Wage and Hour Division Cuts Raise Enforcement Concerns

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By Chris Opfer and Ben Penn

Oct. 28 — Proposed cuts to the Labor Department's Wage and Hour Division could throw a wrench in the Obama administration's plans to enforce new overtime protections and crack down on worker misclassification.

The “significant cuts” to the WHD included in a pair of appropriations bills pending in Congress would mean fewer inspectors, less enforcement and less back pay collected, Deputy Labor Secretary Chris Lu told Bloomberg BNA Oct. 27.

Although Lu said he was “cautiously optimistic” about a budget deal recently reached to raise caps on government spending, he added that “it's still unclear how the money gets divided among the department.”

Those concerns are likely to help shape what may be weeks of wrangling among lawmakers over DOL appropriations before the short-term funding measure currently keeping the government open runs out Dec. 11.

The proposed spending reduction comes as the department works to finalize rules for an ambitious overtime pay expansion and the WHD looks to combat what officials say is employers' increasing misclassification of workers to skirt employment, tax, workers' compensation and other laws.

A number of former wage and hour chiefs and other DOL officials told Bloomberg BNA that the spending reductions could stop the department from beefing up overtime and worker classification investigations. They said they still expect the department to focus on those areas of enforcement, however.

“My expectation is that raising workers’ wages and protecting worker pensions is high on the president's list,” Seth Harris, a former deputy labor secretary in the Obama administration, told Bloomberg BNA Oct. 27. “That doesn't mean that the Labor Department will get a lot of money, but I expect them to get some additional money to ensure that those efforts are carried through to their fruition.”

Next Appropriations Steps Unclear

The budget deal forged earlier this week is likely to ease some of the Labor Department spending cuts featured in individual appropriations bills pending in Congress. Hardline Republican opposition to the agreement means that leadership in both chambers will need to woo Democrat support to get spending legislation passed, but appropriators will still likely need to prioritize various DOL agencies in doling out funds.

A measure (S. 1695) to fund the Labor Department, the Department of Health and Human Services and related agencies approved by a Senate committee in June would trim this year's $227.5 million WHD funding allotment by $17.5 million, while a similar House bill (H.R. 3020 ) would cut spending about $12 million (122 DLR A-10, 6/25/15). The proposed spending levels are as much as a quarter less than the $277.1 million that the president sought for the division in his annual budget request (21 DLR C-2, 2/2/15).

The bills also include policy riders that would roll back various Obama administration labor initiatives like new DOL conflict-of-interest rules for retirement advisers and an executive order (E.O. 13,673) requiring federal contractors to disclose labor and employment law violations.

Republicans and employer groups have criticized the Wage and Hour Division as overly aggressive in recent years. They're also rallying in opposition to a proposed overtime rule (RIN 1235–AA11) that would make some 5 million additional workers eligible for time-and-a-half pay for all hours worked in excess of 40 per week (125 DLR AA-1, 6/30/15).

Sen. Lamar Alexander (R-Tenn.), who sits on the Labor-HHS Appropriations subcommittee, didn't say whether the proposed WHD funding cut is a response to the overtime rule when asked by Bloomberg BNA. He was quick to criticize the regulation, however, saying it will force many employers to shift workers to hourly positions to meet swelling payroll costs.

“I think they should rescind the overtime rule,” Alexander told Bloomberg BNA Oct. 26. “The rule is a disaster for every restaurant and many small businesses in the country, and it hurts employees who are suddenly going to become hourly workers instead of on a career path going up.”

The DOL is currently in the process of reviewing thousands of public comments on the proposed regulation, which would limit the white collar exemption for certain management and professional employees by more than doubling the salary limit for automatic overtime eligibility to $50,440 per year from $23,660.

Harris and former WHD Administrators Tammy McCutchen and Paul DeCamp said they expect final publication anywhere from February 2016 through the summer, with the rule going into effect up to 120 days thereafter.

“This is a tried and true Republican strategy, to effectively obliterate laws by understaffing the agencies that enforce them,” Sen. Chris Murphy (D-Conn.) told Bloomberg BNA Oct. 26. “They've been doing this to the Department of Labor for a long time.”

Other program offices that would see funding cuts under the pending appropriations bills include the Occupational Safety and Health Administration, the Office of Federal Contract Compliance Programs and the Bureau of Labor Statistics.

Size Might Not Matter

While a funding reduction of any size could limit the Wage and Hour Division's ability to effectively enforce the overtime regulation and misclassification guidance, those initiatives should be protected by their priority status, several former agency officials told Bloomberg BNA.

The general consensus among the George W. Bush and Obama appointees to top DOL positions is that having fewer investigators and resources could prevent the agency from scaling up enforcement to the administration's ideal level. However, both the overtime rule implementation and investigations targeting the “fissured workplace” will remain major focus areas in 2016, they said.

“Regardless of what the ultimate appropriation is for the Wage and Hour Division, there will be arguments that if only we had more dollars, we could've done more,” DeCamp, a WHD administrator from 2006-2007, said in an interview. “The agency under any funding scenario will need to make choices about how to prioritize its enforcement efforts. If the funding falls substantially below the budget request then the Wage and Hour Division may have a more difficult time breaking new ground.”

DeCamp, a shareholder at Jackson Lewis P.C., said major cuts might curtail investigations in multiple new areas not historically under the WHD microscope that current Administrator David Weil would like to explore for wage recovery. This includes “sectors not previously addressed” and arguments that joint employment relationships exist between franchisees and franchisors.

After his 2014 confirmation (81 DLR A-13, 4/28/14), Weil quickly took steps to transition from complaint-driven enforcement toward a more efficient, directed approach aimed at companies that are most likely violating laws and employing vulnerable workers (91 DLR A-7, 5/12/14).

Further, the WHD chief announced his intention to apply to enforcement his previous academic focus on multiemployer, or “fissured,” workplaces. By fissured, Weil refers to the practice of companies shedding their own workers in favor of temporary staff or other contracted labor for functions that fall outside of employee core competencies.

Weil has also signaled that the DOL is likely to take a closer look at how employers classify their workers for minimum wage and overtime eligibility purposes. Weil said in guidance issued in July that “most workers” should be considered employees covered under the Fair Labor Standards Act, rather than independent contractors not protected by the law's wage and hour requirements (135 DLR AA-1, 7/15/15).

A spokesman for Weil declined Bloomberg BNA's request for comment. Speaking at a June 15 conference, the administrator said that while Obama's fiscal year 2016 budget request is “great news,” even if approved, “the troubling piece” is that 1,300 investigators is still only slightly above the size in 1979, when the workforce was much smaller.

Number of Enforcement Personnel Fluctuates

Full implementation of Weil's misclassification instructions requires an operating budget that provides a “sufficient number of enforcement personnel” who are properly trained to target the intended work sites and employees, said former Obama administration DOL official Harris, who now practices law at Dentons and teaches at Cornell University.

A slashed budget would also risk WHD's ability to upgrade “some outdated technologies, like the case management system inside Wage and Hour, and giving investigators ready mobile access to the Wage and Hour network so that they can be more productive and efficient,” Harris added. That said, he noted that already under Obama there's been a “dramatic improvement in productivity” at WHD from investigators “working smarter,” not just harder.

McCutchen, the Wage and Hour administrator from 2001-2004 and now a a principal at Littler Mendelson P.C. in Washington, said Weil is already working with considerably greater resources than her $160 million budget in 2004. Plus, there are 500 more full-time equivalent employees now than there were at the end of the Bush administration, she said, meaning Weil should have an appropriate staffing level to carry out his top goals even if the major boost requested by Obama is not approved.

If the Republican-proposed appropriations levels for WHD were realized, “that's something they can absorb just through tightening their belts a little bit,” McCutchen said. Any potential layoffs are likely to come from administrative or other non-enforcement employees, according to McCutchen.

McCutchen added that expectations on enforcement activity do not automatically correlate with the number of investigators. She cautioned that the WHD isn't guaranteed to improve its wage recovery efforts just by increasing the sheer size of the investigative workforce. More important is that the existing staff is thoroughly trained, which requires patience, according to McCutchen.

For instance, McCutchen cited the addition of 300 full-time employees in 2010 from the prior year. WHD's collection of back wages fell to $130 million from $137 million over the same period.

Even in the scenario in which WHD receives a “substantially reduced appropriation,” thereby limiting the “agency's bandwidth to engage in enforcement activities,” DeCamp said he expects to see an uptick in private enforcement.

Education On Overtime to Come Before Enforcement

Enforcement of the overtime rule would face similar constraints from a major decline in WHD resources. Still, Harris anticipates aggressive investigations to ensure compliance with the new rule will begin further down the road, taking a backseat to employer and worker education in 2016.

“I think education will come first, and efforts to get employers to voluntarily comply” with the regulation, before enforcement will come later, Harris said. Such education still costs money, meaning the “effectiveness of the implementation of the rule, the ability to engage employers and employees” might “be hampered if sufficient funds are not provided.”

McCutchen, who led the WHD in 2004—the last time the agency updated its overtime threshold—disagreed. She said the department started an initiative to ensure compliance as soon as the rule was finalized. “I'm not sure why that wouldn't happen in an Obama administration,” McCutchen said.

To contact the reporter on this story: Chris Opfer in Washington at copfer@bna.com and Ben Penn in Washington at Ben Penn

To contact the editor responsible for this story: Susan J. McGolrick at smcgolrick@bna.com