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loophole for the unscrupulous employers to evade the act completely by paying the bulk of his compensation in some kind of bonuses that are not subject to overtime.

Mr. SMETHURST. Well, so far as the unscrupulous employer is concerned, I never did believe in drawing a law to deal with the few deliberate violators, and I do not believe that is the problem we have here. Actually, the minimum-wage provision-and this is much more pertinent if the amount of the minimum is increased-provides the protection so far as the basic hourly rate is concerned, by putting a floor under that rate, and for the overtime the minimum wage required would be time and a half that rate. Anything else is above the field which in my judgment the statute should have anything to do with.

Senator BALL. That would be quite a drastic change.

Mr. SMETHURST. That would be a very drastic change. Nevertheless, I think it would be entirely consistent with the purpose of the original law. Most of the problems in the last 6 years have been concerned with employees who receive double, or three or four times the amount of the statutory minimum, and they have concerned these fringe payments, these supplemental payments or forms of compensation, giving rise to this hair-splitting as to whether they become part of the regular rate under these circumstances, or are excluded under others.

Senator BALL. It has been suggested here that section 7 be amended to require simply after 40 hours work, payment of time and a half the minimum rate, which would settle most of the problems, but would be somewhat of a departure from the original intent of the law to spread the work. Of course, it does not make too much sense today, anyhow.

Mr. SMETHURST. I think the purpose of imposing a penalty and overtime after 40 hours is not affected very seriously by such questions as whether a quarterly production bonus or a year-end attendance bonus has to be tossed in and computed as part of the regular rate. The penalty, even without that, is sufficient as a deterrent to overtime work. So that the suggestion I make, I do not believe is inconsistent with that basic purpose of penalizing overtime.

Senator BALL. I rather like your suggestion of putting in the statement of policy that the courts and the Administrator should interpret this act so as not to disrupt collective-bargaining contracts and normal established procedure in industry. It seems to me the more I hear of the various decisions and interpretations under this act, the more I am convinced that if they had set out deliberately to confuse business procedures, they could not have done a much better job. Any questions, Senator Murray?

Senator MURRAY. No.

Senator BALL. Thank you, Mr. Smethurst.

(Mr. Smethurst submitted the following brief:)

STATEMENT OF RAYMOND S. SMETHURST FOR THE NATIONAL ASSOCIATION OF MANUFACTURERS BEFORE A SUBCOMMITTEE OF THE SENATE COMMITTEE ON LABOR AND PUBLIC WELFARE ON REVISION OF THE FAIR LABOR STANDARDS ACT

My name is Raymond S. Smethurst. I am counsel for the National Association of Manufacturers and appear on behalf of that organization. It has approximately 16,500 members engaged in manufacturing in practically every State of the Union.

The NAM is vitally interested in proposals to amend the Fair Labor Standards Act of 1938 but is not suggesting that the basic safeguards of the law be weakened

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destroyed. This act was adopted to establish and protect basic minimum undards for the lowest paid employees engaged in commerce or producing goods or commerce. However, because its general terms permitted, the act has been sed as an instrument for controlling all phases of employer-employee relationips throughout intrastate as well as interstate industry. It has been the source I numerous controversies between employers and their workers, has greatly stricted the area for collective bargaining, and has formed the basis for retrotive windfall claims threatening bankruptcy for large numbers of employers ho have sought in good faith to comply with the letter and spirit of the act. hese factual developments demonstrate that amendments to clarify the status of mployers and employees under this act are long overdue.

We believe the 10 years of experience and confusion under the act have estabshed the genuine need for Congress to define by law (a) “regular rate," (b) area of production," and (c) "production of goods" for commerce.

In addition, e believe Congress should (a) specify the precise scope of the management ersonnel exemptions provided by the act, (b) provide more flexibility for annual nd semiannual wage agreements, and (c) validate contracts, customs, and pracces which meet the minimum requirements of the statute in order that employers nd employees or unions representing them may agree upon terms of employment Gore beneficial to employees than are required by the act, without risk of liability r penalty under the law.

Ever since the act became effective, there has been widespread confusion conerning its meaning and application. Literally hundreds of court actions have en filed because the act does not define "regular rate" and an almost equal umber of cases have been brought because of uncertainty concerning the meaning f "production of goods" for commerce. "Area of production" problems have een the source of continuing disputes and litigation as have the Administrator's egulations defining “executive," "administrative," and "professional" employees. In general, it might be said that disputes of this character have resulted from e attempted use of the FLSA to control all phases of employer-employee relationships rather than to carry out the original objectives of Congress to place a oor under wages and to reduce excessively long hours of work by requiring peny overtime payments. (See Senate Committee on Education and Labor report

on S. 2475, July 6, 1937.) "Regular rate" litigation warrants special comment. Disputes concerning the meaning of this term have seldom, if ever, involved minimum-wage employees. Instead, they have been concerned with workers whose rates have greatly exceeded the minimum required by law and in many instances the highest minimum rates proposed in bills before your committee.

Everyone close to the picture has recognized the prevailing uncertainties under the act. The Wage-Hour Administrator has referred to them on several occasions. As early as 1941, he advised Congress in his annual report that even the experts in the Department of Labor were uncertain about the meaning or applicability of the statute. Annually, thereafter, he has pointed to sources of confusion and needless litigation, and within the last few days has recommended that this committee approve legislation which would define many terms used in the law As I understand it, there are two major proposals to amend the FLSA under consideration by this committee. They are S. 2062, introduced by Senator Thomas of Utah, and S. 2386 by Senator Ball, of Minnesota. S. 2062 was seemingly designed (1) to extend coverage of the present act, (2) to limit certain exemp tions, and (3) to increase substantially the minimum wage payable under the Statute or an authorized wage order. S. 2386, on the other hand, would deal with some of the generally recognized uncertainties under the present act, by defining "regular rate," "produced," and certain other terms.

"REGULAR RATE" PROBLEMS UNDER FLSA

The meaning of the term "regular rate," upon which overtime must be computed and paid has been the subject of perhaps more litigation than any other term contained in the Fair Labor Standards Act. The United States Supreme Court alone has considered at least 13 "regular rate" cases and has written 8 decisions on the subject.

In written opinions, that Court has ruled that "regular rate" may be defined by employment contracts under which employees are guaranteed a weekly salary for a stipulated number of hours and time and one-half the contract "regular rate" for work in excess of the maximum weekly hours specified in the agreement (Walling v. A. H. Belo Corp. (1942) (316 U. S. 624), and Walling v. Halliburton

Oil Well Cementing Co. (1947) (331 U. S. 17)). Otherwise, the Court has ruled that the statutory "regular rate" must be computed by dividing hours worked into straight-time compensation (Overnight Motor Transportation Co. v. Missel (1942) (316 U. S. 572); Walling v. Helmerich & Payne (1944) (323 U. S. 37); Walling v. Harnischfeger Corp. (1945) (325 U. S. 427); Walling v. Youngerman Reynolds Hardwood Co., Inc. (1945) (325 U. S. 420); U. S. v. Rosenwasser (1945) (35 U. S. 360; 149 Madison Ave. Corp. v. Asselta (1947) (329 U. S. 764)).

In the Harnischfeger decision, the Court also held that a group production bonus had to be included in "regular rate" computations even though the collective agreement defined that term and excluded such bonuses. In the YoungermanReynolds case, the Court established the rule of law that all individual incentive payments must be reflected in the regular rate.

By refusing to review the cases of Walling v. Richmond Screw Anchor Con pany (1946) (154 F. (2d) 780); Walling v. Garlock Packing Co. (1947) (19 F. (2d) 44); and Walling v. Wall Wire Products Co. (1947) (161 F. (2d) 47 ), the Supreme Court in effect established the rule under FLSA that discretion:ry profit-sharing bonuses affect the "regular rate" of each employee who receives such a bonus payment. By denying certiorari in Falling v. Bibb Manufacturing Co. (1917) (164 F. (2d) 179), the rule was established that an attendance bonus increases the "regular rate” of employees whose consistent attendance warrants attendance bonus payments.

When the Supreme Court refused to review the Ninth Circuit Court of Appeals decision in Robertson v. Alaska Juneau Gold Mining Co. (C. C. A. 9 (1946) 6 WH cases 453), it left in effect a ruling that overtime paid under a collective agreement cannot be credited against overtime due under the Fair Labor Standards Act if contract overtime is "normally" or "regularly" worked. This decision, and that of the Second Circuit Court of Appeals in Blue v. Huron Stevedorine Corp. (1947) (162 F. (2d) 665), place the overtime provisions of collec iv >-brirgaining contracts in a most doubtful category. In addition, these decisions bring into serious question the validity of other overtime payment practices throughout industry In the Huron case, the Second Circuit Court of Appeals ru'ed that contract overtime paid at time and one-half the "normal" day rate for time worked outside such normal day could not be credited against overtime payable under the act. Thus, it ruled that such overtime was straight-time for purposes of that act. This matter is now before the Supreme Court.

The majority of controlling "regular rate" decisions were filed 1945, 1946, and 1947. In most cases the Administrator was the party-plaintiff. In them, some six or more years after the act became effective, he had the courts establish "rules of law" that deferred group incentive, profit sharing and attendance bonuses affected the regular rate of employees receiving them. Prior to these decisions, and with good cause, employers assumed that the regular rates of their employees were the agreed upon straight-time rates and did not include fringe payients such as those made under profit-sharing plans or group-incentive p ans which have no relationship to an individual's productivity or the quality of his work.

These decisions compelled many employers, because of the practical difficult ́es of recomputing wages in retrospect, to abandon extra-payment agreevient whereby their employees obtained extra funds. Moreover, they caused many more employers to abandon plans to share profits with their employees in the future. Naturally, the decision greatly restricted the area for collective bargaining.

These bonus decisions, and that of the Second Circuit Court of Appeals in the “overtime-on-overtime" case have made it extremely hazardous, if not foolhardy for an employer to pay his employees bonuses, or overtime under any arrange ment ex ent after 40 hours per week. Even in the latter case, he may be penalized and required to pay overtime-on-overtime if his employees, "regularly” or "normally" work more than 40 hours.

S. 2386 rec gnizes that these decisions have created serious problems. It se k by section 3 (n) to eliminate some of them by defining "regular rate."

The definition proposed in the bill is quite detailed. It specifies items to be ine.uded in "regular rato" computations, states a formula for determining the "reculor rate" of an employee, and enumerates certain fringe payments to employees which must be excluded from their regular rates. In general, the bill would seem to codify into the statute all controlling regular rate decisions that have been filed up to the present time. (10 a. m. Monday, April 3, 1948). It seeks to prohibit "overtime-on-overtime" claims and would limit, to a certain extent, the decision of the Supreme Court dealing with group bonuses excluded

by the collective agreement from regular rate computation. To accomplish these purposes, the definition seems unnecessarily detailed and complicated.

If your committee should feel, after studying the record of these hearings, that existing "regular rate" court decisions conform with the past and present intent of Congress and should not be modified, then no codification of these decisions would seem necessary except to meet the "overtime-on-overtime" and the group incentives problems of the character involved in the Harnischfeger decision and which S. 2386 would now treat.

However, it is our view that all "regular rate" problems should be clarified by legislative action. We believe that employers and unions should have more flexibility in bargaining over matters outside "basic wages." Moreover, we feel that employers should not be penalized for giving to their employees something in excess of that required by the statute or an applicable collective bargaining contract.

An alternative approach to the "regular rate" problem might be preferred over the approach of S. 2386. Specifically, your committee might adopt the concept of "regular rate" which was generally followed before 1945 when the Supreme Court started a series of decisions bringing within that term all sorts of fringe payments which have no direct relationship to an employee's contract hourly or piece rate. Stated differently, we believe that "regular rate" for purposes of the statute should be defined by Congress to be the normal, basic straight-time job rate of the employee, whether fixed on a time or piece-rate basis. Such a definition should exclude all additional or supplemental payments. This theory of meeting the "regular" rate problem is simple and direct. It would provide needed certainty for employers and employees, encourage profitsharing plans, leave employers and unions a broader area for collective bargaining, and not open the way for a new avalanche of suits which might result from a more complicated or detailed definition.

PRODUCTION OF GOODS

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The Fair Labor Standards Act has two bases for coverage. ployees engaged (1) in commerce, or (2) in the production of goods for commerce (including any occupation necessary to such production).

The question of what constitutes an activity "in commerce" has been relatively well settled for many years. However, the concept of what constitutes production of goods for commerce has been ever expanding and changing, and has been the source of almost countless disputes between employers and their employees.

When the act was passed, it was quite generally assumed that under the "production of goods" clause, employees were covered by the act if they (1) produced goods for shipment over State lines, or (2) were so intimately connected with such production as to be a part of it.

The first major change in this concept was brought about by the Supreme Court decision in Kirschbaum v. Walling ( (1942) 316 U. S., 517), when the Court ruled the act applied to maintenance employees in loft buildings where manufacturers rented space. Thereafter, the Supreme Court ruled that employees were engaged in production and covered by the act (1) when washing windows in an establishment of another employer where production took place (Martino v. Michigan Window Washing Co. ((1946) 327 U. S. 173); (2) when rebuilding motors for use by customers in producing goods (Roland Electrical Co. v. Walling (1946) 326 U. S. 657); and (3) when doing maintenance work in an office building occupied by the headquarters staff of a company elsewhere engaged in production of goods for commerce (Borden v. Borella (1945) 325 U. S. 679).

United States circuit courts have ruled that employees are engaged in covered "production" (1) when constructing buildings for subsequent use in producing goods (Walling v. McCrady Construction Co., CCA 3 (1946), 156 F. 2d 932) (certiorari denied Nov. 25, 1946); (2) when watering livestock for a commission company furnishing facilities for temporary holding and transfer of the livestock (Walling v. Friend, CCA 8 (1946) 156 F. 2d 429); (3) when maintaining irrigation ditches (Reynolds v. Salt River Valley Water Users Association, CCA 9 (1944) 4 WH cases 617) (certiorari denied Nov. 6, 1944); (4) when "preparing, executing, or validating bonds, shares of stock, commercial paper, bills of lading and the like" (Bozant v. Bank of New York, CCA 2 (1946) 156 F. 2d 787); and (5) when producing fertilizer in Puerto Rico for use on farms in Puerto Rico (McComb v. Super-A-Fertilizer Works, CCA 1 (1948) 7 WH cases 639).

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The Wage-Hour Administrator has used the "necessary to production" clause to justify interpretations that workers only remotely connected with production are covered by the act. Thus, he has ruled that employees are engaged in covered production (1) when making printers' ink for consumption in the same State and community where it is produced, and (2) when making lubricants for use by industrial establishments in the same State.

Again, it will be noted that the bulk of court decisions extending the concept of "production" were filed in the years 1945, 1946, and 1947.

Two amendments proposed by S. 2386 would limit the effect of some of these court rulings and related administrative interpretations. Section 3 (f) redefines agriculture to include irrigation projects and section 3 (j) defines "produced.” Under the proposed definition of "produced," an employee would not be covered by the wage-and-hour provisions of the law if fewer than 5 and less than 20 percent of the employees "in the establishment in which he is employed" are engaged in commerce or production of goods for commerce and are not exempt by some provision in section 13 (a) of the act. A second proviso would exempt from the wage-and-hour provisions of the act an employee engaged in work necessary to production if his employer (A) is not directly engaged in the production of goods for commerce, and (B) less than 50 percent of the business of such employer is necessary to the production of goods for commerce.

The first limiting clause was seemingly designed to exempt from the act from one to four employees who do covered work but are employed in an establish ment where more than 80 percent of the employees are not engaged in commerce or in producing goods for commerce.

The second proviso proposes an employer concept of coverage. If (1) less than 50 percent of the employer's business is necessary to the production of goods for commerce, and (2) the employer is not directly engaged in production. then none of his employees whose employment is necessary to production would be under the wage-and-hour provisions of the statute because of the character of their work.

These suggested amendments would doubtless do much to clarify the status of many employers. It is not clear from the language of the bill how far it would go to provide more certainty as to the intended meaning of production of goods for commerce.

It it should be determined that this term must be given the normally understood meaning which prevailed before 1945, a simple and effective amendment could provide that the "production of goods" concept of coverage brings under the act only employees of an employer engaged primarily in producing goods which actually enter the channels of commerce.

ANNUAL WAGE CONTRACTS

The mandatory character of the overtime provisions of the act and the interpretation that earned overtime must be paid in the pay period when worki con usion concerning the meaning of the term "regular rate," and the inflexible character of permissible annual wage agreements have presented definite obstacles against guaranteed annual wage plans.

These were summarized by Mr. Murray W. Latimer in his report to the Presi dent on guaranteed wages (Jan. 1, 1947) when he said:

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"Although section 7 (b) (2) was chiefly intended to encourage the adoption of guaranteed wage plans, it is obvious that it has accomplished very little toward that end. In part the insignificant results are due to the inflexibility o the provision; moreover, interpretations have not always been unambiguous, an! it has been difficult for employers and labor organizations to be reasonably cer tain that a plan upon which they have agreed meets the requirements of th It is thus possible for an employer unwittingly to incur a large liability if the plan is later adjudged not to conform to those standards." Section 7 (b) (3) of S. 2385 would provide some flexibility for annual wage plans by permitting employment up to 2.144 hours in a year instead of the present maximum of 2,080. In adition, section 7 (b) (3) (A) and (B) of the bill would seem to authorize the Administrator to approve of plans under which the same salary or wage is payable each week.

law.

We believe the proposals to provide more flexibility for annual wage agreements are in the right direction. Present experience in connection with annual wage agreements is insufficient to determine whether the amendments proposed by S. 2386 would provide enough flexibility to encourage and permit effective annual wage contracts. In view of this, we would suggest that Congress make provisions

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