Legislature(2005 - 2006)SENATE FINANCE 532
04/15/2005 09:00 AM Senate FINANCE
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
CS FOR SENATE BILL NO. 131(L&C) "An Act amending the Alaska Wage and Hour Act as it relates to the employment of a person acting in a supervisory capacity or in an administrative, executive, or professional capacity; relating to definitions under the Alaska Wage and Hour Act and providing definitions for persons employed in administrative, executive, and professional capacities, for persons working in the capacity of an outside salesman, for persons working in the capacity of a salesman employed on a straight commission basis, and for persons that perform computer-related occupations; and providing for an effective date." This was the first hearing for this bill in the Senate Finance Committee. JANE ALBERTS, Staff to Senator Con Bunde, the bill's sponsor, read from the sponsor statement as follows. Alaska's Wage and Hour Act (AS 23.10.050 - 23.10.150) establishes the provisions for overtime compensation. AS 23.10.055 sets forth exemptions to the Wage and Hour Act. One of these exemptions is "an individual employed in a bona fide executive, administrative or professional capacity or in the capacity of an outside salesman or a salesman who is employed on a straight commission basis". As currently defined in our administrative code, the definitions of "executive capacity," "administrative capacity," and "professional capacity" are confusing and difficult to interpret. In order to determine if someone is an executive, administrative or professional employee, you have to use what is known as the "long test." In addition to numerous other factors, the long test includes a calculation of the employee's time spent on "non-exempt work" (i.e. work that is not executive, administrative or professional). If an employee spends more than 20 percent (40 percent in retail or service establishments) of their time on non-exempt work, they become subject to the Wage and Hour Act and can qualify for overtime. The ambiguity within the definitions, including the implementation of the 80/20 test, has lead to numerous wage and hour lawsuits, causing great expense to employers and employees. HB 182 deletes the 80/20 test and sets forth definitions which are much more understandable. The simplicity provided by the new definitions will lead to greater compliance with the statute. It is in the best interests of both the employer and employee that the statutes are straightforward, practical and easy to follow. HB 182 also clarifies another area of confusion in the Wage and Hour provisions. Currently, a person acting in a "supervisory capacity" is exempt from payment of overtime, but not exempt from the full Wage and Hour Act. The definition of "supervisory capacity" in the regulations is also ambiguous and difficult to interpret. HB 182 removes this exemption from statute. There are two reasons for deletion of the provision. The first reason is that due to the uncertainty in interpretation of the definition, the statue is currently unworkable. Secondly, the new definitions of "executive capacity" and "administrative capacity" would subsume a person working in a supervisory capacity. Therefore, there is no need to have a separate provision. Enacting this bill will eliminate ambiguities, align Alaska more closely with other states and reduce the number of frivolous lawsuits, while protecting workers' rights to receive overtime. [NOTE: References to HB 182 should be correctly interpreted as references SB 131] Ms. Alberts informed the Committee that a forthcoming amendment would address the application of the proposed law. Co-Chair Green noted that Senator Bunde, although absent, has provided the forthcoming amendment. Senator Hoffman asked for further information about which states Alaska would be aligned were this legislation adopted. Ms. Alberts deferred to Mr. John Sedor of the Anchorage Society for Human Resource Management. JOHN SEDOR, Anchorage Society for Human Resource Management (ACHRM) testified via teleconference from an offnet site and noted that the ACHRM, which represents 200 business members, as well as the Society for Human Resource Management Alaska State Council, with approximately 250 business members, support this legislation. In response to Senator Hoffman's question, he stated that this bill would, foremost, align Alaska with federal system guidelines. Currently, Alaskan private employers and employees must comply with two sets of overtime standards: federal standards and State standards. This bill would move Alaska toward a single unified system for overtime, consistent with the federal Fair Labor Standards Act (FLSA). Thirty-two of the fifty-one jurisdictions in the nation, including the District of Columbia, defer solely to the federal standard. Eight others defer to a standard known as the "short test" rather than "the 80/20 test" that is applied in Alaska. In effect, were this legislation adopted, Alaska would mirror or be consistent with 40 of the 51 jurisdictions. Alaskan employers and employees would benefit by not having to apply two different standards to exempt executive, administrative and professional employees' hours each week. Co-Chair Green understood that this information is included in Members' packets. Mr. Sedor affirmed that this information is included in a handout titled "State by State Overtime Comparison, completed Spring, 2004 By: John M. Sedor" [copy on file]. Co-Chair Green stated that a breakout of states' standards is included in the handout. Senator Dyson surmised that the onus of adhering to the current standard has "more impact" on small enterprises than larger ones. Mr. Sedor replied that currently, any business "regardless of size" that has exempt employees and desires to conduct business in the State, must comply with two sets of standards. To that point, any business operating in Alaska as well as in other jurisdictions is required to establish a separate process for addressing Alaska's set of exempt employees standards. Smaller businesses are "especially impacted because the increased cost of administration is more difficult to bear on a small business than a larger business". Senator Dyson acknowledged the administrative impacts mentioned by Mr. Sedor, and further questioned this issue's impact on small businesses' manpower allocations in that an employee of a small business might be required to work in a "supervisory and leadership role" in addition to conducting "routine and manual labor duties" due to a limited employee base. Applying the exempt standard in this scenario is difficult. Mr. Sedor concurred that the existing statutory language is especially impacting to small businesses. People who are employed at an executive, administrative or professional exempt level "are hired to accomplish duties … and complete tasks". The time it might take to do something should be "irrelevant in the actual business model". The current law forces both sides into either maintaining "journals or requiring time entries that say" that the person spent six minutes making a pot of coffee, twelve minutes driving to the store; eight minutes reviewing people's work for the day; or two minutes opening the door. This legislation would move the existing mode of interpreting the exempt status "from a time-based unmanageable system" toward a system of a "primary or duties-based test where people are employed to do duties and that is what the courts would consider in determining whether or not they are exempt". Senator Dyson acknowledged the response. Senator Olson asked whether this legislation would align with FLSA. Mr. Sedor replied that certain aspects of Alaska's overtime standards differ from the federal standard. The federal standard is 40 hours a week whereas the Alaska standard is eight hours a day or 40 hours a week. This legislation would substantially move Alaska closer to the FLSA exempt definitional standards in regards to executive, administrative, and professional employees. Employers would only be required "to apply one test rather than two and that test is a duties based test". The State however would not be one of the 32 states that defers entirely to the federal FLSA. This legislation would provide an answer to the question "what is unique about overtime in Alaska?" The answer, in his perspective, is that Alaska pays higher wages than the rest of the nation. Therefore, to qualify for an exemption, Alaskan businesses must compensate an exempt administrative, executive or professional employee with a rate that is "two times the minimum" wage. Therefore, an exempt employee's salary in Alaska would be higher than the federal exempt wage requirement. Senator Olson asked whether the business community supports that salary requirement. Mr. Sedor responded that members of both the Anchorage Society for Human Resource Management and the Society for Human Resource Management Alaska State Council support this legislation. In response to a question from Co-Chair Green, Mr. Sedor specified that he had concluded his remarks and would be available to answer any further questions. Amendment #1: This amendment inserts new language in the bill title, following the word "occupations;" on page one, beginning on line seven, as follows. directing retrospective application of the provisions of this Act to work performed before the effective date of this Act for purposes of claims filed on or after the effective date of this Act, and disallowing retrospective application for purposes of claims for that work that are filed before the effective date of this Act; In addition, a new bill section is inserted on page five, following line 30 as follows. Sec. 6. The uncodified law of the State of Alaska is amended by adding a new section to read: APPLICATION AS TO WORK PERFORMED BEFORE THE EFFECTIVE DATE OF THIS ACT. (a) This Act applies retrospectively to work performed before the effective date of this Act for purposes of any claim or proceeding based on AS 23.10.050 - 23.10.150 (Alaska Wage and Hour Act) that is filed on or after the effective date of this Act. (b) This Act does not apply to work performed before the effective date of this Act for purposes of any claim or proceeding based on AS 23.10.050 - 23.10.150 that is filed before the effective date of this Act. Co-Chair Wilken moved on behalf of Senator Bunde, to adopt Amendment #1. Co-Chair Green objected for explanation Ms. Alberts explained that this amendment would provide the effective date for the application of the new primary duty-based standards. The current 80/20 State standard would be applied to any claim brought before that date and the new primary duties-based standard would be applied to any claim submitted after the effective date. 9:20:22 AM Mr. Sedor affirmed Ms. Alberts' remarks. A two-year "rolling week- by-week" statute of limitations applies to overtime lawsuits. This amendment specifies that, after the effective date, the rules specified in SB 131 would be applied to the entire claim for events up to two-years. This would allow one rule to be applied to the claim rather than having a debate about which weeks would be argued under the current standards and which weeks would be argued under the new standards. This is "an extremely practical approach to this issue". Co-Chair Green removed her objection and noted that this amendment would incur a title change. There being no other objection, Amendment #1 was ADOPTED. 9:22:43 AM KAREN ROGINA, President & CEO, Alaska Hospitality Alliance, testified via teleconference from an offnet site to voice the Alliance industry's support of this legislation. She asked that the Committee also support the bill. Not only is this an important bill for the hospitality industry, it is important to all employers with exempt employees, as it would apply a single set of standards, which would be easier to understand and comply with. Because the current Alaska exemption status is time-based, an employee's eligibility is determined by how the employee spends their time. This bill would change the definition of exempt status to one based on primary duties. This would better reflect "real life workplace roles". Business owners and operators should be able to rely on exempt workers to deliver results without being required "to micromanage" exactly those employees are spending their time. Oftentimes, a business owner or operator is not on site and is, therefore, "unable to ascertain just what their employees are doing. Instead they must manage by results achieved." Labor attorneys would support the fact that "this is one of the most litigated areas of wage and hour law". Ms. Rogina shared an example of a wage and hour dispute, which involved a prominent Kenai Peninsula hotel and its food and beverage director who "was considered exempt". The director oversaw a $750,000 budget and was responsible for hiring, firing, staffing, and the overall food, beverage, and catering responsibilities of the hotel. Upon that person's termination, she produced a "log" that detailed "by the minute how she spent her time each day". Due to a combination of "the seasonality changes" inherent to the hospitality industry and the employer's desire to provide year- round employment, there are times during the year when that employee could have bused a table or seated guests. However, her primary duties, for the most part, were those of an exempt employee. This lawsuit cost the employer thousands of dollars and almost put the hotel out of business. The hotel was "at a total loss of being able to prove otherwise" as it had not kept track of how the person had spent her time "by the minute" since she was a salaried employee. As a consequence of that lawsuit, the hotel now hires only hourly employees. That is the impact of the current standard on the industry. It is detrimental to employees as well, as, absent "a clearer definition of who is exempt and who is not", employers are denying their executive, professional, and management staff access to such things as better health insurance benefits that could otherwise be offered to them because "they are not a segregated group that could be classified differently". In conclusion, this legislation would benefit both employees and employers. 9:25:42 AM JACK AMON, Co-Owner, Marx Brothers Café and Marx Brothers Café Catering, and Member, Alaska Hospitality Alliance, testified via teleconference from an offnet site in support of the bill. The proposed changes regarding the exempt employee definition would be "a great step forward in modernizing Alaska's labor laws to more accurately reflect the current workplace"; specifically in regards to exempt employees in the hospitality and food service industries and in small businesses where both the employer and the employees "wear many hats". Alaska's 80/20 definition "is so onerous and restrictive that it has forced most operators to keep all employees, including those who head departments or supervise others, hourly. This results in negative impacts to both the employer and the employee" who might be the highest skilled and highest paid worker. As benefit costs increase, employers have been required to change their benefit plans to the effect that an employee must be salaried in order to qualify. Mr. Amon noted that two of his twelve restaurant employees would qualify as salaried employees as opposed to hourly employees under the new standards proposed in this bill. In his opinion, an employee with the authority to hire and fire and who is responsible for the work of others should be considered managers regardless of whether they work from behind a stove or behind a desk. He warned that this legislation might be interpreted by some as an opportunity through which employers could "cheat hardworking employees out of legitimate overtime; however, nothing could be further from the truth. In order to run a successful business, "it is essential" that quality employees are properly compensated for their skills. Such employees know that their skills are in demand and would not remain with an employer who attempted to take advantage of them. "The flexibility" offered by this legislation would allow "compensation arrangements" that would be beneficial to both the employee and the employer. 9:28:37 AM GREY MITCHELL, Director, Division of Labor Standards & Safety, Department of Labor and Workforce Development spoke in support of the bill, as it "would streamline the complex set of criteria for establishing overtime exemptions". One example of the 80-percent test is that under the current regulations, there is a fallback test, which requires only a 60-percent test when applied to service and retail establishments. However, there is a provisional requirement that the employee earn at least two times the federal minimal wage for the first 40 weekly work hours. Thus, while a minimal salary provision currently exists, it only pertains to the service and retail industries and only when applied to the 60- percent rather than 80-percent test. The Division's staff has occasionally experienced difficulty in explaining this to employers and employees. The proposed legislation would assist the Division in alleviating the often difficult "burden" of explaining the existing 80/20 Exempt Status Test to both employees and employers. Senator Stedman understood that this is a complex issue that even larger employers have trouble deciphering. Currently, employers could be subject to litigation involving "a revolving multi-year timeframe". Mr. Mitchell affirmed that this issue "has caused litigation". Years could pass before an employer might "find themselves at odds with the requirements". Sometimes, employees know the rules and start spending more than 20-percent of their time making coffee and other non-managerial duties and deliberately "put their employers in a difficult position, based on the complexity of the current definitions". Co-Chair Green asked whether this legislation would also simplify regulations. Mr. Mitchell replied that the legislation would remove the burden of issuing regulations because it would allow the Department "to simply adopt the federal regulatory definitions". Senator Olson, observing that no one has spoken against the bill, asked the reason that "it took so long" for it to be presented. Mr. Mitchell replied that he could not provide the answer to the question. Senator Olson noted that he had experience in the retail service area, and to that point, asked the reason that the 60/40 percent standard rather than the 80/20 standard is applied to that industry. Furthermore, he inquired whether this is addressed in the bill. Mr. Mitchell responded that the 40-percent test was established as a fall-back from the 80-percent standard as a result of concerns raised by those affected industries. The concerns being voiced today echo those earlier concerns. It is difficult to adhere to the current standards in those businesses where you need the manager to jump in and perform production related tasks in order to manage the business. In response to a question from Co-Chair Green, Senator Olson stated that he is in support of the legislation. Co-Chair Green voiced support for it as well. Co-Chair Wilken moved to report SB 131, as amended, from Committee with individual recommendations and accompanying fiscal notes. There being no objection, CS SB 131 (FIN) was REPORTED from Committee with previous zero Fiscal Note #1, dated March 14, 2005 from the Department of Labor and Workforce Development.