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Proposed White-Collar Rules Mostly Good for Employers
Also this month: FASB Supports Expensing Stock Options; Rethinking Traumatic Debriefings; EEOC Enhances Customer Service for Non-English Speakers; more.
The Bush administration’s proposed revisions to the Fair Labor Standards Act (FLSA) regulations that define the so-called “white-collar exemptions” to the 1938 federal minimum wage and overtime law appear largely favorable to employers, but they contain ambiguities that could be the focus of future litigation.
The Department of Labor (DOL) in March issued proposed new rules outlining what it takes to qualify as an exempt executive, administrative or professional employee not entitled to overtime pay when working more than 40 hours in a week. But the fundamentals remain the same.
First, an employee must be paid on a salary basis; that is, a predetermined amount at or above a weekly minimum set by regulation, regardless of the quantity or quality of work performed. Second, the individual must meet the duties tests for one of the exemptions. Lawyers who advise employers on wage and hour matters told HR News that some of the best things about the proposed regulations are the revised duties tests for the exemptions; the new “super-salary” exemption for highly compensated individuals; modifications to the pay-docking rules for salaried employees; and broadening of the “window of corrections” provision that allows employers to remedy certain improper deductions from salary.
In addition to the substantive changes in the regulations, DOL’s proposal streamlines and simplifies the regulations in ways that should make them easier for employers to understand and apply.
Less salutary for employers is the proposed increase from as little as $155 to $425 per week for the minimum salary required for an employee to be considered exempt.
Salary, Duties Tests ModifiedThe increase in the salary level itself is “not necessarily good news for employers,” said Daniel Abrahams, a wage and hour specialist in the law firm of Epstein Becker & Green in Washington, D.C. “But the good news is that it’s only $425 a week—on the low end of what one might expect for a reconstitution of the salary basis test.”
On the other end of the salary spectrum is a new exemption covering employees who make more than $65,000 a year. They will be exempt as long as they perform office or non-manual work and at least one function identifiable as executive, administrative or professional under the duties tests.
“That boils down to a one-factor test,” said Minneapolis attorney Ron Lee with the firm of Faegre and Benson. “I think that’s potentially very significant.”
DOL’s proposal does away with the familiar, if despised, long and short tests for executive, administrative and professional employees and substitutes one duties test for each of the three exemptions. In each case, the DOL has dropped the long test’s requirement that an employee must perform no more than 20 percent nonexempt work.
The proposed tests focus on the employee’s primary duty. They bear a “more rational relationship to what those individuals in salaried exempt positions really do,” said Richard Bush of the law firm of Powell, Trachtman, Logan, Carrle, Bowman & Lombardo in King of Prussia, Pa.
The primary duties tests “wipe away some of the confusion and sweep away some of the requirements that have hamstrung some employers,” Bush said.
Legal experts consider the proposed changes to the duties test for the administrative exemption to be particularly significant. Most notably, the proposal eliminates the requirement that the employee exercise “discretion and independent judgment” and replaces it with a requirement that the employee hold a “position of responsibility.”
The discretion and independent judgment requirement has been difficult to apply and has resulted in considerable litigation. Its elimination is meant to acknowledge “that the [administrative] exemption does apply even to employees who are required to follow procedure manuals and other employer guidance,” said Lee.
But, the “position of responsibility” requirement may “add a different type of confusion to the analysis,” Lee observed. To meet that requirement, an employee must either “perform work of substantial importance” or “employ a high level of skill or training.”
“If I were to ask clients whether a particular employee is required to have a high degree of skill, they’re going to say ‘yes’ even for non-exempt employees,” Lee said. “There is still the potential for a significant amount of confusion and dispute as to how those standards would apply in a particular case.”
Paul Siegel, with the Jackson Lewis law firm in Long Island, N.Y., said the administrative duties test is “still not as precise as one would hope for. It’s better, but not necessarily perfect.”
In fact, the DOL is seeking comment on whether it should throw out the proposed discretion and independent judgment test entirely, keep it as a third alternative under the position of responsibility requirement, or retain it by itself but modify it to provide better guidance.
Changes also have been proposed to the duties test for the professional exemption, most notably with respect to the “learned professional” category. That exemption currently applies to jobs requiring advanced knowledge acquired by a prolonged course of specialized study, which often, but not always, has been interpreted to mean a college degree.
The proposed test says that employees can qualify with a combination of instruction and work experience, potentially broadening the scope of the learned professional exemption.
The standard “would focus on the knowledge of the employee and how that knowledge is used in everyday work, not on the educational path followed to obtain that knowledge,” the DOL said. Companies that employ highly paid technical employees without academic degrees will welcome this change, but the full impact of such a change is not entirely clear.
Suspensions EasedWith a few regulatory exceptions, exempt white-collar employees must receive their full salary for any week in which they perform any work. The DOL’s proposal includes two employer-friendly modifications to this rule. The first allows employers to impose unpaid disciplinary suspensions of one full day or more on exempt employees without compromising their exempt status. The current rule allows such deductions only for violations of safety rules of major importance. The proposal would allow unpaid suspensions for violations of employers’ written policies, such as those outlawing sexual harassment or workplace violence, as long as they are applied uniformly to all workers.
The second proposed change opens wider the so-called “window of corrections” and creates a new “safe harbor” provision.
An employer that makes improper deductions from employees’ pay can lose the exemption for an entire class of employees. In certain circumstances, the window of corrections allows employers to maintain the exemption by reimbursing employees for improper deductions.
But, as is, the window of corrections has been difficult to apply and has spawned considerable litigation. The proposal would make it “easier for employers to use the window of corrections,” Abrahams said. It clarifies that the exemption is lost only if there is a pattern and practice of improper deductions and then only for employees in the same job classification who work for the manager responsible for the improper pay docking.
Budgetary, Employee Relations ChallengesThe proposed changes won’t become final until late 2003 or early 2004, the DOL has said, but employers already have their work cut out for them.
It’s too soon to reclassify employees because the final regulations may differ, but “it’s not premature for employers to conduct their own internal audits to start to focus on [how they might] torque or re-engineer what they are doing,” said Bush.
“It would be advisable for employers to read the proposal and to be thinking about how [they] would alter things for that particular employer, if at all,” Lee recommended. “To the extent there are questions raised, those might be questions that an employer would want to raise [with the DOL] during the comment period” ending June 30, he said.
When the new regulations go into effect, employers also will have to confront the task of reclassifying some employees, communicating that action and managing the budgetary and employee relations consequences of it.
Under the proposed regulations, for example, employees, regardless of their job responsibilities, must make at least $22,100 a year to be exempt white-collar employees. If, for example, an employer has not been paying overtime to managers or supervisors who make less than that, the employer will have to either raise their salaries to the required minimum, reclassify them as non-exempt and pay them overtime, or assign work that would exceed 40 hours in a week to another employee, Bush explained. Depending on the hours the employer needs to have covered, it might be less costly to raise the salary levels or reassign the work than to pay the required overtime, he pointed out.
Employees reclassified as non-exempt probably won’t mind getting extra compensation if they work overtime, but employers will have to explain that the change does not diminish their status, Siegel said. HR professionals at a recent Society for Human Resource Management meeting to gather input on the proposed regulations acknowledged that some employees may resent being reclassified as non-exempt, especially if the change is not accompanied by the opportunity to earn a significant amount of overtime pay.
Reclassifications from non-exempt to exempt pose other challenges. Changing the pay status of employees accustomed to earning a significant amount of overtime pay will be a “major challenge for HR professionals to address,” said Bush.
The employer would not be obligated legally to pay newly exempt employers higher salaries to compensate for lost overtime pay, but should be prepared to take some steps in terms of benefits, recognition, etc., to contribute to employee morale and retention, Bush suggested.
Employers also will have to anticipate and manage culture changes among reclassified employees. Formerly exempt employees will have to accustom themselves to recording their time, for example.
Erstwhile non-exempt employees who are reclassified as exempt may take some time to understand that they are now being paid to do a job, not for working a certain number of hours. Freed from the rigidity of the time clock, some newly exempt employees may begin to develop problems with absenteeism and tardiness. They may resent working long hours without obvious reward.
Bush also reminded employers to examine the impact that any reclassifications and consequent changes in wages or salaries might have on both mandated and voluntary benefits eligibility and costs, such as workers’ compensation insurance premiums and unemployment insurance taxes.
—Margaret M. Clark
Accounting Board Supports Expensing Stock Options
The seven-member board that establishes accounting rules for U.S. companies has determined that the cost of executive and employee stock options should be treated as an expense, a change that could reduce reported earnings for many public corporations if enacted next year.
The April 22 decision by the Financial Accounting Standards Board (FASB), which is based in Norwalk, Conn., was opposed by some high-tech firms and by some members of Congress who said they will attempt to derail the move. Foes of expensing options said the change would depress stock prices and harm the economy.
The FASB plan, which is largely in sync with efforts by an international accounting rules board to require that options be expensed, has been under consideration for many years but has taken on greater interest in the wake of scandals in which some executives used accounting tricks to boost short-term profits and inflate the value of their options. Stock options give an executive or employee the ability to buy a corporation’s shares at a specified price during a specified period.
Companies have not been required to count options as expenses, but they have been required to disclose in the footnotes of financial statements what the value of the options would have been if treated as an expense. Some corporations have announced that they have begun reporting options as expenses voluntarily.
The recession and news reports of stock option abuses have lessened the value and appeal of options in some industries and have put increased pressure on companies—and the agencies that regulate them—to treat the cost of options like other compensation. Shareholder groups have been particularly vocal in urging the change as part of a series of post-Enron reforms.
“Recent events have served as a reminder to all of us that clear, credible and comparable financial information is essential to the health and vitality of our capital market system,” said FASB Chairman Robert Herz. “In the wake of the market meltdown and corporate reporting scandals, the FASB has received numerous requests from individual and institutional investors, financial analysts and many others urging the board to mandate the expensing of compensation cost relating to employee stock options.”
This action is not the final word, according to FASB spokeswoman Cheryl Thompson, but it is a significant step in that direction.
“It’s a long process,” Thompson told HR News. She said the next step, issuance of an FASB exposure draft reflecting the accounting change, could occur “in the latter part of 2003,” with implementation of the rule following in spring 2004.
In fact, some in Congress want to delay the process by as much as three years for additional study. Legislation to that effect was introduced this term by Reps. David Dreier, R-Calif., and Anna G. Eshoo, D-Calif. Sen. Barbara Boxer, D-Calif., said that she and Sen. John Ensign, R-Nev., also plan to introduce a similar measure.
In a recent letter to the FASB, Dreier and Eshoo said expensing stock options would create an inaccurate picture of a company’s financial health because of the difficulty of valuing stock options that holders have not yet exercised. They said the rule change would have a devastating impact on the technology industry and slow overall economic recovery.
“At a time when our government is searching for new ways to stimulate the economy, we need a clear vision about the importance of broad-based stock option plans to the nation’s entrepreneurial soul and the workers and investors who are part of it,” wrote Dreier and Eshoo. “We should adopt policies that encourage and expand the availability of broad-based stock option plans, not destroy them.”
Bruce Ellig, SPHR, former chair of the Society for Human Resource Management board of directors and an author and consultant on executive compensation, told HR News that a rule mandating expensing of options “is not going to be the end of the financial world.”
He said companies concerned about the impact of the rule change could minimize the impact on their earnings reports. For example, they can give out fewer options, substituting stock awards. They also can reduce the term of options, from 10 years to seven or five—“something that is long overdue,” said Ellig.
Ellig agreed that the FASB will have difficulty establishing a way to measure the cost of options, but he predicted that the Black-Scholes pricing model, or some variation, will probably be acceptable to many agencies and corporations.
Traumatic Event Debriefings Getting Second Thoughts
Following the World Trade Center attack on Sept. 11, 2001, scores of counseling firms dispatched critical incident stress debriefing (CISD) specialists to New York to aid survivors and emergency workers. Among the firms was Atlanta-based Crisis Management International (CMI), whose task was to provide trauma relief to workers of 204 employers in the vicinity of Ground Zero.
Like other debriefing firms, CMI’s interventions provided immediate stress relief, attested to by a satisfaction rate of 99.7 percent that also fostered the belief that the interventions had diminished the participants’ potential for post-traumatic stress disorder (PTSD). But critics of CISD, mainly researchers armed with empirical studies, are now arguing against a particular practice they call “rehashing,” during which participants are encouraged to share their thoughts, reactions and symptoms of distress that they experienced either during or after an incident.
“Now we are seeing evidence that debriefings—which always seem like the right thing to do at the time—can cause eventual harm for some, and we’ve had to reassess some of our basic assumptions about the practice,” said CMI Chief Executive Officer Bruce T. Blythe, author of
Blindsided: A Manager’s Guide to Catastrophic Incidents in the Workplace.
“While CISD ostensibly is practiced to help survivors of critical events purge themselves of emotional trauma, for some people it may seal in the very demons that may later morph into PTSD—the same illness that plagued legions of Vietnam veterans during the 1970s,” said Richard Gist, a community psychologist and associate professor at the University of Missouri-Kansas City.
The controversy has been fueled by findings from a study led by Israeli researcher Karni Ginzburg, who examined the occurrence of PTSD in people having different coping styles. Studying people who had suffered myocardial infarctions, she found that people with a “repressive” coping style—who ignore or divert their attention from a potentially traumatizing event—fared far better in the onset of PTSD and its earlier form, acute stress disorder, than did other personality types, such as “high-anxious” copers. For example, seven months after the event, while 19 percent of the high-anxious group had clinical PTSD and another 44 percent had subclinical symptoms, the repressors had only 7 percent and 11 percent, respectively.
“Encouraging natural repressors to bare their souls in a debriefing, or even requiring them to be in a room as others do, may interfere with their natural coping processes,” Gist explained. Debriefers, rather than helping survivors to distance themselves from an event, may tend to rush in and pry open vivid recollections that people are trying to excise.
Misuse by BusinessesAfter a critical incident, the priority for many employers is to rapidly normalize operations, leading to a classic mistake: After an initial debriefing, there is no follow-up with employees. This can have profound organizational repercussions, leading to prolonged workers’ compensation episodes and high job turnover.
According to Philip Deming, president of King of Prussia, Pa.-based Deming & Associates and a member of the Society for Human Resource Management’s Workplace Health, Safety and Security Committee, “Many companies act passive-aggressively, rushing to the rescue of employees right away, then burying the event as though it never happened,” he said. At one financial firm where a shooting occurred, after an initial debriefing the event was swept under the rug. “They lost every employee to turnover within six months because management didn’t want to deal with the ‘post’ piece of it,” Deming said.
Still, debriefings are standard policy these days for many businesses, which may handle them like a mandatory staff meeting. “The one-size-fits-all method of herding traumatized people into a room and doctoring them is both disrespectful and discounts their own ability to process events,” said E. Larry Newton, a psychologist with Peter Rock Consulting in Charlotte, N.C.
Further, while studies show that a person’s lifetime risk of exposure to an event that could give rise to post-traumatic reactions is between 60 percent and 90 percent, the proportion of individuals who actually reported PTSD was only 8 percent, according to the federal government’s National Comorbidity Survey released in 1995. “The challenge is in determining who the 8 percent are and when they need help,” adds Newton. “You won’t find that out by putting everyone through the same process. So why add insult to stress?”
Debriefing firms are starting to get the message. Today, Blythe, who considers himself a “recovering debriefer,” has reformatted his employer services accordingly. CMI’s newly minted “Resiliency Management Program” includes a crisis preparedness process that results in a business response plan; a post-crisis management consultation to address organizational needs; resiliency briefings, in which participants learn methods for personal recovery; a web site with the theme “Bouncing Back” that offers individualized education and research; and more specialized therapy to those exhibiting signs of PTSD. “We don’t do any more ‘rehashing,’ ” he said.
Rebutting the CriticsThe debriefing debate is not without its own controversy, though. According to Jeffrey T. Mitchell, clinical associate professor in the department of emergency health services at the University of Maryland-Baltimore County, many of the conclusions drawn by the debriefing research are invalid due to false assumptions and poor methodologies. In many studies, “inadequately trained personnel were misapplying a group process on individuals for whom the process was never designed and under circumstances in which the intervention would be considered inappropriate,” said Mitchell, who founded the CISD movement and who submitted a 59-page rebuttal to the research claims of critics.
Lawyers To Get The Final Say?
It may be the courts that get the last word in the debate. Employer failure to plan for traumatic workplace events, as well as harmful outcomes from CISD interventions, will be scrutinized as never before, according to Terri Stivarius, a partner in the San Francisco-based labor and employment law firm Littler Mendelson. She said she believes that the cumulative body of research on CISD and PTSD will spur a new breed of lawsuit.
“It could develop into the scenario in the 1980s movie Silkwood, where employees were exposed to contamination at an Oklahoma plutonium plant, but now with physical injuries being substituted with mental and emotional ones,” she said.
Stivarius speculated that litigation worries will have the greatest impact on employee assistance programs (EAPs), which commonly play matchmaker between staff or third-party debriefers and client organizations requesting CISD services. By limiting their purview to generalized workplace problems, she said EAPs may escape being sued by an employee alleging medical malpractice. Additionally, they will need to more carefully screen service providers who come to them claiming to be CISD specialists. “Most EAPs today offer debriefings as part of their standard service delivery package. But if an EAP’s screening process investigates only whether the person has had any debriefing training and, if they have, then count them as qualified, that EAP is going to be increasingly vulnerable.”
“HR professionals will eventually be held accountable for screening, too,” she adds. “There doesn’t right now exist a standard instrument that employers can use to screen critical incident specialists, but there needs to be one.”
—Rudy M. Yandrick
Study: U.S. Government Needs To Restructure Recruiting, Training
A series of reports researched and published by the U.S. Merit Systems Protection Board (MSPB) has found that the federal government’s recruiting and hiring processes are in serious need of an overhaul—especially the procedures for posting job vacancies.
The U.S. government has one of the largest and most experienced workforces in the world, and the MSPB reports give the workforce high marks for its current skill levels. However, the average age of a federal employee is 48, which means that over the next 10 to 15 years a large number of employees will reach retirement age. Projections show that nearly 600,000 federal workers are set to retire by 2010. The reports concluded that little is being done to recruit new workers and to provide current federal employees with the crucial skills and knowledge that will be lost as the older workers retire.
“The U.S. government just has not been hiring and training people to replace the talent and skills of the retiring workers,” said Steve Nelson, director of the MSPB Office of Policy Evaluation. His office is responsible for conducting studies of the civil service and merit systems within the federal government and for reviewing the processes and actions of the Office of Personnel Management.
Nelson said that the government’s looming workforce crisis is a paramount concern to President Bush, and that the administration clearly has demonstrated support for improving its HR functions by listing human capital development as one of its top five key objectives. When developing the MSPB research agenda for the next few years, Nelson said, it was obvious that his office needed to focus on government’s HR processes—primarily its hiring and recruiting efforts.
The most current report released by the MSPB is titled “Help Wanted: A Review of Federal Vacancy Announcements.” Nelson said his agency has planned a series of reports on recruiting and hiring that will focus on other key topics such as strategic recruitment and the impact of technology on hiring.
The latest MSPB reports have found that the government’s current processes and procedures for hiring workers are extremely cumbersome and, in many cases, actually discourage qualified workers from applying for jobs with the federal government.
“Myriad rules governing job vacancy announcements, appointments and applications make applying for a job with the federal government much too difficult and confusing,” Nelson said. “We really need to create a more streamlined and simplistic system.”
Recruiting processes and efforts also differ from agency to agency. While some federal agencies have kept up with the times, many have fallen flat and don’t do a very good job of attracting and hiring qualified job candidates, the reports revealed. For example, most government agencies rely almost exclusively on the government-sponsored job board, USAJOBS, to post announcements, with less than half (44 percent) posting job announcements on their own web sites.
Many of the problems directly relate to the lack of qualified HR managers within the federal government, according to Nelson. Cost and personnel reductions of the late 1980s and 1990s had a dramatic impact on the HR functions within the government, and some essential HR skills, such as recruiting, interviewing and selecting the best candidates, are now lacking within most federal agencies, he added. The report states that while many HR professionals in the federal government are highly competent, many others lack the expertise to develop and implement the necessary strategies for successful hiring programs.
“Much like the private sector, there has been a trend toward having more HR generalists on staff within the federal government,” Nelson said. “But unlike private enterprise, federal agencies don’t have the budget to outsource their recruiting functions, so these agencies now don’t have either the resources or talent for this key HR function.”
The newest MSPB report recommends that the federal government streamline and standardize its recruiting and hiring processes such as developing and implementing a comprehensive recruiting strategy with improved vacancy announcements as a major component. The report also recommends that federal agencies assess the competencies of their current HR staffs and develop a strategy to ensure HR professionals have the competencies and resources needed to carry out their responsibilities.
EEOC Enhances Customer Service For Persons With Limited English
The Equal Employment Opportunity Commission (EEOC) has enhanced services to limited English proficient (LEP) employer and employee communities. The updated agency-wide LEP plan will improve access, outreach and enforcement services to LEP communities by:
According to the U.S. Census Bureau, foreign-born residents of the United States numbered 32.5 million last year, accounting for 11.5 percent of the projected population. Many of these foreign-born people are of Hispanic and Asian origin and may speak little or no English.
"The Commission is responding to these trends by ensuring that all workers who call America home, regardless of English proficiency, fully understand their rights and recourses under the law," said EEOC Chair Cari M. Dominguez.
The LEP Plan is part of the EEOC's efforts to reach out to key stakeholder groups and increase its efficiency and effectiveness to better serve its customers.
The plan was first issued in December 2000 in accordance with Executive Order 13166, which requires that federal departments and agencies examine delivery of services to people with limited or no English proficiency and determine how to ensure meaningful access to these services.
Regulators Must Provide Better Benefits
NEW YORK—Federal regulators have been slow to provide guidance on benefit plan initiatives in recent years, according to one Treasury Department tax expert, but the pace is picking up.
William F. Sweetnam Jr., a benefits tax counsel at Treasury, delivered his assessments at the April 29–30 Employee Benefits Conference presented by the New York-based Conference Board, a business research organization. The conference, hosted by Ernst & Young, Fidelity Investments and Merck, focused on major changes gaining momentum in health and retirement benefits—particularly those that are putting more decision-making responsibility into employees’ hands.
The government has had “mixed success,” Sweetnam said, in regulating the emergence of employee-funded and -directed retirement plans such as 401(k)s in a landscape long dominated by employer-funded traditional pension plans. And regulating attempts to formulate cash-balance plans, he said, are “15 years too late.”
The timing was better, Sweetnam said, when the Internal Revenue Service (IRS) last year issued rules on taxation of employer-funded health reimbursement accounts—the cornerstone of the much-discussed consumer-directed health plans. Treasury and the IRS “tried to be right there when the change was happening,” he said.
On another high-profile benefits topic—phased retirement—attempts to adjust the rules are slower. “We’re not quite sure where people want to go on this,” Sweetnam said.
Healthy retirees with 10 to 30 productive years ahead of them are becoming “the largest untapped labor pool in the economy,” said C. Eugene Steurle, a senior fellow at the Washington, D.C.-based Urban Institute.
Ostacles to “letting older workers work,” he said, are found in retirement, tax and age-discrimination laws. Some of the tactics for circumventing such obstacles won’t pass muster, he said. “We’re going to have to figure out ways to let employers hire older workers” probably by re-examining the laws.
From the employee’s perspective, any change in benefits can be a cause for concern, noted Ellen Severoni, president of California Health Decisions, a consumer-oriented nonprofit organization based in Orange. She advocates consumers’ involvement in health decisions affecting them, but she has found, she said, that “it’s very difficult to get people activated before they get sick.”
Severoni said that when employers unveil a consumer-directed health plan option, employees become “extremely apprehensive that they’re going to lose something.” They also think they lack time and the ability to manage their health care, she added.
Consumer-directed health care, which is structured with financial incentives to encourage participants to be judicious in their health spending, is, in effect, “do-it-yourself” managed care, said Mark V. Pauly, who teaches in the Health Care Systems department of the University of Pennsylvania’s Wharton School in Philadelphia.
In some ways, Pauly said, the latest approach to health coverage is like one of the earliest approaches—the Blue Cross system. Both put the consumer “in the game” through coinsurance and requiring consumers to pay more for costlier physicians.
Pauly envisions the future of consumer-directed health coverage as “more than a boutique product but surely not a mass market...a decent product with some fans but little curb appeal.” He added that “the real issue and the real danger” in such an approach is consumer “backlash against risk.” In the end, solutions for major benefits problems will have to be worked out company by company, said Allen R. Janger, Conference Board program director. “There’s no magic bullet.”
—Terence F. Shea
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