Court blocks DOL’s new overtime rule from taking effect

Wage and Hour Law

December 2016
Ryan B. Frazier
Utah Employment Law Letter

The Fair Labor Standards Act (FLSA) generally requires employers to pay employees at least the federal minimum wage (currently $7.25 per hour). The FLSA also requires employers to pay employees overtime compensation for all hours worked over 40 in a workweek. Overtime compensation must be at least 1½ times an employee’s regular rate of pay.

Some employees are exempt from the FLSA’s minimum wage and overtime requirements. The Act specifically exempts, among others, “any employee employed in a bona fide execu­tive, administrative, or professional capacity.” Those exemp­tions are often referred to as the “white-collar” exemptions. The terms “executive,” “administrative,” and “professional” are not defined in the FLSA, so the U.S. Department of Labor (DOL) has issued a regulation to define the terms. For the last 12 years, the regulation has included a minimum salary that must be paid each week to employees who are purportedly cov­ered by the white-collar exemptions. On May 23, 2016, the DOL revised the rule to increase the minimum salary.

Several states and employers filed lawsuits challenging the updated salary requirement. On November 22, a federal court placed the implementation of the rule on hold. This article ad­dresses the court’s order halting the implementation of the new rule and what it means for employers.

New rule

When Congress enacted the FLSA, it delegated power to define and delimit the terms “executive,” “ad­ministrative,” and “professional” to the secretary of labor. Under authorization from the secretary of labor, the DOL started promulgating regulations to interpret the white-collar exemptions in 1938. The DOL’s tests delineating when the exemptions apply have changed over time, but the focus has always been on the duties performed by employees purportedly covered by the executive, administrative, and professional exemptions. Stated differently, for employees to fall within one of the white-collar exemptions, they must perform executive, administrative, or professional duties (known as the “duties” test). Job titles have never been determinative of whether an exemption applies.

In 2004, the DOL amended the rule to require that employees covered by the exemptions be paid a prede­termined salary (known as the “salary basis” test) and be paid at least $455 per week, or $23,660 annually (the “salary level” test). The salary level test remained un­changed until May 23, when the DOL, at the request of President Barack Obama, issued a new final rule that ef­fectively doubled the minimum salary that must be paid to exempt employees. The new rule increased the salary threshold to $913 per week ($47,476 annually). The antici­pated upshot of the change was that many more workers would be entitled to overtime under the FLSA. Notably, the rule, which was to take effect on December 1, did not eliminate the duties or salary basis tests.

In addition, among the new features of the rule were automatic increases to the salary that must be paid for the white-collar exemptions to apply. Under the change, the salary threshold would automatically update every three years beginning in 2020. The automatic updates were designed to ensure that the threshold remained at the 40th percentile of full-time salaried employees in the lowest-income region of the country according to the U.S. Census.

The DOL’s new rule also increased the minimum salary employees must receive to qualify for the highly compensated employee exemption. The total com­pensation that must be paid to an employee who falls within the exemption was raised from $100,000 per year to $134,004 per year. That equals the 90th percentile of earnings for full-time salaried employees.

Legal challenges

Twenty-one states filed a lawsuit against the DOL, the DOL’s Wage and Hour Division (WHD), and their agents (collectively, the DOL) challenging the imple­mentation of the new rule. In addition, the Plano (Texas) Chamber of Commerce and more than 50 businesses filed a lawsuit in the U.S. District Court for the Eastern District of Texas challenging the new rule. The court combined the two lawsuits into one.

On October 12, the states filed a motion for an emer­gency court order called a preliminary injunction to block the implementation of the increased minimum salary that must be paid under the revised salary level test. The DOL opposed the motion. On November 16, the court held a hearing regarding whether the injunc­tion should be issued. In determining whether to issue the injunction, the court considered the pleadings and papers filed in both lawsuits.

Injunction

On November 22, Judge Amos L. Mazzant issued the requested injunction, which stopped the implemen­tation of the new rule nationwide. The court concluded that although the FLSA does not define the terms execu­tive, administrative, and professional, it was clear from the statute that Congress did not set a requirement that an established salary threshold had to be met for one of the exemptions to apply.

In its ruling, the court explained, “The plain mean­ings of the terms in Section 213(a)(1), as well as Supreme Court precedent, affirms the . . . conclusion that Congress intended the [white-collar] exemption[s] to depend on an employee’s duties rather than an employee’s salary.” The court recognized that the delegation of rulemaking authority allowed the DOL to update the duties tests. However, the court stated that “nothing in the [white-collar] exemption[s] indicates that Congress intended the [DOL] to define and delimit with respect to a minimum salary level.”

The court then determined that the new rule in­creasing the minimum salary under the salary level test was “directly in conflict with Congress’s intent.” Ac­cordingly, the court ruled that the updated salary level test was unlawful. It reasoned: “With the Final Rule, the [DOL] exceeds its delegated authority and ignores Con­gress’s intent by raising the minimum salary level such that it supplants the duties test. . . . If Congress intended the salary requirement to supplant the duties test, then Congress, and not the [DOL], should make that change.” Interestingly, the court was careful to state (almost in­consistently with its opinion) that it was “not making a general statement on the lawfulness of the salary-level test” for the white-collar exemptions.

The injunction was issued just days before the rule was to take effect. The order does not prevent the rule from taking effect permanently. However, for now, em­ployers do not have to comply with the increased salary threshold for the white-collar exemptions.

Appeal

On December 1, the date the new rule was to take ef­fect, the DOL filed a notice of appeal. The appeal will be heard by the U.S. 5th Circuit Court of Appeals.

At this point, it is difficult to prognosticate whether the appellate court will rule that the injunction was properly issued. It may depend on which judges on the court hear the appeal. In addition, it is unclear whether new DOL leadership appointed by President-elect Don­ald Trump will decide to pursue the appeal. In fact, the new administration may decide not to move forward with the new rule altogether. State of Nevada et al. v. United States Department of Labor, Civil No. 4:16-cv-00731 (E. D. Tex., Nov. 22, 2016).

Lessons learned

For now, employers are not required to comply with the new rule. Thus, employers can maintain the status quo. Some employers were watching the lawsuit and de­cided to wait to implement salary increases to comport with the new regulation. Those employers will not need to make a change.

Some employers already implemented salary in­creases or notified employees of salary increases. Those employers are now confronted with the dilemma of whether to leave the salary increases in place or attempt to reverse them. A rollback could be problematic. Em­ployees expecting or relying on increased salaries may become disgruntled when the wage hikes are reversed. Further, a reversal should be implemented only with plenty of notice. Finally, a rollback should apply only to future wages; do not attempt to recoup wages already paid to employees.

Employers need to keep an eye on what happens with the new rule and whether it is ultimately imple­mented. Stay tuned.

You can contact the author at rfrazier@kmclaw.com or 801-323-5933.

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