus programs more widely available. This will help to
increase employee effectiveness and job satisfaction while
decreasing turnover rates and absenteeism. New federal mandates are
not necessary in this process; Congress can modernize the FLSA
simply by freeing employers and workers from the inflexible
requirements of a law that was written over 60 years ago.
Why Reforms are Needed
America's economy and labor force have
changed dramatically since the Fair Labor Standards Act was passed
in 1938, yet few provisions of the Act have been updated to reflect
those changes. For example:
- The mix of industries and occupations has
shifted away from manufacturing toward services, and sophisticated
technologies have reshaped the duties and responsibilities of
nearly every job.
- Women account for nearly 47 percent of the
labor force today, up from 29 percent in 1950.
- In 1999, over 71 percent (18.7 million) of
households of married couples with children had both parents
Nearly 72 percent of single women and 80 percent of single men who
headed families with children worked.
- Since 1954, major statutory changes to the
FLSA have focused only on extending the law's coverage and
increasing the minimum wage.
Concerns over the well-being of the family
often force parents to leave jobs that do not fit their families'
schedules, or to forgo jobs that better suit their talents but
would put additional strain on their families. Such scenarios would
be less frequent if more flexible work schedules were allowed by
the FLSA in the private sector.
Labor-management relations have also
changed since the FLSA was passed, and workers are now demanding
innovative pay and benefits plans not envisioned by the Act. For
- Employees have taken on expanded and more
complex roles. Businesses restructuring during the 1980s and 1990s
significantly reduced the layers of management at many companies
and front-line workers have been given the duties and
decisionmaking responsibilities once reserved for managers.
- Increased competition for employees has
engendered innovative reward systems. Businesses have responded to
increasing competition by offering bonus and gainsharing programs
to salaried employees for meeting performance, quality,
productivity, or health and safety goals. The FLSA, however,
discourages companies from offering these pay incentives to workers
who are paid by the hour.
- Employees have embraced opportunities to
share in their companies' profits, but such opportunities have been
limited in the past. In 2000, Congress took a step to make these
opportunities more available by fixing a problem with the FLSA that
restricted the ability of employers to offer popular stock option
programs to workers covered by the Act.
Outdated and confusing rules make
compliance with the FLSA difficult, particularly for smaller
businesses. For example:
- The salary test that employers use to
determine which workers are covered by the Act has not been updated
- FLSA regulations also have two duties
tests: a long test for lower paid workers and a short test for
workers paid at least $250 per week. In 1999, the U.S. General
Accounting Office found that the tests lead to confusing and
inconsistent classifications of similarly situated workers.
number of federal workplace programs have been reformed over the
past ten years, but very little has been done to modernize the
FLSA. In 1996, Congress reformed federal welfare programs and gave
states greater flexibility to develop innovative ways to move
welfare participants into jobs. In 1998, Congress updated federal
job training programs and provided states with greater authority to
create effective workforce development programs. In 2000, Congress
and President Clinton lifted the FLSA restriction on providing
stock options for workers who are paid by the hour. Now is the time
to move forward with other long overdue FLSA reforms.
Key Principles for Reform
the 107th Congress begins its debate over the minimum wage and the
Fair Labor Standards Act, legislators should consider five
important principles to ensure that both workers and employers
receive the greatest benefit from modernizing the law. These
principles should form the foundation of effective FLSA reform. A
reformed FSLA should:
- Allow a variety
of innovative compensation and benefit options. The 21st
century workplace should not be constrained by a wage and hour law
passed in a bygone era. Employers should be able to provide a
comprehensive set of compensation and work schedule choices that
will empower workers to select the option that best meets the
specific needs of their families.
- Ensure the
voluntary nature of the options. Congress should ensure
that FLSA reforms are voluntary for both employer and worker.
Government should not mandate the available options. Because each
workplace is unique, each employer should have the options of
offering, or not offering, flexible work schedules and compensation
packages. For example, flex-time may work well in some businesses,
while compressed workweeks may work better in others. Workers
should also be able to choose between continuing in traditional pay
programs or switching to new ones.
- Ensure the
flexibility of options. Congress and the Department of
Labor should not attempt to micromanage the FLSA reforms by writing
unnecessary legislative or regulatory requirements, which could
have different impacts in different workplaces. States and
employers are in the best position to design programs that suit
their labor market and workplace needs within broad guidelines.
Burdensome regulations will only discourage employers from offering
such options as flexible schedules and bonus-sharing programs to
their paid-hourly workers.
compliance. Since 1938, the line between professional
workers who are exempt from FLSA requirements and workers covered
by the Act has become increasingly blurred. The U.S. Department of
Labor should modernize and simplify the regulation employers use to
determine which workers are covered by the FLSA. Moreover, the
Department of Labor should provide employers, particularly small
businesses, with easy to understand compliance assistance and the
opportunity to correct mistakes before being prosecuted and
reasonable protections to both workers and employers.
Employers should be prohibited from coercing workers into flexible
work schedules and new compensation programs. Employees should be
fully informed about any new program before agreeing to
participate in it and they should be able to withdraw from the
plan if it does not suit their needs. Finally, employers should be
able to discontinue offering flexible schedules at any time if they
unduly disrupt the business.
What Congress Should Do
time has come to modernize the FLSA for the 21st century workplace.
The focus should be on removing statutory and regulatory barriers
to private sector initiatives that will improve ability of working
parents to balance their work and family life, continue to increase
flexibility for states, and permit employers to reward workers
financially for improving productivity and profitability. Employer
and employee protections should be maintained while confusing and
inconsistent rules are updated and workers are treated with more
Credit Hour (flex-time) Programs
In 1978, Congress
recognized the benefit of flexible schedules when it passed the
Federal Employees Flexible and Compressed Work Schedules Act. This
Act allows federal employees the choice of taking overtime pay
either in cash or in the form of paid time off. As a result of this
innovation, federal workers are more productive, less absent, and
have a greater sense of personal control and autonomy over both
their time and money. Policymakers should strongly
consider extending to all workers the same opportunity that federal
employees have enjoyed for over 20 years.
- Flex-time and compensatory time
(comp-time) programs allow workers, at their own request, to work
additional hours one week in order to be able to take hours off,
with pay, in another week. For example, federal
workers can work an extra hour each day during one week and "bank"
those five credit hours to use when they want to take paid time
off, whether they do so the following week, the following pay
period, or the next month.
- Flex-time programs should be voluntary for
both employer and worker. Each employer should be able to decide
whether or not to implement this option, depending on the needs and
nature of their business.
- Workers should also be able to choose
between continuing to work a standard workweek with overtime pay or
accruing paid time off to use in the future. Both employers and
workers also should be able to revoke the use of flexible schedules
at any time and cash out accrued leave.
- Flex-time programs should provide
reasonable protections to both workers and employers without
policymakers' micromanaging flexible schedule options by writing
unnecessary legislative or regulatory requirements. Employers
should be prohibited from coercing a worker into using flex-time
instead of being paid in cash for overtime work and, before
agreeing to a flexible plan, employees should be fully informed
about how flexible schedules work and the options that are
- Employees also should be permitted to use
accumulated comp-time hours within a reasonable period of time as
long as it does not unduly disrupt the operations of the employer.
This is the same standard that federal managers follow.
Representative Judy Biggert (R-IL) has
introduced the Working Families Flexibility Act (H.R. 1982) and
Senator Judd Gregg (R-NH) has introduced the Workplace Flexibility
Act (S. 624), both of which would give employers the option of
offering their workers the choice of paid time off or cash wages
for overtime hours worked. Both bills would require employers and
workers to complete a written agreement in order to participate in
a comp-time program. Both bills would also retain all of the
employee protections in the FLSA and add new protections to ensure
that the choice and use of comp-time is truly voluntary. As is
currently the case with overtime pay, comp-time would accrue at a
rate of one and one-half hours of comp-time for each hour of
overtime worked. Workers would be able to accrue up to 160 hours of
comp-time annually and both bills would require employers to pay
cash wages for any unused, accrued time at the end of the year.
Workers who opted to receive cash wages could continue to receive
wages for their overtime.
Flexible work schedules benefit families
in a way the family and medical leave provision does not--with paid
time off. Working a few extra hours one week in order to take paid
time off later provides families with the time they need when they
need it, without crimping their budgets. Currently, most workers
can take advantage of short-term unpaid leave for family
responsibilities, but at a cost--their lost pay. Flexible work
schedules would increase a family's sense of control over both
their time and their money.
that more families have both parents in the workforce, American
workers need flexible schedules and compensation packages. The Fair
Labor Standards Act, however, does not allow employers to offer
such flexibility. Providing choices such as the options of
receiving overtime pay as cash or as paid time off will enable
workers to more effectively balance the demands of the workplace
with the needs of their families. Congress can make this happen by
giving private-sector workers and employers the same flexibility
that is currently enjoyed by federal workers and agencies.
In 1996, Congress
wisely gave the states the responsibility of bringing welfare
recipients into the workforce and flexibility regarding the means
they use to accomplish this. In 1998, Washington
provided states with the flexibility to design and implement their
own workforce development programs. To build on those
successful approaches, policymakers should also give the states the
flexibility they need to adapt their own entry-level wage policies
to local economic, demographic, and development needs.
Under the state flexibility (state-flex)
approach to setting entry-level wages, each state would have five
options when the federal minimum wage is raised:
- Raise the state wage at the same pace as
the federal minimum wage rises above $5.15 per hour (this would
happen automatically if states take no action);
- Keep the state rate constant at its
current level to reflect state and local labor market
- Establish regional rates to address local
economic, demographic, and development needs in the state;
- Raise the state rate, but more slowly than
the federal rate hike or to a wage that may be lower than the new
federal minimum wage, while above $5.15 per hour; or
- Raise the state rate higher and/or more
quickly than the federal rate hike.
States already have the authority to
implement an entry-level wage rate that is higher than the federal
rate. This FLSA reform would simply give the states the flexibility
to set their own schedule and rate structure at or above the
current federal minimum wage of $5.15 per hour.
Representative Jim DeMint (R-SC) has
introduced the Minimum Wage State Flexibility Act of 2001
(H.R.1441) that would allow states that set their minimum wage to
at least $5.15 per hour the flexibility to adapt their minimum wage
to local economic and labor market conditions.
State-flex would enable each state to
tailor its entry-level wage to its unique demographic and labor
market challenges. Economic conditions vary widely among the
states. For example, in October 2000, when the national
unemployment rate fell to a 30-year low of 3.9 percent, Connecticut
had the lowest unemployment rate (1.8 percent), while New Mexico
and West Virginia had the highest rates (5.5 percent) in the lower
48 states. Moreover, employment growth
from April 2000 to April 2001 was strongest in Vermont (5.1
percent), while West Virginia had the largest employment loss (-1.7
one-size-fits-all federal minimum wage undermines state efforts to
move Americans from welfare to work. If there is a minimum wage, it
should at least reflect the significant differences in the
cost-of-living and general wage levels that exist among the states
and even in different regions of the same state. Currently, federal
policy recognizes the wide economic variations across the country
and leaves it up to the states to set benefit levels for both
welfare and unemployment insurance. In January 2000, welfare
benefits for a family of three (1 adult, 2 children) ranged from
$164 per month in Alabama to $923 per month in Alaska. Minimum
weekly unemployment benefits range from $5 in Hawaii to $94 in
Washington, while the maximum weekly benefit ranges from $190 in
Mississippi to $646 in Massachusetts.
federal government officially recognizes state labor market
differences when paying its own employees. Beginning in January
2001, the basic hourly wage rate for entry-level federal positions
varies from $7.35 in Orlando, Florida, to $7.98 in San Francisco,
California. A national minimum wage
makes as much sense as requiring Washington to pay federal workers
the same wage for an entry-level job in New York City as it does in
Fargo, North Dakota, where the cost of living is much lower.
such wide differences in employment opportunities, governors and
state legislators are in a better position than are policymakers in
Washington, D.C., to determine the appropriate entry-level wage
levels for their own areas. State legislators understand the living
and working conditions in their districts and how a minimum wage
rate change would affect economic conditions, job opportunities,
and welfare reform for their constituents. The experience of the
states in successfully moving people from welfare to work thus far
will augment this knowledge and help them to make appropriate
decisions--if the federal government does not continue to tie their
The Fair Labor
Standards Act makes two stipulations concerning bonus and
gainsharing programs that limit their use by employers and restrict
their benefit to workers. First, bonuses paid to
covered or non-exempt employees may have to be treated as part of
the employee's regular rate of pay for the purpose of calculating
overtime pay. This adds to the complexity
and cost of the programs and discourages their use. Second, the
FLSA requires non-discretionary bonuses that reward employees
(either individually, as a team, or as a workplace) for meeting
performance measures such as quality, productivity, or health and
safety goals, be included as part of the regular rate of pay for
the purposes of computing overtime pay. Although intended to
prevent evasion of needed worker protections, this deters companies
from developing innovative compensation programs that fully
motivate and reward all their workers.
Adding to the confusion is the different
treatment profit-sharing and gainsharing programs have under the
FLSA. Payments made to workers under profit-sharing plans do not
run afoul of the FLSA provisions, while payments to employees based
on other performance measures are subject to FLSA restrictions.
2000, Congress fixed a similar problem with the FLSA that
restricted the ability of employers to offer stock options to
non-exempt workers. That effort shows that the
63-year-old FLSA can be modernized for the 21st century workplace.
Policymakers should take the next step and remove obstacles to
performance bonuses and gainsharing plans in the FLSA.
Specifically, Congress should:
- Provide that an employee's regular pay
rate, for purposes of calculating overtime compensation, will not
be affected by additional payments that reward an employee or group
of employees for meeting or exceeding productivity, quality,
efficiency, or sales goals under a gainsharing, incentive bonus,
commission, or performance contingent bonus plan.
- Enable a wide variety of bonus and
gainsharing programs. For example, employees should be able to be
paid bonuses on a per-capita basis (where each employee receives
the same amount if a certain goal is reached or exceeded), or,
alternatively, bonuses could vary according to individual or group
performance. Employers should also be able to end the programs,
following a reasonable notice and the payment of all bonuses
- Maintain worker protections. For example,
programs should not be utilized on an ad hoc basis and bonuses
should be over and above an employee's regular base pay. The
programs should be in writing, clearly specifying the formula by
which performance bonuses are paid and when they are paid, and this
information should be made available to employees.
goal of FLSA modernization should be to provide protections against
abuse while allowing flexibility for employers and employees to
structure plans for rewards and payments in ways that best meet
their needs. Currently, the law tries to balance these two factors
but does so in a way that discourages employers from providing
bonus and gainsharing programs to their non-exempt hourly
employees. These sensible reforms would encourage the greater use
of performance bonuses while maintaining protections against
Representative Cass Ballenger (R-NC) has
introduced the Rewarding Performance in Compensation Act (H.R.1602)
that would allow employers to make payments to employees for
meeting or exceeding productivity, quality, efficiency, or sales
goals under a gainsharing, incentive bonus, commission, or
performance contingent bonus plan. This would give hourly,
non-exempt employees the same access to bonuses and gainsharing
programs that exempt employees receive.
Bonus and gainsharing programs have real
benefits for workers. They enable employees to have more control
over their jobs and more involvement in workplace decision-making,
which raises productivity and increases compensation--both wages
number of studies have shown that gainsharing programs improve
productivity and increase pay for workers. One study found that
gainsharing programs improved productivity by an average of 23
percent in the first two years they were implemented and that
workers earned average bonuses equal to 17 percent of gross pay
during that two-year period. Another study of all firms
known to have gainsharing plans found that the median firm
experienced a 5 percent to 15 percent increase in productivity
while the median bonus received by workers was equal to 6 percent
of wages and salaries. Not only do bonus and
gainsharing programs help achieve more productive businesses and
higher pay for employees, but they also are an important part of
meaningful employee involvement, allowing employees to have a
greater share in their company's success.
Despite the benefits of performance bonus
and gainsharing plans for employees, the FLSA currently discourages
employers from offering such plans to their non-exempt employees.
The problem stems from the fact that the U.S. Department of Labor
is applying a 63-year-old labor law to a workplace that was not
envisioned when it was enacted. At the same time, employers are
confronted with the challenge of understanding and complying with
regulations implementing a law that makes little sense in the
current reality of work, the workplace, and workers of today.
Unless the FLSA is reformed, many firms will remain reluctant to
implement bonus and gainsharing programs, despite their obvious
advantages. This will restrain productivity and economic growth.
Moreover, it will impede an important means of improving real wage
growth and providing a higher standard of living for American
The Fair Labor
Standards Act exempts workers who are employed in an executive,
administrative, or professional capacity from the Act's wage and
hour requirements. However these "white-collar" exemptions are not
defined in the FLSA, but are instead left to the Secretary of Labor
to define by regulation. Problems arise because the regulations
have remained essentially unchanged since 1954, while the American
labor force and the responsibilities placed on workers have changed
dramatically. The old line between white-collar and blue-collar
workers has blurred as companies have shed layers of management and
empowered front-line workers with decision-making responsibilities.
FLSA regulations establish two tests to determine which workers are
exempt from the Act's wage and hour requirements--a salary
requirement and a duties requirement. The salary-basis test
requires workers be paid a salary (not on an hourly basis) and that
the level of the salary must indicate managerial or professional
status. The duties test requires that employees' job duties and
responsibilities include managerial or professional skills. For
workers to be exempt, they must meet both criteria.
1999, the U.S. General Accounting Office reviewed the antiquated
FLSA regulations. It found that uncertainties and difficulties with
the two criteria lead to confusing and inconsistent classifications
of similarly situated employees; that the tests do not take into
account the effect of modern technology on employment; that
inflation has eroded the salary exemption levels since they were
last updated in 1975; and that lower-pay supervisory employees may
have inadequate protection. The U.S. Department of
Labor also notes in its May 2001 Semiannual Regulatory Agenda that
the "salary level tests are outdated and offer little practical
guidance in applying the exemption." It goes on to say that
"clear, comprehensive, and up-to-date regulations would provide for
central, uniform control over the application of these regulations
and ameliorate many concerns."
remedy this problem, policymakers should:
- Update and simplify the FLSA salary-basis
and duties tests to ensure clarity and practical application. Any
new test for exemption should also be flexible enough to recognize
existing industry practices, the nature of the work performed, and
the possibility of future changes in the workplace.
- Allow employers to retroactively correct a
worker's pay if he or she has mistakenly been classified as
- Allow pay deductions for part-day absences
and raise the salary levels for the salary-basis test.
- Treat additional highly skilled, well-paid
workers as exempt because their specialized knowledge is equivalent
to that of exempt professionals in many instances. For example, in
1992, Congress exempted certain computer professionals who earn
over 6.5 times the minimum wage even though they are paid by the
economic changes that have occurred over the past 63 years since
the passage of the FLSA make it increasingly important to readjust
its implementing regulations to meet the needs of the modern
workplace. Updating the rules, however, will require carefully
balancing the employers' need for clear and unambiguous regulatory
standards with the employees' demand for fair treatment in the
Sales Workers Fairly
Under the Fair Labor
Standards Act outside and inside sales employees are treated
differently even though they perform the same type of work in many
instances. Specifically, sales employees who travel out of the
office to a customer's place of business are treated as
professional salaried employees. However, employees who conduct
sales from inside a company are subject to the FLSA wage and hour
many companies, there is no meaningful difference between the type
of work that inside and outside sales employees perform. The only
reason these two sales forces are treated differently by the FLSA
is that one works face-to-face with customers and the other uses
modern technology to communicate. The FLSA and its implementing
regulations are outdated and few substantive changes have been made
to the Act that recognize the realities of the modern workplace and
the impact of the Internet.
Congress should add an exemption to the
FLSA that mirrors the outside sales exemption but is tailored to
the duties performed by inside sales employees. This would allow
employers to treat inside and outside sales employees consistently
and limit the divisiveness created under current law while
providing for the maximum flexibility for employers.
Representative Patrick Tiberi (R-OH) has
introduced the Sales Incentive Compensation Act (H.R. 2070) that
would provide for a narrower exemption of certain inside sales
workers who meet certain duties and compensation tests.
Specifically, the bill provides an exemption from the FLSA's wage
and hour requirements for certain inside sales employees who use
the telephone, fax, and computer. It also includes protections to
ensure that inside sales employees who meet specific duty tests
will receive a base salary, guaranteed commissions, and continuing
incentives. The duties test, for example, would require that the
employee has a thorough understanding of the client's needs or
specialized or technical knowledge about the employer's products or
Unlike telemarketers, inside sales
employees are highly trained and usually have detailed technical
knowledge about the products and services that they are selling.
They often develop close working relationships with customers and
perform the same activities as outside sales employees who work
away from the office and travel to a customer's place of business.
However, though inside sales employees have a compensation
structure similar to outside sales employees, because they are
subject to the FLSA overtime requirements, employers limit the
amount of time they may work and thus the number of sales they can
make, curbing incentive pay. The result is a two-tiered class of
sales employees. Exempt outside sales employees have the freedom to
work as needed for additional incentive pay, while non-exempt
inside sales employees are relegated to a 40-hour workweek and
occasional overtime, if they are lucky. Congress should modernize
the FLSA to treat inside and outside sales employees fairly.
Fair Labor Standards Act was enacted to protect unskilled, low-pay
workers. But today, when both parents of more and more families
have to work and the need for flexibility in work schedules is so
great, the rigid provisions of the FLSA hurt American workers more
than they help. The FLSA's outdated provisions also deny many
workers the ability to participate in bonus and gainsharing
programs that would increase their take-home pay.
Updating the FLSA will make it possible
for employers to create a more family-friendly workplace for
American workers and make performance bonus programs more widely
available. This will help to increase employee effectiveness and
job satisfaction while decreasing turnover rates and absenteeism.
New federal mandates are not necessary for this to be achieved:
Congress can accomplish the intended reform of FLSA simply by
freeing employers and workers from the inflexible requirements of a
law that was written 63 years ago.
D. Mark Wilson is a
former Research Fellow in the Thomas A. Roe Institute for Economic
Policy Studies at The Heritage Foundation.
As the 107th Congress begins its debate over the minimum wage and
the Fair Labor Standards Act (FLSA), policymakers should look
beyond increasing the minimum wage in addressing the needs of
today's workforce. The FLSA needs to be updated to give workers
greater flexibility in ordering their lives, both on and off the
job, and to permit employers to reward workers financially for
improving productivity and profitability without being burdened
with the unpredictable and complex requirements of a Depression-era