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Lessons for Service Providers --- Fair Labor Standards Act in Outsourcing: © 2006 William B. Bierce. All rights reserved. On November 22, 2006, International Business Machines Corp. (IBM) announced its agreement to pay $65 million to settle a class action lawsuit involving alleged wage law violations, under the Fair Labor Standards Act (“FLSA”), for its current and former employees in its Technical Services Professional and IT Specialist job categories. The employees had alleged that IBM had misclassified such employees as exempt from overtime wage protection, and that IBM had failed to maintain accurate records of hours worked by employees, who were thereby denied overtime due to faulty recordkeeping. Denying any wrongdoing, IBM settled to avoid a “lengthy, burdensome and expensive” litigation. Rosenberg v. IBM (N.D. Cal., Dkt. No. C-06-0430, settlement Nov. 22, 2006). The published report did not mention whether the employees were providing services to outsourcing customers. The settlement is a lesson to employers of personnel who provide BPO services or who follow BPM scripts. It highlights the tension between quality controls (under ISO 9001, for example) with defined roles and responsibilities and the “lack of quality” through a worker’s exercise of significant “independent” discretion. It also highlights the disparity in wage laws in the United States and certain other countries. Employers who provide outsourced services need to take careful heed to avoid controversy that could lead to a similar settlement after a class action lawsuit. Overtime Wages. The Fair Labor Standards Act of 1938, as amended, 29 USC 201, requires “time and a half” wages for most employees who work over 40 hours in a work week.
Discretion on Matters of Significance. The FLSA contains several exemptions. In outsourcing, the most relevant exemption covers “executive,
administrative, professional and outside sales employees”
who are paid on a salary basis.
Such employees are exempt from both the minimum wage and overtime wage
provisions of the FLSA. Only if the
employee’s “primary duty” includes the “exercise of discretion and
independent judgment” with respect to “matters of significance” does the
employee become exempt. As to
“administrative employees” under FLSA Section 13(a)(1), the employee
is exempt if the employee’s “primary duty is the performance of office or
non-manual work directly related to the management or general business
operations of the employer or the employer's customers” and the “primary duty” includes the exercise of discretion and
independent judgment with respect to matters of significance.
29 CFR 531.200(a)(2) and (3). Computer
Services.
The FLSA also contains an exemption for certain information technology
employees. Computer employees within the
scope of this exemption, as well as those employees not within its scope, may
also have executive and administrative duties which qualify the employees for
exemption under subpart B or subpart C of this part. For example, systems
analysts and computer programmers generally meet the duties requirements for the
administrative exemption if their primary duty includes work such as planning,
scheduling, and coordinating activities required to develop systems to solve
complex business, scientific or engineering problems of the employer or the
employer's customers. Similarly, a senior or lead computer programmer who
manages the work of two or more other programmers in a customarily recognized
department or subdivision of the employer, and whose recommendations as to the
hiring, firing, advancement, promotion or other change of status of the other
programmers are given particular weight, generally meets the duties requirements
for the executive exemption.
29 CFR 541.402. Classification of BPO Service Provider Employees and In-Sourced BPM Employees. In a public company, many employees may be required to follow scripted workflows to follow a predefined business process. In outsourcing, such workers provide “BPO services.” When employed by the company that receives such workflows for internal consumption, such in-sourced employees follow “business process management” to do their jobs. As the Department of Labor notes, there are no exemptions, even if the worker is highly paid, for “employees who perform work involving repetitive operations with their hands, physical skill and energy,” such as electricians, carpenters, operating engineers and longshoremen. 29 CFR 541.601(d). In contrast, office workers (likely candidates for outsourcing or BPM services) are not classified as to whether they are “repetitive operations.”
Outsourced legal services and outsourced medical services are always
exempt if the person is practicing the licensed profession.
29 CFR 541.304. But the
regular analysis applies if they are not licensed, or not “practicing” their
professional roles. BPO and
BPM employees may be non-exempt from the minimum wage and overtime wage
provisions of the FLSA. In the IBM
case, the employees claimed that they did not have, as their primary duty, the
exercise of discretion and independent judgment in matters of significance.
Contrast with Foreign Laws. One country limits overtime. The French government adopted a law making it illegal to work more than 35 hours in a week. [Law relative to the negotiated reduction in the time of work, Law No. 2000-37 of 19 January 2000]. Such limits are intended to increase the number of jobs by spreading work among workers. Labor practices in other countries may not limit overtime or require overtime wages. If such laws exist, they might not be enforced. One consequence of the FLSA may be
that foreign workers are more productive than U.S. workers because they are not
paid overtime wages. This
results in improved productivity (measured as cost of labor per unit of service
or per unit of output). As noted in
a survey by McKinsey & Co. and China’s Tsinghua University reported the Wall
Street Journal (Dec. 1, 2006, p. B2, cols. 3-4), Chinese companies have been
able to make productivity inroads against their foreign competitors because
non-Chinese multinationals “tend to enforce higher standards of labor
treatment – limiting the number of hours employees can work without overtime,
for example.” U.S. Policy
Implications. If IBM is claimed to violate wage laws by misclassification,
the same problem can be expected to be an increasingly prevalent litigation risk
for multinational companies that employ U.S. workers. As job descriptions become increasingly process-driven, fewer
jobs will meet the test of “independent” “discretion” over “matters of
significance.” Such jobs are not
defined by wage level, but rather by tasks.
This settlement highlights the increasing difficulty of applying
“quality” standards of defined processes to the American labor force.
Diplomatic
Efforts. As
a matter of policy, U.S. laws thus promote offshore outsourcing, all things
being considered, if only due to the FLSA.
Since the WTO Uruguay Round in the early
1990's, U.S. politicians have been calling for application of similar wage and hour
laws in foreign countries, but with little success.
Legislative and Regulatory Analysis. The statutory and regulatory definitions of exempt labor have been in place since before the Sarbanes-Oxley Act of 2002 and the resulting focus on defined workflows, process controls, audit and transparency of business processes. The increased use of BPM to automate the office environment in the United States will reduce the number of exempt employees. Such a reduction could have the counterproductive result of inciting the offshoring of workflows that, under rapid global telecommunications and collaboration technologies, could be done anywhere. Senior management may therefore decide between onshoring and offshoring, and in this analysis, labor standards could be one of many considerations. Further Reading:
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