Friday, September 1, 2017

The order invalidates the US Department of Labor’s revisions to the Fair Labor Standards Act regulations for the executive, administrative, and professional overtime exemptions.

On August 31, 2017, a judge from the US District Court for the Eastern District of Texas issued an order invalidating the US Department of Labor’s (DOL’s) revisions to the Fair Labor Standards Act (FLSA) regulations for the executive, administrative, and professional (EAP) overtime exemptions (the Final Rule). In invalidating the Final Rule, the court held that the DOL exceeded its authority in attempting to raise the minimum annual salary threshold to qualify for the EAP exemptions from $23,660 to $47,476. This same court previously enjoined the Final Rule from going into effect on December 1, 2016.

The plaintiffs, which constituted more than 55 business groups, filed an expedited summary judgment motion challenging the Final Rule, which

increases the minimum salary level needed to qualify for the white collar exemptions from $455 per week to $913 per week,

increases the total annual compensation requirement for highly compensated employees, and

establishes a mechanism to update these salary and compensation levels automatically every three years.

The plaintiffs argued that the Final Rule “increases the minimum salary threshold so high that it is no longer a plausible proxy for the job duties of an executive, administrative, or professional capacity employee.”

Upon consideration of the plaintiffs’ summary judgment motion, the court held that the Final Rule fails to give effect to Congress’s intent and is thus invalid. Because Congress clearly defined the EAP exemptions with regard to duties, “any salary-level test that will effectively eliminate the duties test [or] categorically exclude those who perform ‘bona fide executive, administrative, or professional capacity’ duties” is thus improper. Whereas the DOL’s previous salary-level test operated as a floor to screen out obviously nonexempt employees, the Final Rule—which more than doubles the previous minimum salary level—would make “overtime status depend predominately on a minimum salary level, thereby supplanting an analysis of an employee’s job duties.” As Congress did not intend for “salary rather than an employee’s duties” to be determinative of exemption, the court held that the Final Rule—including its automatic updating mechanism—is not entitled to Chevron deference and is invalid.

Although finding that the Final Rule’s salary threshold impermissibly rendered the duties test irrelevant in many situations, the court stated that it is “not making any assessments regarding the general lawfulness of the salary-level test or the Department’s authority to implement such a test.” The court also found invalid the Final Rule’s automatic updating mechanism that would have adjusted the minimum salary level for the EAP exemption every three years starting in 2020.

What the Decision Means

The court did not rule outright that any salary-level test is improper, thus leaving ambiguity as to the scope of the DOL’s authority to adjust the salary level. Rather, the court’s ruling merely holds that the imposed salary threshold in the Final Rule (which is approximately double the prior salary level) goes too far because it renders the duties test meaningless. Notably, the court sends a strong signal that an adjustment of the 2004 salary level for inflation would likely be acceptable, as it would not diminish the impact of the duties test. Indeed, the court also noted in dicta that if the DOL had just raised the 2004 salary level for inflation, “we wouldn’t be here today.”

The DOL is currently accepting comments on the FLSA’s overtime regulations. In its request, the DOL seeks comments on issues that go beyond the scope of the regulations rejected by the court, including (1) whether updating the 2004 salary level for inflation would be an appropriate basis for setting the standard salary level, and (2) whether a test for exemption that relies solely on the duties performed by an employee without regard for the amount of the employee’s salary would be preferable to the current salary test. The deadline to submit comments is September 24, 2017.

This ruling has no effect on state and local law overtime exemptions, so employers will need to continue complying with all requirements under those laws, some of which already have in place salary levels higher than the existing federal level (e.g., in New York, the salary requirement is $675/week and in California the salary requirement is $840/week).

The court’s preliminary injunction maintaining the status quo pending the conclusion of the litigation is the subject of a pending appeal before the US Court of Appeals for the Fifth Circuit, with oral argument scheduled for October 3. On August 31, however, the DOL filed a joint motion with the plaintiffs requesting that the Fifth Circuit remove the oral argument scheduled for October 3 and hold the appeal in abeyance pending discussions between the parties on how to narrow the scope of the appeal and potentially eliminate the need for an appeal. The Fifth Circuit has yet to rule on this motion—it is also possible that the Fifth Circuit would now dismiss the appeal as moot given that the district court has entered final judgment.