[House Report 106-358]
[From the U.S. Government Publishing Office]
106th Congress Report
HOUSE OF REPRESENTATIVES
1st Session 106-358
======================================================================
REWARDING PERFORMANCE IN COMPENSATION ACT
_______
October 1, 1999.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Goodling, from the Committee on Education and the Workforce,
submitted the following
R E P O R T
together with
MINORITY VIEWS
[To accompany H.R. 1381]
[Including cost estimate of the Congressional Budget Office]
The Committee on Education and the Workforce, to whom was
referred the bill (H.R. 1381) to amend the Fair Labor Standards
Act of 1938 to provide that an employee's ``regular rate'' for
purposes of calculating overtime compensation will not be
affected by certain additional payments, having considered the
same, report favorably thereon with an amendment and recommend
that the bill as amended do pass.
The amendment is as follows:
Strike out all after the enacting clause and insert in lieu
thereof the following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Rewarding Performance in Compensation
Act''.
SEC. 2. REGULAR RATE FOR OVERTIME PURPOSES.
Section 7(e) of the Fair Labor Standards Act of 1938 is amended--
(1) by inserting before the semicolon at the end of paragraph (3)
the following: ``; or (d) the payments are made to reward an employee
or group of employees for meeting or exceeding the productivity,
quality, efficiency, or sales goals as specified in a gainsharing,
incentive bonus, commission, or performance contingent bonus plan'';
and
(2) by inserting after and below paragraph (7) the following:
``A plan described in paragraph (3)(d) shall be in writing and made
available to employees, provide that the amount of the payments to be
made under the plan be based upon a formula that is stated in the plan,
and be established and maintained in good faith for the purpose of
distributing to employees additional remuneration over and above the
wages and salaries that are not dependent upon the existence of such
plan or payments made pursuant to such plan.''.
Purpose
The purpose of H.R. 1381 is to amend the Fair Labor
Standards Act of 1938 to provide that an employee's ``regular
rate'' for the purpose of calculating overtime compensation
will not be affected by certain additional payments.
Committee Action
104TH CONGRESS
The Subcommittee on Workforce Protections held a hearing on
June 8, 1995, which focused on several issues under the Fair
Labor Standards Act, including the problems associated with the
use of bonus and gainsharing programs. The witnesses who
testified were: Kathleen M. Fairall, Senior Human Resource
Representative, The Timken Company, located in Randolph County,
North Carolina; Ms. Sandie Moneypenny, Process Technician, The
Timken Company, located in Randolph County, North Carolina; Dr.
Richard W. Beatty, Professor of Industrial Relations and Human
Resources, School of Management and Labor Relations, Rutgers
University, New Brunswick, New Jersey; and Mr. Robert J.
Niedzielski, Director of Human Resources, Tighe Industries,
Inc., York, Pennsylvania, testifying on behalf of the Society
for Human Resource Management.
On March 14, 1996, Representative Cass Ballenger introduced
H.R. 3087, legislation amending the Fair Labor Standards Act to
provide that an employee's ``regular rate'' for the purpose of
calculating overtime compensation will not be affected by
certain additional payments.
105TH CONGRESS
Representative Cass Ballenger introduced H.R. 2710, the
Rewarding Performance in Compensation Act, on October 23, 1997.
The Subcommittee on Workforce Protections held a hearing on the
legislation on July 16, 1998. The following individuals
testified at the hearing: Ms. Anita U. Hattiangadi, Economist,
Employment Policy Foundation, Washington, D.C.; Ms. Jodi P.
Holt, Manager of Compensation, Cordant Technologies, Inc,
Ogden, Utah; Ms. Sally K. Fanning, SPHR, CCP, Director of
Compensation and Benefits for Praxair, Inc., Connecticut,
testifying on behalf of the Society for Human Resource
Management; and Mr. Michael T. Leibig, Attorney-at-Law,
Zwerdling, Paul, Leibig, Kahn, Thompson, & Wolly, Fairfax,
Virginia.
106TH CONGRESS
Representative Cass Ballenger introduced H.R. 1381, the
Rewarding Performance in Compensation Act, on April 13, 1999.
The Subcommittee on Workforce Protections held a hearing on the
legislation on April 13, 1999. The following individuals
testified: Ms. Margaret A. Coil, Partner, Center for Workforce
Effectiveness, Northbrook, Illinois; Ms. Pam Farr, President
and Chief Operating Officer, Cabot Advisory Group, LLC,
Washington, D.C.; Ms. Lynne Bourgeois, SPHR, Director of Human
Resources, BlueCross BlueShield of Louisiana, Baton Rouge,
Louisiana, testifying on behalf of the Society for Human
Resource Management; and Mr. Nicholas Clark, Assistant General
Counsel, United Food and Commercial Workers International
Union, Washington, D.C.
On May 19, 1999, the Subcommittee on Workforce Protections
ordered H.R. 1381 favorably reported without amendment by voice
vote. The Committee on Education and the Workforce ordered the
bill favorably reported, as amended, to the House of
Representatives by a rollcall vote of 26-22 on June 23, 1999.
Committee Statement and Views
Background
The Fair Labor Standards Act of 1938 \1\ (FLSA) is the
primary federal statute which regulates the wages and hours of
work for most workers. Among other things, the FLSA mandates
that employees who are ``nonexempt'' from its provisions
receive an overtime rate of one-and-one-half times the
employee's ``regular rate'' of pay for all hours worked over 40
within a seven-day period. An employee's regular rate of pay
generally must include all ``remuneration for employment'' with
the exception of certain narrowly prescribed statutory
exemptions.\2\
---------------------------------------------------------------------------
\1\ 29 U.S.C. Sec. 201-219.
\2\ 29 U.S.C. Sec. 207(e)(1)-(7).
---------------------------------------------------------------------------
For example, the regular rate does not include, ``* * *
sums paid as gifts; * * * the amounts of which are not measured
by or dependent on hours worked, production, or efficiency.''
\3\ Likewise, ``payments made for occasional periods when no
work is performed due to vacation, holiday, illness, failure of
the employer to provide sufficient work, or other similar
cause'' \4\ are not required to be calculated as part of the
employee's regular rate of pay. Neither are ``* * * reasonable
payments for traveling expenses, or other expenses, incurred by
an employee in the furtherance of his employer's interests and
properly reimbursable by the employer; and other similar
payments to an employee which are not made as compensation for
his hours of employment.'' \5\
---------------------------------------------------------------------------
\3\ 29 U.S.C. Sec. 207(e)(1).
\4\ 29 U.S.C. Sec. 207(e)(2).
\5\ Ibid.
---------------------------------------------------------------------------
The FLSA also excludes from calculation of the regular rate
``sums paid in recognition of services performed during a given
period if either (a) both the fact that payment is to be made
and the amount of the payment are determined at the sole
discretion of the employer at or near the end of the period and
not pursuant to any prior contract, agreement, or promise
causing the employee to expect such payments regularly, or (b)
the payments are made pursuant to a bona fide profit-sharing
plan or trust or bona fide thrift or savings plan, meeting the
requirements of the Administrator set forth in appropriate
regulations which he shall issue, having due regard among other
relevant factors, to the extent to which the amounts paid to
the employee are determined without regard to hours of work,
production, or efficiency.'' \6\
---------------------------------------------------------------------------
\6\ 29 U.S.C. Sec. 207(e)(3).
---------------------------------------------------------------------------
The FLSA thus makes three distinctions which are relevant
here. First, the FLSA distinguishes between bonuses paid to
different employees. Bonuses paid to so-called ``exempt''
employees, the largest category of whom are professional,
managerial, and administrative, require no particular
recordkeeping or compensation treatment. Bonuses paid to
``nonexempt'' employees may have to be treated as part of the
employee's regular rate of pay and the employee's hourly and
overtime rates recalculated to take any bonus into account.
Second, the FLSA distinguishes between discretionary and
non-discretionary bonuses. Bonuses for which the employer has
the sole discretion as to their payment and amount are not
required to be included as part of the employee's regular rate
of pay. On the other hand, non-discretionary bonuses, which
reward employees according to an agreed upon schedule or
formula for meeting (either individually, as a team, as a
workplace or as a company) performance measures such as
quality, productivity, efficiency, or health and safety goals,
are regarded as part of the regular rate. If a bonus is paid
under such a schedule or formula, the employer must compute the
bonus as part of the employee's regular rate of pay for the
entire period of work on which the level of performance has
been achieved. The employer must then divide the bonus by all
of the hours worked by the employee and retroactively include
that amount in the hourly rate used to determine overtime pay.
Third, the FLSA distinguishes between performance bonuses
tied to company profits (profit-sharing plans) and performance
bonuses tied to other factors and measures, such as quality,
productivity, sales, and safety. While payments to an employee
under profit-sharing plans are not included in the employee's
regular rate, payments to an employee based on other
performance measures are required to be included in the
employee's regular rate. This is so, despite the fact that
current human resource policies and compensation programs often
favor the use of gainsharing plans over profit-sharing because
gainsharing plans can be linked to the performance of an
individual or a group of individuals, while profit-sharing
plans depend on the organization as a whole and are often
dependent on a great many other factors.
The Subcommittee on Workforce Protections has heard much
testimony over the past few years that these distinctions and
the current treatment of performance bonuses under the FLSA are
outdated and, most importantly, do not benefit the very
employees which the FLSA is intended to protect.
Testimony before the Subcommittee, as well as other
studies, shows that performance bonuses result in increased pay
for employees, as well as improved performance by the company.
Dr. Richard W. Beatty, professor of industrial relations and
human resources, School of Management and Labor Relations,
Rutgers University, put the issue in the context of other
changes in the workplace, changes that have occurred and are
occurring in order for companies to compete in the ever-
changing and very competitive world marketplace: \7\
---------------------------------------------------------------------------
\7\ Hearings on the Fair Labor Standards Act before the
Subcommittee on Workforce Protections, Committee on Education and the
Workforce, U.S. House of Representatives, 104th Congress, First
Session, June 8, 1995, Serial No. 104-46, pp. 191-192.
* * * I think what we are seeing in the revision of
pay plans is that pay plans are going to be based more
and more upon the contributions of workers, the
competencies of workers, the collaboration of working
in teams, their creativity * * *
These plans, and what's happening in incentive pay, I
believe have very real benefits for individuals, give
them the opportunity to earn more, also you give the
firm an opportunity to become more competitive * * *
Gainsharing is one type of pay plan that links pay to
measurable improvements in productivity. Employees are given
individual or group productivity goals, and the savings
achieved from such improvements, or the gains, are then shared
between the company and the employees. The payouts are based
directly on factors under an employee's control, such as
productivity or costs, rather than on the company's profits.
Thus, employees directly benefit from improvements that they
help to produce by increasing their overall compensation.
Gainsharing and other similar type plans allow employees not
only to increase their wages, but also to share in the success
of the company, to improve productivity, to have more control
over their jobs, and to have more involvement in decision-
making.
In 1998 testimony before the Subcommittee, economist Anita
U. Hattiangadi reviewed the results of a number of studies
which have shown that gainsharing plans result in improved
productivity and increased pay for workers: \8\
---------------------------------------------------------------------------
\8\ Hearing on H.R. 2710, the Rewarding Performance in Compensation
Act, before the Subcommittee on Workforce Protections, Committee on
Education and the Workforce, U.S. House of Representatives, 105th
Congress, Second Session, July 16, 1998, Serial No. 105-132, pp. 5-6.
An early study by Eldridge Puckett of gainsharing
found that productivity improvements in the first two
years of plan implementation range between ten and 49
percent, with average productivity growth of 23
percent.
A study by the General Accounting Office found that
most firms achieved average labor cost savings of 17
percent, which they attributed to performance
improvements in employees, improved employee attitudes,
and improved productivity.
A study by Roger Kaufmann of all firms known to have
info-share or gainsharing plans, found that the median
firm experienced a five to 15 percent increase in
productivity. That's compared to a two percent increase
for all manufacturing firms.
Finally, a study by the American Compensation
Association found that most gainsharing plans
translated into 129 percent net return to firms, on
average. Gains per employee were about $2,000 per year.
* * * In addition to these productivity increases,
there are also substantial increases in workers' wages
that are realized through gainsharing. When gains are
distributed to workers through bonus payouts, their
compensation rises and their standards of living rise
accordingly.
Aggregate studies show that gainsharing bonuses range
from three to 29 percent of base pay. Workers in the
Puckett study earned average bonuses equal to 17
percent of gross pay during a two-year period, and
individual firms' bonuses range between eight and 29
percent. In the Kaufmann study, mean and median bonus
payouts during the first quarter of plan operation were
four and six percent of wages and salaries,
respectively, and remained significant over time.
Gainsharing payouts in the ACA study were approximately
three percent of base pay and had a median value of
$700.
These studies show that workers can achieve
significant productivity and wage gains through a
gainsharing plan. In fact, EPF research shows that a
median-wage worker could earn a total of $17,000 to
$26,000 more over a 20-year period if gainsharing and
teams were implemented and more widespread.
Not only do performance bonus plans, such as gainsharing,
help achieve more productive businesses and higher pay for
employees, but they also are an important part of meaningful
employee involvement and allow employees to have a greater
share in their company's success. In fact, President Clinton
has urged business groups to share ``the benefits when times
are good'' \9\ by working in partnership with employees.\10\
---------------------------------------------------------------------------
\9\ Strobel, Warren P., ``Clinton Prods U.S. Firms to Treat Their
Workers Better.'' The Washington Times, March 24, 1996.
\10\ Given President Clinton's admonition in this regard, it is
unfortunate that his administration is opposed to legislation that
would encourage businesses to share their success with workers.
---------------------------------------------------------------------------
Despite the benefits of performance bonus and gainsharing
plans for employees, the FLSA currently discourages employers
from offering such plans to their nonexempt employees. This
point has been made repeatedly in testimony before the
Subcommittee. As. Ms. Margaret A. Coil, a partner with the
Center for Workforce Effectiveness in Northbrook, Illinois,
testified: \11\
---------------------------------------------------------------------------
\11\ Hearing on the Rewarding Performance in Compensation Act
before the Subcommittee on Workforce Protections, Committee on
Education and the Workforce, U.S. House of Representatives, 106th
Congress, First Session, April 13, 1999, Serial No. 106-17, pp. 40, 47.
* * * We and many of our clients, are looking for
ways to make employees ``business partners'' and
provide opportunities to share in the success of the
business.
Goalsharing, gainsharing and incentive compensation
are labels used to speak to these monetary linkages
between business performance and rewards. Under the
current statutory framework, these programs are
problematic when applied to the nonexempt workforce of
a firm.
Companies are also trying to minimize the trappings
of hierarchy to ensure that all employees feel free to
participate in the organization. The collaboration
required to be successful and to make the workplace an
engaging environment is also impeded by the strict
interpretations we have seen from the DOL. The DOL is
valiantly trying to apply sixty year old labor law to a
workplace that was not envisioned when the regulations
were enacted. At the same time, employers are trying to
understand and comply with these regulations that make
little sense in the current reality of work, the
workplace and today's workers.
* * * Does it make sense to continue to enforce
provisions written for and about a workplace that has
all but become extinct? Is it not time that the
regulations be amended to fit the realities of work
today in the United States?
I am not suggesting that the Fair Labor Standards Act
be removed and abandoned. I do believe that there needs
to be a reasonable framework within which all employers
can legally operate in this country. At the same time,
it is important that employers and employees be
afforded the flexibility to ensure a workplace that is
responsive to the diversity, complexity, and the
intellectual contribution necessary to succeed.
Sally K. Fanning, director of compensation and benefits for
Praxair, Inc., explained the effect of the outdated provisions
of the law on her company: \12\
---------------------------------------------------------------------------
\12\ Hearing on H.R. 2710, the Rewarding Performance in
Compensation Act, before the Subcommittee on Workforce Protections,
Committee on Education and the Workforce, U.S. House of
Representatives, 105th Congress, Second Session, July 16, 1998, Serial
No. 105-132, p. 8.
We compete very globally, and we need to be able to
use every tool available to reward and motivate
employees. It's important that you understand that SHRM
does not take exception with the intent or the spirit
of the FLSA. The contention is with the outdated
provisions. The regulation that we are talking about
today was essentially written in 1953, 45 years ago.
And it was really intended to address individual
productivity incentive systems such as piece-rate
systems for cut-and-sew type of operations. Very easy
to measure on an individual basis.
Today's incentive rewards focus on group
productivity, teams, company-wide profit-sharing. The
regulations do encourage profit-sharing, but they do
not encourage productivity-improvement programs, nor
employee-ownership programs.
The Committee believes that the FLSA creates a disincentive
for employers to include hourly workers in employee bonus and
gainsharing programs. For other types of employees, such as
executive, administrative, or professional employees who are
exempt from minimum wage and overtime, an employer can easily
give financial rewards without having to recalculate rates of
pay. Yet, hourly workers should have the same opportunity as
salaried workers to participate in gainsharing programs. Ms.
Lynne Bourgeois, director of human resources for BlueCross
BlueShield of Louisiana, told the Subcommittee that employees
want to be rewarded for a job well done: \13\
---------------------------------------------------------------------------
\13\ Hearing on the Rewarding Performance in Compensation Act
before the Subcommittee on Workforce Protections, Committee on
Education and the Workforce, U.S. House of Representatives, 106th
Congress, First Session, April 13, 1999, Serial No. 106-17, p. 67.
* * * They want to feel like a key player on a
winning team. Different standards such as ``how
incentives must be paid'' continue to separate non-
exempt and exempt employee groups. Today's employees
are not well served by the outdated provision of the
FLSA. It discourages companies from fully motivating
---------------------------------------------------------------------------
and rewarding their employees for their hard work.
Ms. Coil also described how, in her experience, the regular
rate requirements of the FLSA deter many employers from
implementing bonus or gainsharing programs for their nonexempt
workforce: \14\
---------------------------------------------------------------------------
\14\ Ibid., p. 45.
The restrictions of [the] FLSA make adopting
incentive compensation for nonexempt employees
problematic at best. They force employers to choose
between complying with the regulations or opting to
restrict incentive compensation to their exempt
---------------------------------------------------------------------------
workforce where it can be simply applied.
Many employers who choose to operate performance-based pay
plans for their nonexempt workforce can be burdened with
unpredictable and complex administrative costs. The
administrative costs of recalculating each employee's regular
rate and overtime rate can be substantial, taking up much of
the money that the employer has set aside for the employee
bonuses. Ms. Pam Farr, president and chief operating officer,
Cabot Advisory Group, LLC, testified that: \15\
---------------------------------------------------------------------------
\15\ Ibid., p. 58.
* * * the amount of human resources staff time
required to recalculate overtime pay after the bonus
amounts have been determined has partially caused
companies to slow down the pace with which they roll
out such bonus plans. Although calculating overtime on
an employee's bonus is not impossible, it consumes a
significant amount of staff time * * * For example, a
single bonus payment for a single employee may involve
three or four steps that must be performed by a person,
and for companies that have multiple facilities in
several states, the calculations take on geometric
proportions. While much can be computerized, it still
takes time and effort to build the programs, test for
compliance, calculate weekly wage reports, and cut the
bonus checks. Many executives when faced with the
decision of either implementing additional bonus
programs or allocating the staff's time to improve
administration of existing programs would opt for the
latter. Employees would be better served if the
employer spent additional time communicating the plans
to employees, training them on how to satisfy customers
to become more efficient, and celebrating and honoring
---------------------------------------------------------------------------
their efforts above and beyond the average.
Current law also reinforces the concept that employees
should be paid only on the basis of how many hours they work,
rather than on their contribution to gains in productivity,
quality of service, or other similar type goals. In complying
with the regular rate requirements prescribed in the FLSA,
companies are compelled to reward employees based on the time
that they are on the clock versus their contribution to the
organization. Ms. Farr described how the FLSA is a barrier to
team-based bonus plans: \16\
---------------------------------------------------------------------------
\16\ Ibid., p. 57.
* * * [T]he FLSA effectively precludes companies from
offering bonus plans because it requires bonuses to be
included in the employee's regular rate of pay.
Companies must pay overtime compensation based upon
this higher hourly rate, distorting overtime pay.
By requiring companies to pay employees overtime on a
bonus payment, the FLSA contradicts the messages that
companies attempt to send through such payments. The
bonuses are not given merely to increase employee's
base pay. Rather, they are provided for achieving goals
that go well beyond performing the minimum job
requirements. Employees who delight the customers and
think of ways to increase sales, improve manufacturing
processes, or otherwise save money by being more
efficient should receive a bonus. Because the bonus is
paid separately, and for distinct reasons, it should be
differentiated from base pay or the overtime premiums
that employees receive.
Similarly, Ms. Kathleen M. Fairall, senior human resource
representative with the Timken Company in Randolph County,
North Carolina, told of how current law undermines rewards
based on teamwork: \17\
---------------------------------------------------------------------------
\17\ Hearings on the Fair Labor Standards Act before the
Subcommittee on Workforce Protections, Committee on Education and the
Workforce, U.S. House of Representatives, 104h Congress, First Session,
June 8, 1995, Serial No. 104-46, p. 184.
Currently, the Act requires that if an employer wants
to provide employees a non-discretionary bonus, they
must determine the period of time covered by the bonus,
for that period recalculate the previously established
regular rate of pay or base pay by adding in the
proposed bonus payment, and then recalculate any
overtime pay that had been paid during the time covered
by the bonus. If that sounds complicated, there's a
simple reason. It is. And as a result, a non-exempt
employee who works overtime in that period receives the
bonus and then an additional ``extra'' payment for his
or her recalculated overtime. The employee who does not
work overtime or who is exempt does not receive this
``extra'' payment.
This type of preferential treatment strikes a blow to
the heart of work teams--essentially the law is saying
``you are equal, except with bonus payments.'' Each
member of a team contributes equally to the business
and this must be reflected in equal bonus payments.
This is the foundation on which self directed teams
must be built.
Ms. Sandie Moneypenny, a process technician for the Timken
Company, described the effect of current law on self-directed
work teams: \18\
---------------------------------------------------------------------------
\18\ Ibid., p. 187.
* * * In our plant, we have some pieces of equipment
that are not as dependable as others and some processes
that are slower than the rest. The people in these
areas work more hours. They would receive a larger
bonus than the other associates in the plant. Just
because these people work more hours does not mean they
are more valuable than the rest of us. They could
actually be not as efficient at operating their process
or may not be as experienced at maintaining their
---------------------------------------------------------------------------
equipment.
It is true that many employers do maintain performance
bonus and gainsharing plans for their nonexempt employees.\19\
Some employers do so unaware that the FLSA treats such bonuses
as part of the employees' regular rate--until they happen to be
audited by the Department of Labor.\20\ Other employers have
maintained such programs despite the administrative difficulty
and expense of doing so, and despite the fact that the FLSA's
current treatment of performance bonuses can undermine the
purpose of the gainsharing or performance bonus plan. For many
employees, however, the current burdens and costs imposed on
performance bonuses and gainsharing programs simply prevents
such bonuses from being available to them.\21\
---------------------------------------------------------------------------
\19\ A recent survey by William M. Mercer indicated that 24 percent
of large and midsize companies use team-based incentive pay.
\20\ As Mr. Robert J. Niedzielski from Tighe Industries, Inc., in
York, Pennsylvania, testified before the Subcommittee in April 1999:
``We thought we were being a good employer by sharing profits with our
associates. We thought we had been a responsible employer by paying
wages far above the minimum and complying with the overtime provisions
of the FLSA. Finally, we thought we had been a fair employer, by
consistently applying the criteria for bonus determination.''
\21\ In April 1999 testimony before the Subcommittee, Ms. Lynne
Bourgeois testified about her experience with her former employer: ``We
implemented a management incentive program--the sales group had
commission and sales incentives but the support staff, all non-exempt,
received base pay and overtime. Consequently, the support staff often
felt left out and not appreciated since they were not able to
participate in the branch's financial success. After considering the
issue, we decided not to implement a gainsharing program for the
support staff because of the time and effort that would have been
necessary to perform the bureaucratic calculations.''
---------------------------------------------------------------------------
The Committee does not believe that the current treatment
of performance bonuses and gainsharing plans is necessary or
beneficial for employees. Federal law should not discourage
companies from implementing such plans, yet that is what the
FLSA currently does.
Legislation
The Rewarding Performance in Compensation Act is intended
to make performance bonuses and gainsharing more available to
employees by removing the current obstacles to such plans in
the FLSA. Under the bill, payments ``made to reward an employee
or group of employees for meeting or exceeding the
productivity, quality, efficiency, or sales goals'' would not
be considered part of the employee's regular rate of pay.
As introduced, H.R. 1381 specified that such payments must
be made pursuant to a compensation plan; in other words, an
employer could not utilize such performance bonuses on an ad
hoc basis. During the Committee's consideration of the bill,
opponents of the bill argued that employers would abuse the
change made by H.R. 1381, particularly, they alleged, by
redesignating a portion of an employee's regular, base pay as a
performance bonus and thereby avoid paying overtime on that
portion of the employee's hourly pay. The specific example
given was an employee who is paid $10 per hour. Opponents
alleged that his employer would continue to pay $10 per hour,
but the employer would designate some portion of the $10--for
example, $4 as a ``performance bonus.'' As a result, under this
hypothetical, if the employee worked overtime, he or she would
receive the time-and-one-half overtime rate only on $6, rather
than on the employee's real hourly rate of $10.
As was pointed out during the Subcommittee and full
Committee markups on H.R. 1381, this hypothetical ignores a
number of practical considerations. It also ignores current
Department of Labor regulations prohibiting false or ``pseudo''
bonuses, regulations that are unchanged by H.R. 1381 and would
remain in place. Those regulations read as follows: \22\
---------------------------------------------------------------------------
\22\ 29 C.F.R. Sec. 778.502.
(a) The term ``bonus'' is properly applied to a sum
which is paid as an addition to total wages usually
because of extra effort of one kind or another, or as a
reward for loyal service or as a gift. The term is
improperly applied if it is used to designate a portion
of regular wages which the employee is entitled to
receive under his regular wage contract * * *
(e) The general rule may be stated that wherever the
employee is guaranteed a fixed or determinable sum as
his wages each week, no part of this sum is a true
bonus and the rules of determining overtime due on
bonuses do not apply.
In short, the law currently prohibits, and would continue
to prohibit, the hypothetical situation that opponents claim
would result from the passage of H.R. 1381.
In order to further ensure that H.R. 1381 accomplishes the
goal of increasing employee pay by promoting legitimate
performance bonuses and gainsharing plans and not be
misconstrued or misused, the Committee adopted an amendment in
the nature of a substitute which was offered by Rep. Cass
Ballenger, the chief sponsor of H.R. 1381 and the Chairman of
the Subcommittee on Workforce Protections.
The amendment is similar to long-standing Department of
Labor regulations defining when payments made to employees
under profit-sharing plans are not included in the employee's
regular rate of pay.\23\
---------------------------------------------------------------------------
\23\ 29 C.F.R. Sec. 549.0-549.4.
---------------------------------------------------------------------------
First, the amendment requires that the plan under which the
performance bonus is provided and calculated be in writing and
made available to employees. The requirement ensures that
employees are informed about the performance bonus and the
basis and manner on which it is calculated. It also provides
further assurance to employees that, contrary to claims made by
the opponents of H.R. 1381, an employer may not arbitrarily
claim that some portion of an employee's regular, hourly pay is
deemed a performance bonus on which overtime need not be paid.
Second, the amendment requires that the plan specify the
formula by which the performance bonus to be paid to the
employees is to be calculated. As is the case under the
Department of Labor's regulations for profit-sharing plans, the
formula stated may be ``per capita'' (that is, each employee
covered by the plan will receive the same amount if a certain
goal is reached or exceeded.) Alternatively, the bonus may vary
by individual or group performance. In either case, the plan
must state how the performance bonus or gainsharing payment is
calculated and when it is to be paid.
Third, the amendment states that the plan for paying
performance bonuses or gainsharing payments must be
``established and maintained in good faith for the purpose of
distributing to employees additional remuneration over and
above the wages and salaries that are not dependent upon the
existence of such plan or payments made pursuant to such
plan.'' This requirement further ensures that any attempt by an
employer simply to ``rename'' a portion of an employee's
regular hourly rate as a ``performance bonus'' is not permitted
under H.R. 1381. The performance bonus must be separately
determined and identified as such to the employee and must be
``over and above'' the employee's regular base pay.
H.R. 1381 does not prohibit an employer from changing pay
plans, for example, changing from all base pay to a base pay
plus performance bonus, even if such a change may result in
changes in the amount of base pay. But, in order for the
performance bonus to be exempt from the regular rate, it must
be ``established and maintained in good faith,'' that is, to
carry out the purposes of the performance plan itself and not
to evade or avoid paying employees time-and-a-half overtime
compensation.
Performance plans and gainsharing payment plans are
obviously of great variety. One of the witnesses who testified
before the Subcommittee on Workforce Protections described a
performance bonus plan that was instituted for housekeepers and
other employees of Fairfield Inns: \24\
---------------------------------------------------------------------------
\24\ Hearing on the Rewarding Performance in Compensation Act
before the Subcommittee on Workforce Protections, Committee on
Education and the Workforce, U.S. House of Representatives, 106th
Congress, First Session, April 13, 1999, Serial No. 106-17, pp. 6-7.
* * * [I]n our small hotels, we recognized that it
had to be a team approach. We were all interdependent.
Housekeepers, front-desk, laundry, maintenance, and
sometimes restaurant workers, all had to be part of a
moving-part, organic organization. The housekeepers
couldn't check people in if the rooms weren't ready or
if the plumbing didn't work. Our housekeepers needed
fresh linens. Our front-desk people couldn't check
people out unless all of the bill was in order.
So, we worked with employees. This was very important
when we began the gainsharing plans. We talked to the
employees about ``what they would think if we had a
gainsharing type plan?'' We worked with the managers
and compensation experts, ``how would they be able to
administer it?''
We had a very strong belief that we needed to reward
the associates on top of their base pay. We actually
calculated these bonuses based on actual guest
comments. People like yourselves that were checking out
of our hotels, who rated us on room cleanliness, on
friendliness, on services, and all of the amenities.
The bonuses were paid out quarterly, and it averaged in
our beginning years from $200-300 per quarter.
* * * We would ask the housekeepers, ``how do you
think we can improve the check-in speed?'' We would ask
them about the room amenities, and they gave us great
information. They listened to the customers, who
oftentimes were in the room when they began cleaning.
We learned from our employees. They also helped us
adjust the bonus plans over time.
Such a plan involves different considerations and factors
than a performance bonus, for example, for employees at a
manufacturing plant. The goal of H.R. 1381 is to provide
protections against abuse while allowing flexibility for
employers and employees to structure such plans in ways that
meet their needs. Current law also balances these two factors,
but does so in a way that, as the testimony verifies,
discourages employers from maintaining such plans for their
nonexempt, hourly employees. The Committee believes that a
better balance is struck by H.R. 1381, which encourages greater
use of performance bonuses but maintains protections against
abuse.
Conclusion
H.R. 1381 will not reduce the pay of workers; it will
encourage employers to include more of their hourly workers in
performance bonus plans and thereby increase their
compensation. Nor does H.R. 1381 in any way affect the 40-hour
workweek or the right to overtime pay on employees' regular,
hourly wage. It simply brings the 1938 Fair Labor Standards Act
a step closer to meeting the workplace realities as we enter
the 21st century.
In conjunction with the Committee's markup of H.R. 1381,
the Secretary of Labor sent a letter \25\ expressing the
Administration's opposition to the legislation. The letter
unfortunately ignored the realities of current workplace needs
and policies and, in response, Rep. Cass Ballenger sent the
following letter to Secretary Herman:
---------------------------------------------------------------------------
\25\ Letter dated June 22, 1999, from Alexis M. Herman, Secretary
of Labor, U.S. Department of Labor, to the Honorable William F.
Goodling, Chairman, Committee on Education and the Workforce, U.S.
House of Representatives.
Subcommittee on Workforce Protections,
Committee on Education and the Workforce,
Washington, DC, May 25, 1999.
Hon. Alexis M. Herman,
Secretary of Labor, U.S. Department of Labor,
Washington, DC.
Dear Madam Secretary: I must respond to the excessive
rhetoric in your letter to me dated May 19, 1999, expressing
the Department of Labor's views on H.R. 1381, the ``Rewarding
Performance in Compensation Act.'' Your letter arrived just as
the Subcommittee on Workforce Protections was beginning the
markup of several bills, including H.R. 1381. The timing of its
arrival couldn't have been more indicative of its rhetorical
rather than substantive intent.
As I'm sure you know, the purpose of H.R. 1381 is to
encourage companies to implement bonus, ``gainsharing,'' and
similar compensation plans that provide a means for employees
to share directly in the benefits the company receives when the
employees' efforts produce improvements in any number of
areas--productively, product or service quality, safety, etc.
Your predecessor as Secretary of Labor, Mr. Reich,
frequently criticized American companies for, in his view,
failing to share their success with their employees. In that
context, he frequently urged employers to implement employee
gainsharing programs. President Clinton has echoed the same
theme and has encouraged employers to implement employee
gainsharing programs. Additionally, as I am sure you are aware,
studies have shown that employee gainsharing programs have
helped American workers become more productive and led to
increased compensation for employees. I regret that you and
your Department apparently do not share your predecessor's
encouragement for compensation programs by which employees can
directly share in the success that their efforts have helped to
achieve.
The Subcommittee on Workforce Protections has received
considerable testimony, over several Congresses, from companies
large and small, that a principal deterrent to providing or
expanding gainsharing programs for non-exempt workers is the
current treatment of bonus and gainsharing programs under the
Fair Labor Standards Act (FLSA). H.R. 1381 attempts to address
that very issue, thereby encouraging wider use of gainsharing
programs.
During our hearings on this issue, only one witness has
taken the same approach as you expressed in your letter, that
is, to say that any change in the law is unwarranted. That
witness testified that the number of hours worked should be the
only way in which an employee's contribution is measured. Not
only is this position inconsistent with current law (profit
sharing and employed benefits, for example, are not now
included in the employee's regular rate), but it also reflects
a view of work that is increasingly at odds with what employees
want and what the workplace of the 1990s demands.
Beyond that, your letter repeats the old, worn out rhetoric
that any legislation that amends the FLSA to make it fit the
workplace of the 1990s rather than the 1930s is ``an assault on
the 40-hour workweek.'' If in fact, as you say in your letter,
employers would simply decrease employees' hourly wage as a
result of H.R. 1381, then any profit-making company would
already be doing so under the exclusion from regular rate for
``profit sharing'' payments that was added to the FLSA in 1949.
The rhetoric in your letter simply makes no sense.
I have made very clear and I am willing to work with anyone
to improve the legislation to address any legitimate concerns.
Your letter of May 19, however, contributes nothing towards
constructive discussion or the needs of employees as we enter
the 21st century.
Sincerely,
Cass Ballenger,
Chairman.
Summary
The bill would amend the Fair Labor Standards Act to
specify that an employee's regular rate of pay for the purposes
of calculating overtime would be unchanged by additional
payments that reward or provide incentives for meeting
productivity, quality, efficiency or sales goals. Any incentive
plan offered pursuant to the bill must be in writing and made
available to employees, the amount of the payments must be
based on a formula that is stated in the plan, and the plan
must be established and maintained in good faith for the
purpose of distributing additional compensation over and above
the employee's wages and salaries.
Section-by-Section Analysis
Section 1. Short title
``Rewarding Performance in Compensation Act''.
Section 2. Regular rate for overtime purposes
Adds a new provision to section 7(e)(3) of the Fair Labor
Standards Act of 1938 which specifies that certain payments can
be excluded from the calculation of the employee's regular rate
of pay if the payments are made to reward an employee or group
of employees for meeting or exceeding the productivity,
quality, efficiency, or sales goals as specified in a
gainsharing, incentive bonus, commission, or performance
contingent bonus plan.
Adds a new provision after section 7(e)(7) which specifies
that such plan shall be in writing and made available to
employees, provide that the amount of the payments to be made
under the plan be based upon a formula that is stated in the
plan, and be established and maintained in good faith for the
purpose of distributing to employees additional remuneration
over and above the wages and salaries that are not dependent
upon the existence of such plan or payments made pursuant to
such plan.
Explanation of Amendments
The Amendment in the Nature of a Substitute is explained in
the body of this report.
Application of Law to the Legislative Branch
Section 102(b)(3) of Public Law 104-1 requires a
description of the application of this bill to the legislative
branch. This bill amends the Fair Labor Standards Act of 1938
to provide that an employee's ``regular rate'' for the purpose
of calculating overtime compensation will not be affected by
certain additional payments. The bill does not prevent
legislative branch employees from receiving the benefits of
this legislation.
Unfunded Mandate Statement
Section 423 of the Congressional Budget and Impoundment
Control Act (as amended by Section 101(a)(2) of the Unfunded
Mandates Reform Act, P.L. 104-4) requires a statement of
whether the provisions of the reported bill include unfunded
mandates. This bill amends the Fair Labor Standards Act of 1938
to provide that an employee's ``regular rate'' for the purpose
of calculating overtime compensation will not be affected by
certain additional payments. As such, the bill does not contain
any unfunded mandates.
Rollcall Votes
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee Report to include for
each record vote on a motion to report the measure or matter
and on any amendments offered to the measure or matter the
total number of votes for and against and the names of the
Members voting for and against.
Correspondence
Congress of the United States,
House of Representatives,
Washington, DC, September 23, 1999.
Hon. William F. Goodling,
Chairman, House Education and the Workforce Committee, Rayburn House
Office Building, Washington, DC.
Dear Mr. Chairman, Due to other legislative
responsibilities, I was unable to be present for the House
Education and Workforce Committee vote on H.R. 1381, the
Rewarding Performance in Compensation Act. Had I been present I
would have voted in the affirmative. Please include this in the
full committee report. Thank you.
Sincerely,
Matt Salmon,
Member of Congress.
Statement of Oversight Findings and Recommendations of the Committee
In compliance with clause 3(c)(1) of rule XIII and clause
(2)(b)(1) of rule X of the Rules of the House of
Representatives, the Committee's oversight findings and
recommendations are reflected in the body of this report.
New Budget Authority and Congressional Budget Office Cost Estimate
With respect to the requirements of clause 3(c)(2) of rule
XIII of the House of Representatives and section 308(a) of the
Congressional Budget Act of 1974 and with respect to
requirements of 3(c)(3) of rule XIII of the House of
Representatives and section 402 of the Congressional Budget Act
of 1974, the Committee has received the following cost estimate
for H.R. 1381 from the Director of the Congressional Budget
Office:
U.S. Congress,
Congressional Budget Office,
Washington, DC, July 2, 1999.
Hon. William F. Goodling,
Chairman, Committee on Education and the Workforce, House of
Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 1381, the
Rewarding Performance in Compensation Act.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Christina
Hawley Sadoti.
Sincerely,
Barry B. Anderson
(For Dan L. Crippen, Director).
Enclosure.
H.R. 1381--Rewarding Performance in Compensation Act
H.R. 1381 would amend the Fair Labor Standards Act of 1938
to provide that an employee's regular rate of compensation for
purposes of calculating overtime compensation will not be
affected by additional payments, such a performance bonuses.
CBO estimates that enactment of H.R. 1381 would have no
significant impact on the federal budget. Because the bill
would not affect direct spending or receipts, pay-as-you-go
procedures would not apply.
H.R. 1381 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act and
would impose no net costs on state, local, or tribal
governments.
This estimate was prepared by Christina Hawley Sadoti
(federal cost), Susan Sieg (impact on state, local, and tribal
governments), and Karuna Patel (impact on the private sector).
This estimate was approved by Paul N. Van de Water,
Assistant Director for Budget Analysis.
Statement of Oversight Findings of the Committee on Government Reform
With respect to the requirement of clause 3(c)(4) of rule
XIII of the Rules of the House of Representatives, the
Committee has received no report of oversight findings and
recommendations from the Committee on Government Reform on the
subject of H.R. 1381.
Constitutional Authority Statement
Pursuant to clause 3(d)(1) of rule XIII of the Rules of the
House of Representatives, the Committee finds that the
Constitutional authority for this legislation is provided in
Article I, section 8, clause 3, which grants Congress the power
to regulate commerce with foreign nations, among the several
States, and with the Indian tribes.
Committee Estimate
Clauses 3(d)(2) of rule XIII of the Rules of the House of
Representatives requires an estimate and a comparison by the
Committee of the costs that would be incurred in carrying out
H.R. 1381. However, clause 3(d)(3)(B) of that rule provides
that this requirement does not apply when the Committee has
included in its report a timely submitted cost estimate of the
bill prepared by the Director of the Congressional Budget
Office under section 402 of the Congressional Budget Act.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported are shown as follows (new matter is
printed in italic and existing law in which no change is
proposed is shown in roman):
SECTION 7 OF THE FAIR LABOR STANDARDS ACT OF 1938
maximum hours
Sec. 7. (a) * * *
* * * * * * *
(e) As used in this section the ``regular rate'' at which an
employee is employed shall be deemed to include all
remuneration for employment paid to, or on behalf of, the
employee, but shall not be deemed to include--
(1) * * *
* * * * * * *
(3) sums paid in recognition of services performed
during a given period if either, (a) both the fact that
payment is to be made and the amount of the payment are
determined at the sole discretion of the employer at or
near the end of the period and not pursuant to any
prior contract, agreement, or promise causing the
employee to expect such payments regularly; or (b) the
payments are made pursuant to a bona fide profit-
sharing plan or trust or bona fide thrift or savings
plan, meeting the requirements of the Secretary of
Labor set forth in appropriate regulations which he
shall issue, having due regard among other relevant
facts, to the extent to which the amounts paid to the
employee are determined without regard to hours of
work, production, or efficiency; or (c) the payments
are talent fees (as such talent fees are defined and
delimited by regulations of the Secretary) paid to
performers, including announcers, on radio and
television programs; or (d) the payments are made to
reward an employee or group of employees for meeting or
exceeding the productivity, quality, efficiency, or
sales goals as specified in a gainsharing, incentive
bonus, commission, or performance contingent bonus
plan;
* * * * * * *
A plan described in paragraph (3)(d) shall be in writing and
made available to employees, provide that the amount of the
payments to be made under the plan be based upon a formula that
is stated in the plan, and be established and maintained in
good faith for the purpose of distributing to employees
additional remuneration over and above the wages and salaries
that are not dependent upon the existence of such plan or
payments made pursuant to such plan.
* * * * * * *
MINORITY VIEWS
We strongly oppose H.R. 1381. This legislation effectively
repeals the requirement that workers be paid time-and-a-half
for hours worked in excess of 40 hours a week. There are
approximately 73 million workers who are entitled to overtime
pay. The number of overtime hours worked are presently at or
near an all-time high. Since 1990, overtime work has increased
by one third in the manufacturing sector.
Under current law, a worker is entitled to time-and-a-half
pay based on all incentive based pay a worker receives. H.R.
1381 permits employers to exclude performance-related bonuses
from the calculation of a workers' overtime pay. A worker who
is making $10 an hour today is entitled to $15 an hour for
overtime work. H.R. 1381 would provide a financial incentive to
employers to reduce base pay to the minimum wage, $5.15 an
hour, and convert all additional compensation to some form of
bonus.
For example, this bill would allow an employer to pay a $10
an hour worker $5.15 and an additional bonus of $4.85 an hour
for the first forty hours worked in a week. Under this
arrangement the employee appears to be receiving the same rate
of pay per hour. However, when the employee works overtime,
H.R. 1381 provides that instead of receiving $15 an hour, the
employee would only be entitled to $7.73 an hour. In effect,
H.R. 1381 enables employers to require workers to work overtime
for less than the normal amount of compensation they receive
for regular hours worked. Simply put, this legislation
encourages employers to make workers work longer hours for less
pay and will result in the creation of fewer jobs as a
consequence.
The Majority contends that an amendment in the nature of
substitute adopted in Committee will ensure that the
legislation is not abused. Notwithstanding that amendment, this
bill remains fatally flawed. The amendment provides that a
bonus plan must be written and that the bonus must be in
accordance with a specific formula. Additionally, the amendment
provides that the bonus plan must be ``established and
maintained in good faith for the purpose of distributing to
employees additional remuneration over and above the wages and
salaries that are not dependent upon the existence of such
plan.'' By definition, every bonus is in addition an employee's
regular wage. Nothing in this amendment says that an employer
may not reconfigure the pay or lower the wages of current
employees. However, even if the amendment prevented employers
from reconfiguring the pay of current employees, this bill
remains fatally flawed. Such a provision would simply have the
effect of providing financial incentive for employers to
displace current workers with new workers. There is nothing in
this legislation that prevents an employer from restructuring
the compensation package of a new worker or a worker who is
moved into a new job. The ultimate consequence of the
legislation remains the same.
Proponents of H.R. 1381 also claim that existing Department
of Labor regulations will ensure that the provisions of the
legislation will not result in the restructuring of workers'
pay. As quoted by the Majority, those regulations provide:
(a) The term ``bonus'' is properly applied to a sum
which is paid as an additional to total wages usually
because of extra effort of one kind or another, or as a
reward for loyal service, or as a gift. The term is
improperly applied if it is used to designate a portion
of regular wages which the employee is entitled to
receive under his regular wage contract * * *
(e) The general rule may be stated that wherever the
employee is guaranteed a fixed or determinable sum as
his wages each week, no part of this sum is a true
bonus and rules of determining overtime due on bonuses
do not apply.
The intent of these provisions is to prevent an employer
from claiming ad hoc that a part of an employees regular wage
is a bonus that would otherwise be exempt from the overtime
calculation. However, these provisions do not restrict an
employer from establishing the employee's wage at any level the
employer desires and the provisions do not restrict an employer
from providing additional compensation in the form of bonuses.
Claims of the Majority notwithstanding, nothing in these
regulations prevents an employer from establishing an
employee's ``wage'' at the minimum wage rate and providing
additional compensation in the form of performance bonuses. Far
from prohibiting this, H.R. 1381 encourages it by ensuring that
no part of the bonus will be used in calculating the employee's
overtime pay.
Our Republican colleagues claim that employers would not be
so cost conscious as to try to reduce overtime costs by
converting wages to bonuses. Controlling overtime costs has
been, is, and will remain an important management objective.
However, this bill provides important additional financial
incentives for employers. The potential savings to employers,
not only in terms of reduced overtime pay, but in terms of
reduced hiring, training, and fringe benefit costs are such
that, ultimately, employers will have to take advantage of the
loophole created by H.R. 1381 in order to remain competitive.
The fact is that enactment of H.R. 1381 would make it much
cheaper for employers to work fewer workers for longer hours
than to hire new workers for a second shift.
Finally, it is hard to give credence to the justification
proffered by the proponents of this legislation that it is too
difficult for employers to offer bonuses if they must account
for overtime. As the Majority notes, thousands of employers
operate gainsharing plans and other performance based bonus
plans for non-exempt workers. Calculating for overtime does not
require an employer to generate any new information. The
employer already knows how many hours the employee has worked,
how many overtime hours the employee has worked, and what the
employee has been paid for those hours so far. Calculating a
bonus for employees that includes proper overtime is an easy
process, as the Department of Labor's regulations make clear
(see 29 CFR Section 778.209). Where employees have already been
paid their regular hourly rate for non-overtime work and have
already been paid time-and-a-half for overtime hours,
additional pay due to a bonus is easily computed simply by
multiplying the number of overtime hours worked over the period
for which the bonus is paid by one-half of the overall hourly
increase in pay caused by the bonus payment.
Employees have been paying performance based bonuses to
workers in compliance with the Fair Labor Standards Act for
more than fifty years. To contend that it is now too difficult,
in an era when there is widespread use of payroll services and
virtually universal computer access, is not credible.
Eliminating or reducing overtime pay is nothing less than a
pay cut for millions of working families who work extra hours
to make ends meet. H.R. 1381 jeopardizes their living standards
at the same time that it effectively requires them to work
longer for less.
The Majority is seeking to impose this pay cut upon workers
at a time when corporate profits are at unprecedented levels
and executive incomes are not just 10 to 20 times greater than
workers' salaries, but are 200 to 400 times greater. The
Democrats on this Committee are committed to increasing the
income of low wage workers by increasing the minimum wage. The
Majority continues to block a minimum wage increase, while
pushing legislation that undermines overtime pay and decreases
workers' income. It is difficult to imagine a more wrong-headed
piece of legislation than H.R. 1381.
William L. Clay.
Dale E. Kildee.
Major R. Owens.
Patsy T. Mink.
Tim Roemer.
Lynn Woolsey.
Chaka Fattah.
Carolyn McCarthy.
Ron Kind.
Harold E. Ford, Jr.
David Wu.
George Miller.
Matthew G. Martinez.
Donald M. Payne.
Robert E. Andrews.
Bobby Scott.
Carlos Romero-Barcelo.
Ruben Hinojosa.
John F. Tierney.
Loretta Sanchez.
Dennis J. Kucinich.
Rush Holt.