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105th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES

 2d Session                                                     105-558
_______________________________________________________________________


 
                    SALES INCENTIVE COMPENSATION ACT

                                _______
                                

  June 3, 1998.--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 AND ADDITIONAL VIEWS

                        [To accompany H.R. 2888]

      [Including cost estimate of the Congressional Budget Office]

  The Committee on Education and the Workforce, to whom was 
referred the bill (H.R. 2888) to amend the Fair Labor Standards 
Act of 1938 to exempt from the minimum wage recordkeeping and 
overtime compensation requirements certain specialized 
employees, 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 ``Sales Incentive Compensation Act''.

SEC. 2. EXEMPTION.

  Section 13(a) of the Fair Labor Standards Act of 1938 (29 U.S.C. 
213(a)) is amended by striking the period at the end of paragraph (17) 
and inserting a semicolon and by adding at the end the following:
          ``(18) any employee employed in a sales position if--
                  ``(A) the employee has specialized or technical 
                knowledge related to products or services being sold;
                  ``(B) the employee's--
                          ``(i) sales are predominantly to persons who 
                        are entities to whom the employee's position 
                        has made previous sales; or
                          ``(ii) position does not involve making sales 
                        contacts;
                  ``(C) the employee's position requires a detailed 
                understanding of the needs of those to whom the 
                employee is selling;
                  ``(D) the employee's position requires the employee 
                to exercise discretion in offering a variety of 
                products and services;
                  ``(E) the employee receives--
                          ``(i) base compensation, determined without 
                        regard to the number of hours worked by the 
                        employee, of not less than an amount equal to 
                        one and one-half times the minimum wage in 
                        effect under section 6(a)(1) multiplied by 
                        2,080; and
                          ``(ii) in addition to the employee's base 
                        compensation, compensation based upon each sale 
                        attributable to the employee;
                  ``(F) the employee's aggregate compensation based 
                upon sales attributable to the employee is not less 
                than 40 percent of one and one-half times the minimum 
                wage multiplied by 2,080;
                  ``(G) the employee receives a rate of compensation 
                based upon each sale attributable to the employee which 
                is beyond sales required to reach the compensation 
                required by subparagraph (F) which rate is not less 
                than the rate on which the compensation required by 
                subparagraph (F) is determined; and
                  ``(H) the rate of annual compensation or base 
                compensation for any employee who did not work for an 
                employer for an entire calendar year is prorated to 
                reflect annual compensation which would have been 
                earned if the employee had been compensated at the same 
                rate for the entire calendar year.''.

SEC. 3. CONSTRUCTION.

  The amendment made by section 2 may not be construed to apply to 
individuals who are employed as route sales drivers.

                                Purpose

    The purpose of H.R. 2888, the Sales Incentive Compensation 
Act, is to amend the Fair Labor Standards Act to provide that 
certain specialized ``inside'' sales employees may be exempt 
from minimum wage, overtime compensation, and record-keeping 
requirements.

                            Committee Action

    During the 104th Congress, the Subcommittee on Workforce 
Protections held a hearing on the treatment of inside sales 
employees under the Fair Labor Standards Act. The following 
individuals testified at the hearing, which was held on October 
25, 1995: Mr. Chris Lute, President of Lute Plumbing Supply, 
Inc., Portsmouth, Ohio; Mr. Kevin M. Priest, Vice President of 
the Cleveland Plant and Flower Company, Cleveland, Ohio; and 
Ms. Deborah Dietrich, Senior Legislative Representative, 
Service Employees International Union.
    A second hearing was held on the issue during the 105th 
Congress by the Subcommittee on Workforce Protections on May 
13, 1997. Testimony was heard from the following individuals: 
Mr. Anthony L. Williams, Sales Associate, Ferguson Enterprises, 
Incorporated, Baltimore, Maryland; Ms. Leronda Lucky, Inside 
Sales Associate, the Berry Company, Ohio; and Ms. Deborah 
Siday, Vice President of Human Resources, Atlantic Food 
Services, Inc., Manassas, Virginia. On November 7, 1997, 
Representatives Harris W. Fawell and Robert E. Andrews 
introduced H.R. 2888, ``The Sales Incentive Compensation Act.''
    On March 5, 1998, the Subcommittee on Workforce Protections 
approved H.R. 2888, as amended, by voice vote and ordered the 
bill favorably reported to the Full Committee. On April 1, 
1998, the Committee on Education and the Workforce approved 
H.R. 2888, as amended, by voice vote, and ordered the bill 
favorably reported.

                     Committee Statement and Views

                               Background

    The Fair Labor Standards Act (FLSA),\1\ which was enacted 
in 1938, is the primary federal statute regulating the wages 
and hours of work. The Act covers employees who are (1) engaged 
in interstate commerce, or (2) engaged in the production of 
goods for travel for interstate commerce, or (3) employed in an 
enterprise engaged in commerce or in the production of goods 
for commerce. For covered or ``nonexempt'' employees, the FLSA 
sets a minimum wage of $5.15 per hour and requires, as a 
general rule, that hours of work by nonexempt employees in 
excess of 40 hours in a seven-day period be compensated at a 
rate of one-and-one-half times the employee's regular rate of 
pay. In addition, the FLSA requires employers to maintain 
records which reflect the employees' hours of work and wages 
received. There are, however, a number of exemptions from the 
minimum wage and/or overtime requirements under the FLSA for 
specific groups of employees, including certain employees who 
work in sales.
---------------------------------------------------------------------------
    \1\ 29 U.S.C. Sec. 201-219.
---------------------------------------------------------------------------
    For example, the FLSA contains an exemption from minimum 
wage and overtime for ``any employee employed * * * in the 
capacity of outside salesman.'' \2\ Whether or not a sales 
employee can qualify for the exemption depends on where the 
work is performed and whether the employee is employed to 
sell.\3\ The employee must customarily and regularly work away 
from the employer's place of business for the purpose of 
selling tangible or intangible items, or obtaining orders or 
contracts for services or use of facilities. In addition, the 
hours of work in activities unrelated to sales can not exceed 
20 percent of the hours worked in the workweek by nonexempt 
employees of the employer.\4\
---------------------------------------------------------------------------
    \2\ 29 U.S.C. Sec. 213(a)(1).
    \3\ ``Executive, Administrative, Professional and Outside Sales 
Exemptions Under the Fair Labor Standards Act,'' WH Publication 1363, 
U.S. Department of Labor, Employment Standards Administration, Wage and 
Hour Division.
    \4\ 29 C.F.R. Sec. 541.500-508.
---------------------------------------------------------------------------
    The FLSA also contains an exemption from overtime for 
certain sales employees of retail or service (but not 
wholesale) establishments. Three conditions must be met in 
order for an employee to qualify for the exemption: (1) the 
employee must be employed by a retail or service establishment, 
as defined by the Department of Labor; (2) the employee's 
regular rate of pay must exceed one-and-one-half times the 
applicable minimum wage for every hour worked in a workweek in 
which overtime hours are worked, and (3) more than half the 
employee's total earnings in a representative period (not less 
than one month) must consist of commissions on sales of goods 
or services.\5\
---------------------------------------------------------------------------
    \5\ 29 U.S.C. Sec. 207(i).
---------------------------------------------------------------------------
    A third category of sales employee--whose importance in 
many businesses is growing as technology advances and the 
marketplace becomes ever more global in scope--is an individual 
who works primarily at the employer's facility, using phone, 
fax, and computer connections to communicate with non-retail 
customers. These sales employees may deal with sophisticated 
products or function as both consultant and salesperson to 
customers, yet neither of the existing sales employee-specific 
FLSA exemptions reaches them. These are ``inside sales'' 
employees to whom H.R. 2888 is addressed.
    Many of these inside sales employees have been considered 
exempt under the general exemption for ``administrative'' 
employees in section 13 (a)(1) of the FLSA. Unfortunately, 
section 13 (a)(1) is a general exemption written many years ago 
without today's professional sales person in mind, and the 
result is a confusing situation as to whether these sales 
persons qualify for the ``administrative'' exemption.
    Two recent cases demonstrate the problem. In Martin v. 
Cooper Electric Supply Co.,\6\ the Third Circuit Court of 
Appeals considered whether an electrical products wholesaler's 
inside sales persons were ``administrative'' employees within 
the FLSA exemption. Adopting language from the Department of 
Labor's regulations, the Court of Appeals said that 
``administrative'' operations of a business must be 
distinguished from ``production'' activities.\7\ Cooper 
Electric Supply, the Court of Appeals said, is a wholesale 
business whose ``primary business purpose is to produce sales 
of electrical products.'' \8\ Thus, the court reasoned, the 
company's sales employees were ``production'' employees rather 
than ``administrative'' employees.
---------------------------------------------------------------------------
    \6\ Martin v. Cooper Electric Supply Co., 940 F.2d 896, (3rd 
Cir.1991).
    \7\ Ibid., at 902.
    \8\ Ibid., at 903.
---------------------------------------------------------------------------
    A different result was reached in Reich v. John Alden Life 
Insurance Co.\9\ In that case, the U.S. Court of Appeals for 
the First Circuit found that marketing representatives for John 
Alden Life Insurance Company fit within the ``administrative'' 
employee exemption. The Court of Appeals distinguished the 
Cooper Electric case by citing the fact that John Alden Life 
Insurance Company's ``principal production activity [is] the 
creation of insurance policies.'' Thus, the Court of Appeals 
found, John Alden's sales employees were engaged in servicing 
the employer's business, rather than in ``production.''
---------------------------------------------------------------------------
    \9\ Reich v. John Alden Life Insurance Co., 126 F.3d 1, (1st 
Cir.1997).
---------------------------------------------------------------------------
    These two cases point out the difficulty of relying on the 
``administrative'' employee exemption for inside sales 
employees. Although many professional sales employees do 
qualify for the ``administrative'' employee exemption, the 
application of the exemption is unpredictable and not very 
logical.\10\ Without disturbing the ``administrative'' employee 
exemption, the Committee believes that a complementary and more 
direct exemption written for professional, inside sales 
employees is needed.
---------------------------------------------------------------------------
    \10\ For example, the combination of the Cooper Electric and Alden 
cases would appear to favor large, integrated companies in which inside 
sales personnel sell products produced in whole or in part by the 
company itself, as compared to smaller, more entrepreneurial firms that 
primarily market other companies' products.
---------------------------------------------------------------------------
    An exemption written specifically for inside sales 
employees is also appropriate and necessary because of changes 
in the manner in which the commercial world works in 1998 as 
compared to 1938, when the FLSA was written. The FLSA's 
provisions and regulations regarding sales employees have not 
been updated to reflect various technological changes--such as 
the increased use of computers, modems, facsimile machines, and 
the Internet--which have dramatically altered the way in which 
sales employees perform the duties of their job.
    Outside sales employees, many of whom perform the same 
duties as their inside sales counterparts, are exempt from the 
FLSA's minimum wage and overtime provisions because they sell 
from outside of their employer's place of business, traveling 
to the customer's business establishment. While this may have 
been a typical way of conducting business in years past, 
technological advances in communication have enabled many 
outside sales employees to become more productive by working 
from within their employer's business establishment. However, 
once the sales employee is working primarily from within the 
employer's business establishment, the individual no longer 
qualifies for the exemption from minimum wage and overtime.
    In today's highly-competitive global marketplace, many 
individuals earn a living by selling goods and services to 
customers across the continent or across the globe. The pay 
structure of many of these sales employees is determined, in 
part, by how much they sell and many are compensated through 
bonuses, commissions or incentive pay. Thus, for some 
individuals the FLSA has the ironic effect of preventing them 
from reaching their full income potential. For example, a sales 
employee may be restricted from working more than 40 hours per 
week because of the additional overtime cost to the employer. 
Yet, this has the unintended effect of placing a ceiling on the 
employee's income because he or she is prevented from working 
additional hours to generate additional sales and increase 
earnings.
    Ms. Deborah Siday, Vice President of Human Resources for 
Atlantic Food Services, articulated the problem to the 
Subcommittee on Workforce Protections:

          Under the Fair Labor Standards Act as currently 
        written, these inside sales people, who operate from 
        within our facility primarily by phone, fax, or 
        computer, must be paid overtime for all hours worked 
        over 40 in 1 week. While this requirement might at 
        first glance appear to be the most profitable method of 
        compensation for these employees, in practice it merely 
        serves to reduce their actual earnings potential.\11\
---------------------------------------------------------------------------
    \11\ ``Hearing on the Treatment of Inside Sales Personnel and 
Public Sector Volunteers under the Fair Labor Standards Act,'' The 
Subcommittee on Workforce Protections, Committee on Education and the 
Workforce, U.S. House of Representatives, 105th Congress, First 
Session, May 13, 1997, Serial No. 105-30, p. 22.

    Mr. Anthony L. Williams, an employee who works as an inside 
sales associate with Ferguson Enterprises, told the 
Subcommittee on Workforce Protections why he would like to see 
---------------------------------------------------------------------------
changes made to the FLSA:

          Number one, I consider myself a professional salesman 
        and would like to be treated as such. Number two, the 
        law as it currently stands is antiquated and does not 
        reflect employee needs as we approach the 21st 
        century.\12\
---------------------------------------------------------------------------
    \12\ Ibid., p. 18.

    Mr. Williams testified in favor of changing the application 
of the 1938 Fair Labor Standards Act as it relates to inside 
---------------------------------------------------------------------------
sales employees. In his view,

        . . . the inside sales force is certainly every bit as 
        professional, knowledgeable and well trained as the 
        outside sales force. We deserve to be seen as such by 
        the wage and hour laws.
          . . . consider that the inside salesperson of today 
        didn't exist when these laws under which we operate 
        were initially written. Just as the office environment 
        of today with faxes, beepers, telephones, PCs, voice 
        mail and everything else was inconceivable in 1938, so 
        was the aspect of the inside sales profession in which 
        I operate.
          . . . Today's inside sales position was just unknown 
        in 1938. Just as telecommunications and about 
        everything else in our world has changed in 60 years, 
        it is time for this area of the law to adapt to today's 
        marketplace as well, to reflect reality.\13\
---------------------------------------------------------------------------
    \13\ Ibid., p. 20.

    Ms. Leronda Lucky, an employee who works as an inside sales 
associate with the Berry Company in Ohio, also testified in 
favor of changing the FLSA to classify commissioned inside 
---------------------------------------------------------------------------
sales employees as exempt. As Ms. Lucky told the Subcommittee--

          I am in this business because I am a salesperson. My 
        motivation to sell is the earning potential that I 
        have. My choice is to be paid on a commission basis. I 
        would like to be able to work as many hours as possible 
        and earn as much money as possible for me . . .
          Unless I have prior approval, I am restricted to 
        working 40 hours per week due to a law passed in 1938, 
        a time when people did not have telephones, let alone 
        conducted sales over the telephone.
          There is also a very important customer service 
        component to my job. My clients do not necessarily have 
        9-to-5 work hours. Many start their day early in the 
        morning and work until late in the evening. I need the 
        flexibility to determine when I need to meet with the 
        customers on their hours. Being an exempt employee 
        would provide for that flexibility.\14\
---------------------------------------------------------------------------
    \14\ Ibid., p. 21.

    Many employees who are classified as exempt under the FLSA 
are less restricted by law and often are permitted by their 
employers to have much more flexibility in their schedules than 
nonexempt employees. This very issue was highlighted by Ms. 
Lucky, who told the Subcommittee how her experience and job 
duties as a nonexempt inside sales employee compares with that 
of many of her exempt colleagues who work outside of the 
---------------------------------------------------------------------------
office:

          . . . I feel that I should not be treated any 
        differently than my co-workers who sell the same 
        product, receive the same training, and use the same 
        marketing techniques as I do, but do so outside the 
        employer's office. We do the exact same things, but 
        because of a law established 60 years ago, prior to 
        advancements in technology, I am treated differently. I 
        do not believe this is fair or right. I am motivated by 
        the same things as these employees.\15\
---------------------------------------------------------------------------
    \15\ Ibid., p. 22.

    The Committee recognizes that the constraints under current 
law frequently work against many highly-trained, highly-skilled 
sales employees by restricting their ability to achieve greater 
earnings. Thus, the Committee believes that the FLSA should be 
updated to more accurately reflect the duties and functions of 
inside sales employees and to provide employees who are highly 
motivated with the opportunity to increase their wages.

                              legislation

    H.R. 2888 amends section 13(a) of the FLSA \16\ to exempt 
certain specialized sales employees from the FLSA's minimum 
wage and overtime compensation and record-keeping requirements. 
The exemption consists of a two-prong test: first, the employee 
must meet the requirements in the bill which outline specific 
functions and duties of the job; second, the employee's pay 
structure must meet the minimum requirements in the bill for a 
specified amount of base compensation in addition to 
compensation which is based on sales made by the employee.
---------------------------------------------------------------------------
    \16\ 29 U.s.C. Sec. 213(a).
---------------------------------------------------------------------------
    The bill applies to employees whose principal activity is 
making sales. In order to qualify for the exemption, an 
individual employed in a sales position must possess 
specialized or technical knowledge related to the products or 
services being sold. The employee would have to possess more 
than a general familiarity with the products or services being 
sold. A sales employee who offers different services or 
products to customers based on the varying needs of each 
customer using the employee's own training or experience would 
have a specialized knowledge of the products or services being 
sold in order to make appropriate recommendations to the 
customer. This exemption is not intended for employees who 
merely take orders over the telephone or utilize a prepared 
script, such as, telemarketing sales employees. This type of an 
employee would not meet the requirement for possessing 
specialized or technical knowledge about the products or 
services being sold.
    Several additional requirements for the exemption are 
included in the bill in order to ensure that it is limited to 
sales employees who work with and advise customers on behalf of 
the employer, rather than to persons engaged in mass ``cold 
calling'' of businesses or residences. The bill requires that 
either the employee's sales be made predominately to persons or 
entities to whom the employee's position has made previous 
sales; or that the employee does not initiate sales 
contacts.\17\ During the Committee markup, an amendment offered 
by Representative Andrews was accepted which further requires 
that the employee have a detailed understanding of the needs of 
those to whom he or she is selling and requires that the 
employee must exercise discretion in offering a variety of 
products and services to various customers.\18\
---------------------------------------------------------------------------
    \17\ The amendment adopted during the Committee on Education and 
the Workforce's markup inadvertently substituted the words ``who are'' 
for the word ``or'' and the word ``make'' for the word ``initiate.''
    \18\ The type of discretion which the Committee believes 
appropriate to professional sales employees for purposes of H.R. 2888 
is similar to that exercised by the sales employees in Reich v. John 
Alden Life Insurance Co., 126 F.3d 1, (1st Cir. 1997): ``It is 
undisputed that these employees have discretion in choosing which 
agents to contact on any given day, and concerning which products to 
discuss with each agent. In addition, the marketing representatives 
rely on their own knowledge of an agent's business to help tailor 
proposals for the agent's end-customers. Further, they must be able to 
anticipate the competing products that the agent's customers might be 
considering, and distinguish John Alden's offerings from those of 
competitors.'' 126 F. 3d at 13. The Secretary of Labor argued that 
since Alden's marketing representatives operated within certain 
parameters and applied sales techniques given them by the company, they 
were ``merely skilled workers.'' The Court of Appeals rejected the 
Secretary's argument that sales employees who operate within the 
employer's instructions do not exercise the requisite level of 
discretion: ``These employees do not use prepared scripts or read from 
required verbatim statements, nor do they operate within the contours 
of a prescribed technique or `sales pitch.' On the contrary, the 
content of a given conversation with an agent is dictated by the needs 
or customer base of that agent, or by the particular information sought 
by the marketing representative during that phone call. Further, to the 
extent that the marketing representatives receive guidance about 
products to emphasize and suggested points to make with agents, they 
nonetheless exercise discretion in applying this instruction--for 
instance, in determining which agent may have an interest in that 
product, or in fashioning bid proposals that meet the needs of the 
agent's customers. (citing case) In light of all this, we concur that 
the marketing representatives `are not merely skilled workers who 
operate within a strict set of rules. Rather, they exercise significant 
discretion in their daily contacts with various insurance agents.' '' 
126 F.3d at 14.
---------------------------------------------------------------------------
    With regard to compensation, in order to qualify for the 
exemption the employee must receive a base compensation amount, 
determined without regard to the number of hours worked by the 
employee, of not less than an amount equal to one-and-one-half 
times the minimum wage in effect under section 6(a)(1) of the 
FLSA,\19\ multiplied by 2,080. Currently this would require 
that the employee be paid at least $16,068, without regard to 
hours worked. The bill provides that if the employee does not 
work for the employer for an entire calendar year, the base 
compensation can be prorated to reflect the compensation which 
would have been earned if the employee had been compensated at 
the same rate for the entire calendar year.
---------------------------------------------------------------------------
    \19\ 29 U.S.C. Sec. 206(a)(1).
---------------------------------------------------------------------------
    In addition to receiving base compensation as described in 
the preceding paragraph, in order to qualify for the exemption 
the employee must receive compensation-commission income-based 
upon each sale attributable to the employee. The Committee is 
aware of the fact that sales commission arrangements vary 
tremendously among different industries and employers, and may 
vary by type of product or cost of product. For example, an 
employer may set a higher commission rate for new products as a 
way of encouraging their introduction into the marketplace. 
Similarly, in some companies, sales employees are paid 
commissions on the value of all sales by the employee or a 
group of sales employees. The bill does not attempt to 
``straitjacket'' these various sales and commission 
arrangements, but the employer must have a reasonable method of 
assigning sales to each employee and allocating commissions to 
each sale made.
    The bill requires that the total amount of compensation 
from these commissions, or sales attributable to the employee, 
must be at least 40 percent of one-and-one-half times the 
minimum wage in effect under section 6(a)(1) of the FLSA 
multiplied by 2,080. Currently, this requires that the sales 
employee receive a minimum commission compensation of 
$6,427.20.
    With regard to the employee's compensation which is based 
upon each sale attributable to the employee beyond that 
required to attain the previous requirement of 40 percent of 
one-and-one-half times the minimum wage multiplied by 2,080, 
the employer must continue to pay the same rate of compensation 
as that which was paid to the employee to meet the bill's 
requirement for aggregate compensation based upon the 
employee's sales. In other words, the employer cannot reduce 
the inside sales employee's commission rate or rates once the 
employee has earned $6,427.20 (based on the current minimum 
wage) in commission income.
    Finally, an amendment offered by Representative Carolyn 
McCarthy was accepted which stated that the exemption in the 
bill does not apply to individuals who are employed as route 
sales drivers.\20\
---------------------------------------------------------------------------
    \20\ H.R. 2888 does not address or affect in any way the existing 
exemptions under the FLSA for ``outside sales'' employees under section 
13(a)(1) or for sales employees of retail and service establishments 
under section 7(i).
---------------------------------------------------------------------------
    The Committee believes that H.R. 2888 will give many sales 
employees who are highly motivated and highly skilled, the 
opportunity to increase their earnings by removing them from 
the confines of the 40-hour workweek and allowing them to 
increase their earnings by increasing their sales. Many of 
these employees could earn more income from generating 
additional sales than could otherwise be made through overtime 
compensation.
    In a letter to the Chairman of the Education and Workforce 
Committee dated March 31, 1998, the Secretary of Labor listed 
several objections to H.R. 2888. Most of the Secretary's 
objections have to do with the alleged burden on employers of 
meeting the bill's conditions for the inside sales exemption. 
Of course, the exemption is not mandatory and an employer may 
choose not to make employees eligible for the exemption. The 
Secretary also argues that the bill will subject employees to 
long hours of work with little or no additional pay. The 
Committee believes that the specter of employers forcing their 
professional and skilled sales force to spend long hours in the 
office, against the employee's wishes, when they are not making 
additional sales (and thus increasing their income) is simply 
not realistic. The Committee believes that H.R. 2888 allows 
these sales employees to perform their jobs more effectively by 
allowing them to schedule their work hours in such a way as to 
maximize sales and increase their own earnings.

                                Summary

    H.R. 2888 would create a new exemption from minimum wage 
and overtime for any employee in a sales position if the 
employee has specialized or technical knowledge related to the 
products or services being sold; if the sales are made 
predominately to persons or entities to whom the employee has 
made previous sales, or if the employee's position does not 
involve initiating sales contacts; if the employee has a 
detailed understanding of the needs of those to whom he or she 
is selling; and if the employee exercises discretion in 
offering a variety of products and services.
    In addition, H.R. 2888 would require that the employee 
receive base compensation--determined without regard to the 
number of hours worked by the employee--of not less than one-
and-one-half times the minimum wage in effect under section 
6(a)(1) of the Fair Labor Standards Act, multiplied by 2,080; 
and an additional amount of compensation equal to at least 40 
percent of the employee's base compensation which is based on 
each sale attributable to the employee.
    The employee must receive additional compensation based on 
each sale, beyond that which is necessary to meet the previous 
requirement for 40 percent of the employee's base compensation. 
The amount of additional compensation must be determined at the 
same rate or rates which was used to determine the portion of 
the employee's compensation which is equal to at least 40 
percent of the employee's base compensation. The exemption made 
by H.R. 2888 shall not be construed to apply to individuals who 
are employed as route drivers.

                      Section-by-Section Analysis

Section 1

    ``The Sales Incentive Compensation Act''.

Section 2

    Amends section 13(a) of the Fair Labor Standards Act of 
1938 to provide an exemption for any employee employed in a 
sales position if:
          (A) the employee has specialized or technical 
        knowledge related to the products or services being 
        sold;
          (B) the employee's sales are made predominately to 
        persons who are entities to whom the employee's 
        position has made previous sales; or the employee's 
        position does not involve making sales contacts;
          (C) the employee's position requires a detailed 
        understanding of the needs of those to whom the 
        employee is selling;
          (D) the employee's position requires the employee to 
        exercise discretion in offering a variety of products 
        and services;
          (E) the employee receives base compensation, 
        determined without regard to the number of hours 
        worked, of not less than one-and-one-half times the 
        minimum wage, in effect under section 6(a)(1) of the 
        Fair Labor Standards Act, multiplied by 2,080; and an 
        additional amount of compensation based upon each sale 
        attributable to the employee;
          (F) the employee's aggregate compensation based upon 
        sales attributable to the employee is not less than 40 
        percent of one-and-one-half times the minimum wage 
        multiplied by 2,080;
          (G) the employee receives a rate of compensation, 
        based upon each sale attributable to the employee, 
        which is beyond sales required to reach the 
        compensation required by (F) and which is not less than 
        the rate on which the compensation required by (F) is 
        determined; and
          (H) the rate of annual compensation or base 
        compensation for any employee who did not work for an 
        entire calendar year is prorated to reflect annual 
        compensation which would have been earned if the 
        employee had been compensated at the same rate for the 
        entire calendar year.

Section 3

    The amendment made by section 2 may not be construed to 
apply to individuals who are employed as route sales drivers.

                       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 by 
exempting certain inside sales personnel from the overtime pay 
requirements of the Fair Labor Standards Act. The bill does not 
prevent legislative branch employees from receiving the 
benefits of this legislation.

                   Constitutional Authority Statement

    The Fair Labor Standards Act has been held to be a 
constitutional use of the Commerce power under United States v. 
Darby (S. Ct. 1941) and Garcia v. The San Antonio Metropolitan 
Transit Authority (S. Ct. 1985). This bill's creation of an 
exemption to certain of the Acts provisions would not further 
extend the reach of the Fair Labor Standards Act, and as such 
is constitutional.

                       Unfunded Mandate Statement

    Section 423 of the Congressional Budget and Impoundment 
Control Act requires a statement of whether the provisions of 
the reported bill include unfunded mandates. This bill amends 
the Fair Labor Standards Act by exempting certain inside sales 
personnel from the overtime pay requirements of the Fair Labor 
Standards Act. As such, the bill does not contain any unfunded 
mandates.

  Statement of Oversight Findings and Recommendations of the Committee

    In compliance with clause 2(l)(3)(A) of Rule XI 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.

 Statement of Oversight Findings of the Committee on Government Reform 
                             and Oversight

    With respect to the requirement of clause 2(l)(3)(D) of 
Rule XI 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 and 
Oversight on the subject of H.R. 2888.

                           Committee Estimate

    Clause 7 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. 2888. However, clause 7(d) 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 403 of the Congressional Budget Act.

     Budget Authority and Congressional Budget Office Cost Estimate

    With respect to the requirements of clause 2(l)(3)(B) of 
Rule XI of the House of Representatives and section 308(a) of 
the Congressional Budget Act of 1974 and with respect to 
requirements of 2(l)(3)(C) of Rule XI of the House of 
Representatives and section 403 of the Congressional Budget Act 
of 1974, the Committee has received the following cost estimate 
for H.R. 2888 from the Director of the Congressional Budget 
Act:

                                     U.S. Congress,
                               Congressional Budget Office,
                                     Washington, DC, April 9, 1998.
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. 2888, the Sales 
Incentive 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,
                                              James L. Blum
                                   (For June E. O'Neill, Director).
    Enclosure.

H.R. 2888--Sales Incentive Compensation Act

    H.R. 2888 would amend the Fair Labor Standards Act of 1938 
to exempt certain specialized sales employees from provisions 
governing minimum wage record-keeping and overtime 
compensation. The bill would exempt employees working in 
specialized sales positions whose base salary and commissions 
total at least $22,495 per year. CBO estimates that enactment 
of H.R. 2888 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. 2888 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act of 1995 
and would impose no costs on state, local, or tribal 
governments.
    This estimate was prepared by Christina Hawley Sadoti 
(federal cost), Marc Nicole (impact on state, local, and tribal 
governments), and Bruce Vavrichek (impact on the private 
sector).
    This estimate was approved by Robert A. Sunshine, Deputy 
Assistant Director for Budget Analysis.

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3 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 (existing law proposed 
to be omitted is enclosed in black brackets, new matter is 
printed in italic, existing law in which no change is proposed 
is shown in roman):

           SECTION 13 OF THE FAIR LABOR STANDARDS ACT OF 1938

                               exemptions

  Sec. 13. (a) The provisions of sections 6 (except section 
6(d) in the case of paragraph (1) of this subsection) and 7 
shall not apply with respect to--
          (1) * * *

           *       *       *       *       *       *       *

          (17) any employee who is a computer systems analyst, 
        computer programmer, software engineer, or other 
        similarly skilled worker, whose primary duty is--
                  (A) * * *

           *       *       *       *       *       *       *

        who, in the case of an employee who is compensated on 
        an hourly basis, is compensated at a rate of not less 
        than $27.63 an hour[.];
          (18) any employee employed in a sales position if--
                  (A) the employee has specialized or technical 
                knowledge related to products or services being 
                sold;
                  (B) the employee's--
                          (i) sales are predominantly to 
                        persons who are entities to whom the 
                        employee's position has made previous 
                        sales; or
                          (ii) position does not involve making 
                        sales contacts;
                  (C) the employee's position requires a 
                detailed understanding of the needs of those to 
                whom the employee is selling;
                  (D) the employee's position requires the 
                employee to exercise discretion in offering a 
                variety of products and services;
                  (E) the employee receives--
                          (i) base compensation, determined 
                        without regard to the number of hours 
                        worked by the employee, of not less 
                        than an amount equal to one and one-
                        half times the minimum wage in effect 
                        under section 6(a)(1) multiplied by 
                        2,080; and
                          (ii) in addition to the employee's 
                        base compensation, compensation based 
                        upon each sale attributable to the 
                        employee;
                  (F) the employee's aggregate compensation 
                based upon sales attributable to the employee 
                is not less than 40 percent of one and one-half 
                times the minimum wage multiplied by 2,080;
                  (G) the employee receives a rate of 
                compensation based upon each sale attributable 
                to the employee which is beyond sales required 
                to reach the compensation required by 
                subparagraph (F) which rate is not less than 
                the rate on which the compensation required by 
                subparagraph (F) is determined; and
                  (H) the rate of annual compensation or base 
                compensation for any employee who did not work 
                for an employer for an entire calendar year is 
                prorated to reflect annual compensation which 
                would have been earned if the employee had been 
                compensated at the same rate for the entire 
                calendar year.

           *       *       *       *       *       *       *


                            ADDITIONAL VIEWS

    The product of significant bipartisan cooperation, H.R. 
2888 represents a positive modernization of the FLSA and will 
bring practical and significant improvements to workers and 
employers alike. As originally introduced, the bill achieved 
the intended goal of benefiting inside salespeople while not 
harming other workers who deserve to retain their overtime 
rights. In doing so, it did not disturb the important 
protections and philosophy of the FLSA. Instead, it proposed 
reform based on the principles of fairness and opportunity, and 
we were glad to offer our support as cosponsors.
    Following its introduction, H.R. 2888 has been subsequently 
amended in a bipartisan fashion to provide even more clarity 
about who it affects and who it does not. These amendments 
serve to further improve the bill, making it a product which 
deserves the support of the full House.
    In specific, two amendments to the bill provided additional 
guidance about the range of affected employees. First, Ms. 
McCarthy's amendment made crystal clear the understanding that 
the bill's exemption does not apply to individuals who are 
employed as route sales drivers. This understanding was and 
continues to be widely-held; the amendment simply reinforces 
beyond doubt the inapplicability of the bill to these 
employees.
    Similarly, the amendment offered by Mr. Andrews simply 
clarified that the employees to be exempted must indeed be 
professional salespeople; as such, the employees must be well-
versed in the specific characteristics of both the products and 
the clients. In order to exercise independent and autonomous 
judgment and to provide consultative advice, the salesperson 
must know a great deal about the clients' needs. This type of 
client-specific information cannot be gained through cursory 
contact, but rather results only through on-going and regular 
contact with the client.
    These two amendments remove any doubt about the type of 
employees covered by the bill. The amended legislation, 
therefore, represents a well-crafted effort to improve 
compensation opportunities for workers and employers. By both 
preserving the FLSA's protections and expanding worker 
opportunity, H.R. 2888 offers sensible and modernizing reform. 
We are pleased to offer our full support and to commend the 
bill for positive consideration by the full House.

                                   Robert E. Andrews.
                                   Harold E. Ford, Jr.
                                   Carolyn McCarthy.
                                   Tim Roemer.
                                   Ron Kind.

                             MINORITY VIEWS

    The proponents of H.R. 2888 believe that overtime pay 
requirements limit the number of hours an employee may work. We 
take an almost diametrically opposed view. By requiring 
employers to pay time-and-a-half for hours worked in excess of 
40 hours a week, the overtime provisions act to ensure that 
workers have sufficient time off to care for themselves and 
their families. It also ensures that workers who are required 
to work extra hours are fairly compensated. Further, we believe 
that the absence of the protection afforded by overtime would 
not only result in workers receiving less pay for hours worked 
in excess of 40 hours a week, but would serve to diminish an 
employees regular pay as well.
    H.R. 2888 has been justified by its proponents on the basis 
that: (1) outside sales persons are exempt from overtime and 
therefore inside sales persons should be as well; (2) 
eliminating the overtime requirement will provide employees 
greater flexibility in determining their own hours; and (3) 
eliminating the requirements to pay overtime will enable 
workers to increase their income. None of these rationales 
withstands close scrutiny.

        i. h.r. 2888 punishes workers for advances in technology

    Though H.R. 2888 contains no language limiting its 
applications only to inside sales persons, its proponents have 
often described the bill as being limited to ``inside sales'' 
workers. Outside sales persons are currently exempt from 
overtime because such individuals typically and necessarily 
spend a large amount of time in activities that are not 
directly productive, such as travel. No similar justification 
is applicable to inside sales persons. Unlike outside sales 
persons, inside sales persons are directly engaged in making 
and processing sales during their entire time at work. Since 
the employer is receiving a direct benefit from the employee's 
labors throughout the employee's work period, there is no 
justification for denying the employee fair compensation when 
the employee is required to work more than 40 hours a week.
    We certainly agree with the proponents of the legislation 
that remarkable advances in communications technology have 
encouraged more employers to bring the outside sales force 
indoors and have allowed sales forces to become more efficient. 
However, we believe that workers, as well as employers, should 
share the benefits of that efficiency. Technology has enabled 
employers to ensure that a sales person's entire time at work 
is spent directly in productive activity and thereby has 
enhanced an employer's ability to earn a profit. That same 
technology cannot and should not serve as a basis for 
diminishing a worker's income or requiring workers to work even 
longer hours. For more than 60 years, inside sales persons have 
been entitled to overtime for hours worked in excess of 40 
hours a week.\1\ The fact that more sales persons are now able 
to work inside and fewer must work outside is not a 
justification of eliminating overtime. To claim otherwise is to 
effectively insist that workers be denied any share of the 
profits that result from efficiencies brought about by 
technological advances.
---------------------------------------------------------------------------
    \1\ In other circumstances, exemptions from minimum wage have been 
justified on the basis that employers could not afford to pay time and 
a-half. However, since the employees covered by this legislation have 
been entitled to overtime for more than 60 years, it is hard to contend 
that employees are unable to financially meet that commitment. Indeed, 
no one has seriously contended that the exemption is justified on the 
basis of the financial hardship that overtime imposes on employers.
---------------------------------------------------------------------------

 ii. h.r. 2888 will result in workers being required to work more hours

    Proponents of the legislation contend that eliminating the 
requirement that employers pay overtime will provide employees 
a more flexible work schedule. However, nothing in H.R. 2888 
alters or changes the fact that it is the employer, not the 
employee, who controls when and how long a worker may be 
required to work. Other than overtime pay provisions, nothing 
limits the hours an employee may be required to work.
    H.R. 2888 exempts employees from overtime if they receive a 
base compensation, determined without regard to the number of 
hours worked, of not less than one and one-half times the 
minimum wage multiplied by 2,080 (the equivalent of a year's 
work at 40 hours a week, presently $16,078.40 \2\), and 
additional compensation, in the form of commissions or bonuses 
based upon sales attributable to the employee, of not less than 
40% of the minimum required base compensation (which is 
$6,431.36 \3\).\4\ Thus H.R. 2888 exempts an employee from 
overtime pay protection if an employee earns $16,078.40 a year 
either in hourly wages or as a salary, and earns an additional 
$6,431.36 annually in commissions. An employee who earns these 
threshold amounts is not entitled to overtime pay, or even 
additional wages for hours worked. However, an employer must 
continue to pay commissions for sales attributable to the 
employee and may not reduce the commission paid per sale below 
the commission per sale paid for the first $6,431.36 worth of 
commissions.
---------------------------------------------------------------------------
    \2\ See H.R. 2888, Sec. 2, at subparagraph ``(C) clause (i)''.
    \3\ Id. at subparagraph ``(C) clause (ii)'' and subparagraph 
``(D)''.
    \4\ Id. at subparagraph ``(E)''.
---------------------------------------------------------------------------
    We believe H.R. 2888 not only eliminates the requirement 
that workers be paid time-and-a-half, thereby eliminating any 
disincentive an employer may have to requiring excessive hours 
of work, but it, in fact, encourages employers to require 
employees to work overtime by permitting employers may pay 60% 
less in compensation for hours worked in excess of 40 hours a 
week than an employer is required to pay for the first 40 hours 
worked. To most employees, increasing workplace flexibility 
means permitting employees to choose for themselves when they 
will work. Requiring workers to work more hours, and to be 
compensated for those extra hours, if they are compensated for 
them at all, at only 40% of their normal rate of pay simply 
serves to exploit workers, rather than enhancing worker 
flexibility or earning opportunities.
    In order to ensure that employees subject to H.R. 2888 
truly had the right to ``choose'' overtime work without 
overtime pay, Rep. Owens offered an amendment in Committee to 
make overtime work voluntary. It stated that such employees 
could not be required to work more than 8 hours a day, or 40 
hours a week. The amendment would have ensured that employees 
could choose whether they wished to work more hours in order to 
earn more money. Unfortunately, this amendment was rejected by 
the Committee.
    H.R. 2888 creates a very powerful economic incentive for an 
employer to require an employee to work as many hours as 
possible, and thus diminishes rather than enhances workers' 
flexibility. If the intent of this legislation is to benefit 
workers, then the choice to work overtime must belong to the 
worker.

   iii. h.r. 2888 will diminish, rather than enhance, workers' income

    Proponents contend that by eliminating the requirement that 
employers pay overtime, H.R. 2888 eliminates the incentive that 
employers have to restrict the number of hours an employee 
works and therefore will enhance the earning ability of workers 
by permitting them to work longer hours and earn more 
commissions. We agree that enactment of H.R. 2888 will result 
in workers working longer hours, though not as a consequence of 
the employee's choice. We dispute whether or not employees will 
actually earn more money as a consequence.
    Al that H.R. 2888 literally provides is that an employer 
may require an employee to work unlimited hours without being 
required to pay more than a base salary of $16,078.40 per year 
and annual commissions of at least $6,431.36 to the employee. 
Although it is impossible to tell who is actually covered by 
H.R. 2888, the employees most likely to be impacted by H.R. 
2888 include non-retail sales representatives, of whom the 1996 
Occupational Employment Statistics survey by occupation 
identified 1,485,420 individuals. In 1996, these almost 1.5 
million workers had an average hourly wage of $19.21, $39,957 a 
year assuming an individual works 2080 hours a year.\5\ Most of 
these employees, with the exception of those in the computer 
industry who have annual incomes in excess of $57,000, are 
currently receiving overtime pay. By the terms of H.R. 2888, 
employees making only 56% of the current annual earnings of 
sales representatives will be exempted from 
overtime.5.1
---------------------------------------------------------------------------
    \5\ The term sales representative encompasses a vast and disparate 
population in virtually every industry and the disparity in income 
earned by sales representatives is reflective of this fact. There are 
sales representatives, such as those who sell communication and 
computer systems to large employers, who earn annual incomes in excess 
of $100,000 a year. For purposes of the Fair Labor Standards Act 
(FLSA), the Department of Labor typically defines professional in terms 
of a job requiring a post-graduate college education as a typical 
condition of employment. While certainly some sales representatives may 
qualify as professionals under the current rules, others, including 
some who make substantial incomes, do not. College curriculums do not 
necessarily conform in a timely manner to technological advances. The 
Congress took cognizance of this fact in 1990 with regard to the 
computer industry. At the time, there were many occupations in that 
industry which clearly required specialized, professional expertise, 
and which were compensated accordingly, but for which there was no 
corresponding advanced college degree. While professional status has 
typically been measured largely by educational achievement, another 
measure of professional status is reflected by the compensation that 
the skills and knowledge of the worker are able to command. The 
Congress, therefore, amended the FLSA to provide that employees in the 
computer industry making 6.5 times the minimum wage would be deemed 
professionals and therefore exempt from overtime. (In the last 
Congress, when the minimum wage was increased, the provision was 
changed from 6.5 times the minimum wage to 6.5 times $4.25.) An 
extension of that provision to sales representatives would likely have 
attracted much less opposition. However, to contend that employees 
making as little as $22,500 a year are earning ``professional'' 
salaries is ludicrous.
    \5.1\ A full-time employee who is paid a salary equal to 1.5 times 
the minimum wage, $7.73 per hour, and earns additional commissions 
equal to a rate of $3.10 per hour is exempt from overtime under this 
legislation. An employee who is earning less than $11.00 an hour is not 
highly compensated employee and probably needs to be able to earn 
overtime in order to be able to make ends meet. However, not only does 
H.R. 2888 deny this employee overtime, but it provides that hours 
worked in excess of 40 hours a week will only be compensated for in 
commissions. Whereas the employee normally earns the equivalent of 
$10.83 per hour, including commission and base compensation, for the 
first forty hours worked in a week, for every hour in excess of that 
the employee will only earn the commission. Assuming the employee is 
able to make sales at the same rate outside of the normal work day that 
the employee is able to make during the normal work day, the employee 
will only earn $3.10 per hour for hours in excess of 40 hours a week 
instead of the normal $10.83 per hour paid to the employee for the 
first 40 hours worked. If the employee is required to work extra hours, 
but fails to make any additional sales during that time, the employee 
is not compensated at all for the extra hours the employee was required 
to work.
---------------------------------------------------------------------------
    The contention by proponents that $22,509.76 reflects a 
``professional'' wage or specialized expertise on the part of 
the employee is also false. In 1996, the median full-time, 
full-year worker earned $28,000 and the average annual earnings 
for workers was $25,500. In fact, $22,509.76 is more typical of 
the starting pay for sales representatives than it is of the 
average pay earned by most sales representatives. Establishing 
the guaranteed annual income at such a paltry level guarantees 
that virtually no sales representative will be excluded from 
the overtime exemption on the basis of insufficient 
earnings.5.2
---------------------------------------------------------------------------
    \5.2\ In Committee, Mr. Owens offered an amendment to provide that 
employees subject to H.R. 2888 must earn at least $40,000 in total 
annual income before they can be exempted from overtime. The intent of 
the amendment was to at least mitigate the effect that H.R. 2888 would 
have on lower paid workers and decrease the downward pressure H.R. 2888 
will otherwise have on workers' income by ensuring that those making 
less than the average wage for sales representatives would retain 
overtime protection.
---------------------------------------------------------------------------
    Notwithstanding the assertions of the proponents of H.R. 
2888, this legislation does not benefit workers. Rather, the 
legislation appears to be intended to provide a windfall to 
employers at the expense of workers. Virtually all reputable 
economic studies indicate that the income disparity between the 
wealthy and everyone else continues to increase. Despite the 
strong labor markets of recent years, both the real average 
hourly wages and the weekly earnings of non-supervisory workers 
fell by 1.5 percent between 1989 and 1997. We should be 
considering legislation, such as legislation increasing the 
minimum wage, to address and correct these trends. Instead, by 
permitting employers to require workers to work longer hours 
for less money, this legislation effectively exacerbates these 
trends.

 IV. H.R. 2888 promotes burdensome compliance obligation and excessive 
                               litigation

    Our strongest objection to H.R. 2888 is the damage it will 
inflict upon those workers unfortunate enough to be held within 
the purview of the bill. There are, however, other significant 
flaws in the legislation. As Representative Owens stated during 
subcommittee consideration of this legislation, ``Among the 
first questions any Member of Congress should ask in 
considering this legislation is how many employees will lose 
the protection afforded by overtime if this legislation is 
enacted.'' In fact, no one can answer that question. Even the 
most basic questions regarding the scope of this legislation 
are unclear. By its terms, the bill applies to ``any employee 
employed in a sales position.'' It would then appear that the 
bill effectively replaces existing overtime exemptions 
affecting sales persons, though the sponsors have never 
indicated that such was their desire. The more prosaic issues 
raised by the legislation are a litigator's dream.
    Under the terms of H.R. 2888, to be exempt from overtime, 
the employee must have ``specialized or technical knowledge 
related to the product or service being sold.'' \6\ The 
Department looks at whether a position typically requires a 
post-graduate degree to determine whether or not the 
specialized or technical knowledge required for the position is 
sufficient to exempt employees from overtime. One of the 
principal purposes of H.R. 2888 is substitute a different 
standard with regard to sales positions. However, H.R. 2888 
provides no basis for assessing or determining what constitutes 
specialized or technical knowledge. Nor are the terms 
sufficiently clear as to lend themselves to a common 
understanding. H.R. 2888 is, therefore, likely to produce 
significant confusion and litigation if it is enacted.
---------------------------------------------------------------------------
    \6\ See H.R. 2888, Sec. 2, at subparagraph ``(A)''.
---------------------------------------------------------------------------
    Secretary Herman, in a letter to the Committee, stated that 
the legislation places substantial, almost impossible, burdens 
or employer record keeping:

          Proper application of the exemption will require 
        employers to maintain extensive records, for example: 
        (1) the specialized or technical knowledge required to 
        sell each product and/or service; (2) the amount and 
        timing of training provided to each salesperson on each 
        product and/or service; and (3) the rate of incentive-
        based compensation paid to each salesperson after the 
        40 percent of base pay incentive-based compensation 
        requirement has been met.

    Further, while exempting some sales representatives for 
overtime, the bill covers only those employees whose duties 
``consist of making sales predominantly to persons or entities 
to whom the employee's position has made previous sales'' \7\ 
and only if the employee's position ``does not involve 
initiating sales contacts.'' \8\ In addition, employers must be 
prepared to demonstrate that the employee has a ``detailed 
understanding of the needs of those to whom the employee is 
selling'' \9\ and exercises ``discretion in offering a variety 
of products and services.'' \10\ There will likely be extensive 
litigation before what constitutes ``entities to whom the 
employee's position has made previous sales'' is defined, 
before it is clear what ``predominantly'' means, or what 
constitutes ``initiating sales contacts'' or a ``detailed 
understanding of the needs of those to whom the employee is 
selling.'' Even after the initial round of litigation, the 
obligation of maintaining records sufficient to demonstrate 
that employer was justified in withholding overtime pay would 
seem substantial and the issue of just what records would be 
sufficient to meet that burden is likely to remain murky.
---------------------------------------------------------------------------
    \7\ Id. at subparagraph ``(B) clause ``(i)''.
    \8\ Id. at subparagraph ``(B)'' clause ``(ii)''.
    \9\ Id. at subparagraph ``(C)''.
    \10\ Id. at subparagraph ``(D)''.
---------------------------------------------------------------------------

                               Conclusion

    We are strongly opposed to H.R. 2888. The principal 
rationale that has been proffered to justify this legislation, 
that the requirement that employers pay overtime acts to 
diminish the wages of employees, is as nonsensical as it 
appears on its face. The assertion that workers will benefit by 
eliminating the requirement that certain sales persons receive 
time-and-a-half pay for hours worked in excess of 40 hours a 
week is absurd. The legislation exempts employees earning as 
little as $22,509.76 a year, 12% below American workers' 
average annual earnings, from overtime on the basis that they 
are professional employees with specialized expertise. If the 
employee is, in fact, a professional employee with specialized 
expertise, then surely the employee would merit a significantly 
higher income for his or her services.
    This legislation is distinct from other existing overtime 
exemptions. H.R. 2888 not only exempts employers from the 
requirement that they pay time-and-a-half for hours worked in 
excess of 40 hours a week, it exempts employers from the 
requirement that they pay an employee any wage at all for 
overtime hours. H.R. 2888 requires that employers pay 
commissions on such sales as are made during the overtime 
period, but does not require an employer to provide any 
additional compensation. The consequence H.R. 2888 has for 
workers was clearly pointed out by the Secretary of Labor.

          The overall design of the expanded exemption clearly 
        shifts business risk from employers to employees. 
        Employees who work long hours but are unable, for 
        whatever reason, to make significant sales will receive 
        little or no additional pay for the extra hours they 
        work. The employer can not lose in this situation, but 
        the employees certainly will.

                          U.S. Department of Labor,
                                        Secretary of Labor,
                                    Washington, DC, March 31, 1998.
Hon. William F. Goodling,
Chairman, Committee on Education and the Workforce,
House of Representatives, Washington, DC.
    Dear Chairman Goodling: I am writing to provide you with 
the views of the Department of Labor on H.R. 2888, the ``Sales 
Incentive Compensation Act,'' which would amend the Fair Labor 
Standards Act (FLSA) by providing a minimum wage and overtime 
exemption to all sales people who meet certain criteria.
    H.R. 2888 has no provision requiring additional 
compensation for sales employees who may be forced to work long 
hours. This would deny FLSA protection for significant numbers 
of often low-paid workers who have long received such 
protection. The Department believes that expansion of the FLSA 
``sales'' exemptions would weaken a basic principle of the 
FLSA--to limit excessive hours of work by employees and provide 
them just compensation for working overtime.
    H.R. 2888 incorporates several important worker protections 
and guarantees, and in this regard we believe that the bill 
represents an improvement over previous bills with such 
purpose. Our careful review of the proposal, however, raises 
several concerns regarding these protections, including:
          The overall design of the expanded exemption clearly 
        shifts business risk from employers to employees. 
        Employees who work long hours but are unable, for 
        whatever reason, to make significant sales will receive 
        little or no additional pay for the extra hours they 
        work. The employer cannot lose in this situation, but 
        the employees can.
          The requirement that the exempt ``employee's position 
        requires specialized or technical knowledge related to 
        products or services being sold,'' whether further 
        defined by regulation or in the legislative history, is 
        so vague and subject to differences in understanding 
        and application that there will undoubtedly be an 
        increase in the already high levels of private 
        litigation involving sales employment.
          Determining when and how this complicated, multi-test 
        exemption applies will be very difficult for employers, 
        employees and the Department of Labor. This difficulty 
        too will undoubtedly lead to misunderstandings, 
        disputes and litigation.
          Proper application of the exemption will require 
        employers to maintain extensive records, for example: 
        (1) the specialized or technical knowledge required to 
        sell each product and/or service; (2) the amount and 
        timing of training provided to each salesperson on each 
        product and/or service; and (3) the rate of incentive-
        based compensation paid to each salesperson after the 
        40 percent of base pay incentive-based compensation 
        requirement has been met.
    For these reasons, the Department opposes the bill's 
expansion of the FLSA ``sales'' exemptions to sales employees 
in all industries. The Office of Management and Budget has 
advised that there is no objection to the presentation of this 
report from the standpoint of the Administration's program.
            Sincerely,
                                   Alexis M. Herman.
                                   William L. Clay.
                                   Dale E. Kildee.
                                   Major R. Owens.
                                   Patsy T. Mink.
                                   Lynn Woolsey.
                                   Chaka Fattah.
                                   George Miller.
                                   Matthew G. Martinez.
                                   Donald M. Payne.
                                   Bobby Scott.
                                   Carlos Romero-Barcelo.
                                   Ruben Hinojosa.
                                   John F. Tierney.
                                   Dennis J. Kucinich.