Economic and legal aspects of FLSA exemptions: A case study of companion care

Introduction

ECONOMIC AND LEGAL ASPECTS OF FLSA EXEMPTIONS: A CASE STUDY OF COMPANION CARE

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Section 13(a)(15) of the Fair Labor Standards Act (FLSA)exempts workers "employed in domestic service employment to provide companionship services for individuals who (because of age or infi rmity) are unable to care for themselves" from the FLSA's minimum wage and overtime provisions.1 In addition, Section 13(b)(21) of the FLSA exempts from FLSA's overtime provisions(but not minimum wage provisions) any worker employed "in domestic service in a household and who resides in such household."2 The Department of Labor (DOL) issued implementing regulations in February 1975 (the 1975 Rules),3 under which most providers of companion care services, regardless of whether they are employed directly by the household or through a third-party employer, and even if they occasionally provide ancillary services such as driving or limited housework, are not covered by the FLSA's minimum wage or overtime provisions. Section 13(a)(15) and its implementing regulations are commonly referred to as the "Companion Care Exemption" while Section 13(b)(21) is referred to as the "Live-in Exemption."

On December 27, 2011, the DOL published in the Federal Register a Notice of Proposed Rulemaking (NPRM)4 which would narrow the Companion Care Exemption and the Live-In Exemption significantly, eliminating them entirely for workers employed by third-party employers, and restricting the types of activities companion careworkers and domestic live-in providers who are employed directly can engage in while still being classified as exempt. Because the proposed changes would have an annual economic impact of more than $100 million (and other significant effects), the DOL is required under Executive Order 12866 to conduct a Regulatory Impact Analysis of the effects of the proposed rule. The Department's Preliminary Regulatory Impact Analysis (PRIA) was published with the NPRM on December 27, 2011, and concludes that the proposed changes would result in annual costs (comprised of transfers and efficiency losses) averaging between $42 million and $226 million over the next 10 years, and cause annual employment losses of between 172 and 938 jobs.5 The DOL concludes, however, that these costs are more than compensated for by unquantifiable benefits, such as an increased supply of companion care labor and improved quality of care.

The economic effects of this proposal (on workers in the industry and others) depend critically on (1) the extent to which labor costs would increase as a result of the cost of compliance;and (2) the elasticity of demand for companion care labor, which itself is derived from the demand for companion care services. In this case study, we review the available evidence and findt hat the economic impact of repeal is likely to substantially exceed the DOL's estimates. Due primarily to data limitations, key cost categories are underestimated or ignored altogether in the DOL's analysis, as are the disproportionate overtime and recordkeeping costs that would likely be imposed on the market for live-in care. The PRIA also assumes an extremely low value for the elasticity of demand for companion care labor that ignores entirely the "scale effect," which reflects the tendency for firms to scale back their operations (or even shut down) in response to an increase in input costs. Using data from the industry, we conduct an econometric analysis,which indicates that the demand for companion care labor (and, by implication, the demand for companion care services), is elastic, and therefore quite sensitive to increases in the cost of labor. We conclude that the compliance costs associated with the proposal would cause aggregate worker compensation in the industry to decline, reduce the availability of companionship care services to the special needs populations that typically require them, and have other adverse effects. More generally, our case study suggests that efforts to expand the FLSA's minimum wage and overtime provisions to previously exempt occupations may result in unintended harm to both workers in the industry and others.

 

Jeffrey A. Eisenach is a visiting scholar at AEI, a managing director and principal at Navigant Economics LLC and an Adjunct Professor at George Mason Law School. Kevin W. Caves is a Director at Navigant Economics LLC.

Notes

1 See 29 U.S.C. 213(a)(15).

2 See 29 U.S.C. 213(b)(21).

3 See 29 CFR part 552, 40 FR 7404 (February 25, 1975).

4 See 76 FR 81190-81245 (December 27, 2011). Hereafter “NRPM.”

5 NPRM at 81228

 

 

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About the Author

 

Jeffrey
Eisenach
  • Jeffrey Eisenach is a visiting scholar at AEI. Eisenach has served in senior positions at the Federal Trade Commission and the Office of Management and Budget. At AEI, he focuses on policies affecting the information technology sector, innovation, and entrepreneurship. Eisenach is also a senior vice president at NERA Economic Consulting and an adjunct professor at the George Mason University School of Law, where he teaches Regulated Industries. He writes on a wide range of issues, including industrial organization, communications policy and the Internet, government regulations, labor economics, and public finance. He has also taught at Harvard University's Kennedy School of Government and at the Virginia Polytechnic Institute.


    Learn more about Jeffrey Eisenach and AEI's Center for Internet, Communications, and Technology Policy.

  • Phone: 202-448-9029
    Email: jeffrey.eisenach@aei.org

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