February 14, 2012

Application of the Fair Labor Standards Act to Domestic Service

Proposed Rule
Summary

Score: 24 / 60

Additional details
Agency
Department of Labor
Regulatory Identification Number
1235-AA05
Agency Name
Department of Labor
Rule Publication Date
12/27/2011
Comment Closing Date
03/12/2012
Dollar Year
2012
Time Horizon (Years)
10

RULE SUMMARY

The Department of Labor (DOL) proposes to amend the regulations attached to the Fair Labor Standards Act (FLSA) to revise the definitions of ‘‘domestic service employment’’ and ‘‘companionship services’’ and to require employers of live-in domestic workers—known as Home Health Aides (HHA) or, if they carry out limited medical supervision, as Personal Care Aides (PCA)—to maintain an accurate record of hours worked by such employees. In addition, the proposed regulation would limit the scope of duties a companion may perform and prohibit employees of third-party employers from claiming the certain exemptions. Elimination of these exemptions would increase the number of live-in domestic workers covered under minimum wage laws, eligible for overtime pay, and eligible for compensation for time spent commuting between worksites.

 

COMMENTARY

The RIA fails to identify the labor-market failure that necessitates the use of the minimum wage, overtime, and travel compensation regulations set forth in the DOL’s Notice of Proposed Rule Making (NPRM). Without any mention of asymmetric information, noncompetitive labor market, or noncompetitive market for live-in domestic workers, the RIA uses only selected quotes from hearings on the 1975 expansion of the Fair Labor Standards Act. Although the NPRM does account for the responsiveness of consumers of services of live-in domestic workers, the proposed amendment does not consider alternative definitions or regulatory approaches, nor does it set forth potential ways to measure the effectiveness of the regulation.

MONETIZED COSTS & BENEFITS (AS REPORTED BY AGENCY)

Dollar Year
2012
 
Time Horizon (Years)
10
 
Discount Rates
3%
7%
Expected Costs (Annualized)
$4.6 million
$4.7 million
Expected Benefits (Annualized)
Not Reported by Agency
Not Reported by Agency
Expected Costs (Total)
$46 Million
$47 Million
Expected Benefits (Total)
Not Reported by Agency
Not Reported by Agency
Net Benefits (Annualized)
Not Reported by Agency
Not Reported by Agency
Net Benefits (Total)
Not Reported by Agency
Not Reported by Agency

METHODOLOGY

There are twelve criteria within our evaluation within three broad categories: Openness, Analysis and Use. For each criterion, the evaluators assign a score ranging from 0 (no useful content) to 5 (comprehensive analysis with potential best practices). Thus, each analysis has the opportunity to earn between 0 and 60 points.

Criterion Score

Openness

1. How easily were the RIA , the proposed rule, and any supplementary materials found online?
The NPRM is easy to find using either the RIN or keywords on regulation.gov. Summary information was easily found using both keyword and RIN search on the Department of Labor's website. The DOL’s site did not link directly to the proposed rule, however. A Google RIN search returns both a summary and the entire rule. OMB 'Economic Impact' is just a copy of the Preliminary Regulatory Impact Analysis section of the Federal Register entry.
3/5
2. How verifiable are the data used in the analysis?
For most of the rule, the DOL provides easily verifiable sources and often links directly to the research paper or agency from which the data are gathered. There are a few assumptions, mostly pertaining to benefits of regulation, which are made without reference to any data sources.
3/5
3. How verifiable are the models and assumptions used in the analysis?
There is no formal model overall, but rather a discussion of arguments made in a series of legal cases (e.g., Coke, 551 US 158), Congressional debates, and academic papers: reasoning amounts to a suspicion that employers may circumvent the FLSA because literal elements of an exemption do not match Congressional intent. The exercise is essentially one of statutory interpretation, per Coke. There is some use of price elasticity and deadweight loss. Assumptions are applied speculatively. Most of the data and assumptions come from either government agency data, such as the Bureau of Labor Statistics (BOL) or academic research that is cited and linked in the NPRM. A few of the assumptions are undocumented, though these are readily admitted in the rule.
3/5
4. Was the analysis comprehensible to an informed layperson?
The results and conclusions are clear, however, if only because of repetition. An economist could easily understand the analysis. A layperson may have a bit more difficulty.
3/5

Analysis

5. How well does the analysis identify the desired outcomes and demonstrate that the regulation will achieve them?
3/5
Does the analysis clearly identify ultimate outcomes that affect citizens’ quality of life?
The NPRM seeks to revise the definition "domestic service employment" and "companionship services" so that employers of live-in workers must maintain records of hours worked and travel time between sites so that workers must be paid the legal minimum wage and overtime. The rule will also narrow the duties they can perform and prohibit employees of third-party employers (instead of families) from claiming exemption from Fair Labor Standards. A small subset of agency-employed and independent workers will realize an increase in the wage rate. A larger fraction will now be eligible for overtime, and all will now be paid an hourly rate for travel time between worksites. The rule will increase the cost of providing care for infirmed family members, however, the rule also proposes that the benefits will be less turnover, fewer worker injuries, less home care worker reliance on direct public assistance, and improved quality of care.
4/5
Does the analysis identify how these outcomes are to be measured?
The RIA does not specifically state how these outcomes are to be measured. However, the RIA does use BOL statistics to determine the number and wages of workers that might be affected by the rule and thus could use these data to calculate the effect on the wage of workers. The RIA also uses data from a Paraprofessional Healthcare Institute (PHI) analysis of the U.S. Census Bureau’s Current Population Survey, Annual Social and Economic Supplement (ASEC), on home-health-care workers, which could be used in the future to determine the number of overtime hours worked. There is little in the way the agency might measure travel time between work sites, turnover, employment injuries, less reliance on direct public assistance, and improved quality of care.
2/5
Does the analysis provide a coherent and testable theory showing how the regulation will produce the desired outcomes?
The analysis speculates that moving exemption closer to the perceived intent of Congress will have a series of beneficial effects. The RIA explains how the rule will reduce the number of Home Health Aides (HHAs) and Personal Care Aides (PCAs) who are exempt from the federal or local minimum wage and overtime rules. Because both demand and supply of these services are, with some support, assumed to be inelastic, this will raise the hourly pay for a small subset of home assistance workers. Now that travel time is compensated, workers will now earn while traveling between worksites. The testable theory is that this will raise wages per hour of work, reduce turnover and employment injuries, and result in less reliance on direct public assistance and improved quality of care.
3/5
Does the analysis present credible empirical support for the theory?
The RIA does report empirical support that a small fraction of current Home Health Aids and Personal Care Aids, from states that do not have state regulations on wages and overtime for home assistance workers, will realize an increase in their wage rate and potentially overtime wages. The DOL admits it has been unable to find data on the number of hours spent traveling between sites and the fraction of HHA or PCAs that are currently compensated for travel. The DOL uses data on the elasticity of demand associated labor services but then asserts that the demand for companionship is one half those for labor services (p. 81224). The RIA only discusses overall employment quality and lower turnover for higher wages in general and not for these types of workers.
2/5
Does the analysis adequately assess uncertainty about the outcomes?
The RIA does present three scenarios for the uncertainty over overtime and three for travel time. However, the RIA only acknowledges the uncertainty over benefits such as reduced turnover and employment injuries, less reliance on direct public assistance, and improved quality of care.
2/5
6. How well does the analysis identify and demonstrate the existence of a market failure or other systemic problem the regulation is supposed to solve?
1/5
Does the analysis identify a market failure or other systemic problem?
The RIA fails to identify the labor market failure assumed by minimum wage, overtime, and travel compensation required by the NPRM. Without any mention of asymmetric information, noncompetitive labor market, or noncompetitive market for HHA or PCAs, the DOL is simply left with using selected quotes from hearings from the 1975 expansion of the Fair Labor Standards Act.
1/5
Does the analysis outline a coherent and testable theory that explains why the problem (associated with the outcome above) is systemic rather than anecdotal?
Without identifying a market failure, there is no way to outline a coherent theory of why this rule should be made. The rule does discuss previous congressional reports that support the idea that the intent of the initial rule was to cover all domestic workers under the Fair Labor Act.
0/5
Does the analysis present credible empirical support for the theory?
The rule does not provide empirical evidence as to why one should believe market failure is the reason that a small fraction of worker's wages are too low or some workers are not compensated for overtime work or travel time. The RIA does present empirical evidence and published support for the relationship between quality of care and the number of hours worked by the care assistant.
1/5
Does the analysis adequately assess uncertainty about the existence or size of the problem?
The analysis does report the fraction of both HHAs and PCAs whose wages are below the federal minimum wage, though the rule does not describe why or how this is attributable to a market failure. Nor does it describe why lack of overtime pay and travel time pay is a problem, though it does note the higher pay that would result from including these in the compensation of HCAs and PCAs. The regulation also notes the existence of current, higher state-based standards in states with high levels of home-based care. These discussions are not linked clearly to uncertainty over the scale of the underlying problem, defined as underpayment of care workers.
1/5
7. How well does the analysis assess the effectiveness of alternative approaches?
1/5
Does the analysis enumerate other alternatives to address the problem?
The RIA only briefly mentions two alternative options (p.81235): 1) no action or 2) allowing companions to assist with activities of daily living (ADLs) only five percent of the time. They do not report effects of either of these policies, only that the second option is 'overly burdensome.' Nor does the RIA look at different ways to increase the overall compensation for HHA or PCAs, such as only requiring overtime pay or only requiring pay for travel time between worksites. This may be due to how the Fair Labor Standard Act is written.
1/5
Is the range of alternatives considered narrow (e.g., some exemptions to a regulation) or broad (e.g., performance-based regulation vs. command and control, market mechanisms, nonbinding guidance, information disclosure, addressing any government failures that caused the original problem)?
The proposed rulemaking only investigates one set of policy options. The rule does not consider policy alternatives that would cover fewer HHAs or PCAs. Nor does the rule discuss only seeking minimum wage coverage, or overtime coverage, or travel costs individually. The rule fails to mention that much of this growth in HHA and PCA is likely due to the increases in the cost of institutional provided assistance such as nursing homes and assisted living centers.
1/5
Does the analysis evaluate how alternative approaches would affect the amount of the outcome achieved?
There are no alternative approaches evaluated.
0/5
Does the analysis adequately address the baseline? That is, what the state of the world is likely to be in the absence of federal intervention not just now but in the future?
The RIA does thoroughly investigate state regulations of companionship. The RIA also acknowledges the projected growth in the number of new families and firms hiring home health providers. The RIA does not acknowledge how the current evolution of policies at the state level might lower the net benefits realized by HHA and PCAs through this rule. A number of states are beginning to require state minimum wage, overtime, and travel costs to be included, but the regulation baseline simply assumes the current status quo and does not consider the trend in state regulations.
3/5
8. How well does the analysis assess costs and benefits?
3/5
Does the analysis identify and quantify incremental costs of all alternatives considered?
The RIA does not offer alternative policies and thus does not report incremental costs for the nonexistent options. It considers the extension of coverage only, save for a sketchy discussion of the impact on small businesses of altering the definition of home care assistants.
1/5
Does the analysis identify all expenditures likely to arise as a result of the regulation?
The RIA does identify the expenditures on familiarization of regulation, higher wages, overtime wages, and travel-time compensation that will result from the rule. Medicare, Medicaid, private insurance, and private out-of-pocket expenditures will likely increase. The RIA mentions, but does not address, whether those considering home assistance will now, given the higher price, consider institutional care more frequently and thus incur greater costs.
4/5
Does the analysis identify how the regulation would likely affect the prices of goods and services?
The RIA does calculate the increase in wages realized by HHAs and PCAs separately as well as the total increase in spending by patients, private insurance, Medicare, Medicaid, and other federal and state programs. It does so by halving the elasticity of demand for general labor services, because the RIA assumes that much of the increase in hourly rate will be paid for by government programs.
3/5
Does the analysis examine costs that stem from changes in human behavior as consumers and producers respond to the regulation?
The RIA does include the elasticity of demand and supply when determining the effect on quantity with an increased price. The RIA also notes that others may go to the grey market to avoid the regulation on compensation. However, the rule does not address the increase in cost realized by those who now seek the more expensive, though now relatively less expensive, option of institutionalized care. Discussion of data within the RIA indicates the DOL's perception that the underlying problem of restricted coverage of the FLSA is small.
3/5
If costs are uncertain, does the analysis present a range of estimates and/or perform a sensitivity analysis?
Because employers may alter HHA and PCA’s work schedules, the RIA proposes three possible increases in costs associated with overtime pay: the current number of hours worked as overtime, only 50 percent of current overtime, or no overtime. The RIA also considers three potential scenarios for travel-time compensation.
3/5
Does the analysis identify the alternative that maximizes net benefits?
The RIA does not offer alternative policies and thus does not have options on which to potentially maximize net benefits. It does report the potential net benefits from the responses of home companion workers and firms.
1/5
Does the analysis identify the cost-effectiveness of each alternative considered?
The RIA claims to have chosen the least burdensome option, though it does not offer any analysis of the alternative policies briefly mentioned. Thus it does not report cost effectiveness for the options mentioned in passing.
1/5
Does the analysis identify all parties who would bear costs and assess the incidence of costs?
The RIA reports figures and describes the various parties that will realize higher costs. These include private family costs, private insurance, federal Medicare, federal and state Medicaid, and other federal and state programs. The RIA also looks at how these higher costs will affect third-party suppliers of various sizes in terms of number of employees. The RIA also reports the costs of record keeping that would be required under the new compensation rules.
4/5
Does the analysis identify all parties who would receive benefits and assess the incidence of benefits?
The RIA identifies that a number of HCAs and PCAs will receive higher wage rates, the potential for overtime wages, and travel-time compensation. The rule also suggests, though does not assess the magnitude, employees will suffer fewer injuries due to fewer hours and have less reliance on direct public assistance due to higher wages. The rule reports in which states these rules will affect a fraction of HCAs and PCAs. The rule also suggests that, due to higher compensation, the infirmed will realize less turnover and improved quality of care.
3/5

Use

9. Does the proposed rule or the RIA present evidence that the agency used the analysis?
The department undertook this revision to the definition of 'companionship services' on its own belief that the current application of the law is not consistent with the original intent, not in response to a new law. Regulation is predicated on the belief that HCAs and PCAs are undercompensated. There is little evidence that the RIA was used to redefine companionship services or help the DOL devise the regulation.
1/5
10. Did the agency maximize net benefits or explain why it chose another alternative?
The DOL does not offer alternative regulatory options and thus is unable to show whether net benefits are maximized. The RIA does report the benefits in terms of higher wages, overtime wages, and travel-time compensation for HCAs and PCAs. The RIA also reports the deadweight costs. The RIA only reports potential benefits to those who are unable to care for themselves in speculative and qualitative terms.
1/5
11. Does the proposed rule establish measures and goals that can be used to track the regulation's results in the future?
The goals appear to be to increase the compensation of home assistance workers. The department makes no commitment to track or measure results in the future.
1/5
12. Did the agency indicate what data it will use to assess the regulation's performance in the future and establish provisions for doing so?
The RIA is complete enough to track the effects of this rule on wages and overtime using BLS data as well as the costs to Medicare and Medicaid. It is not compete enough to offer potential ways to measure travel compensation, the effects on small business, nor the suggested benefits through less turnover and greater quality of care.
1/5
 
Total 24 / 60