The Fair Labor Standards Act (“FLSA”) is the federal law requiring employers – with certain exceptions – to pay overtime wages to employees that work more than forty hours in a single week. FLSA overtime litigation has been a major concern for employers with the Department of Labor (“DOL”) reporting more than 20,000 cases with violations occurring each year going back to 2011, and accounting for more than $200,000,000.00 in back wages paid in 2016 alone. DOL, Fiscal Year Data for Wage and Hour Division, https://www.dol.gov/whd/data/datatables.htm#panel2 (last visited June 13, 2017). Executive, administrative, and professional employees (“EAP”) are exempt from overtime wages as long as their work activities fit the EAP definitions and their salaries are greater than the $23,660 minimum annual salary. However, under the Obama Administration, new DOL rules sought to raise the minimum salary requirements by more than 67%, which would eliminate the EAP exemption for a substantial number of employees across the country overnight, and consequently, force employers to either raise wages or pay overtime.
However, the new DOL labor rules have been put on hold after a federal judge in the Eastern District of Texas halted enforcement pending a formal trial. See Nevada v. United States Dep’t of Labor, No. 4:16-CV-00731, 2016 WL 6879615, at *1 (E.D. Tex. Nov. 22, 2016). Several states, including Texas, challenged the DOL rules, arguing that the DOL overstepped its authority in basing the exemption on a minimum salary. The district court agreed, granting an emergency injunction and halting implementation of the new rules across the country until the matter can be ultimately resolved at trial. Naturally, the DOL appealed before the Trump Administration came to office and the matter is before the Fifth Circuit waiting to be fully briefed. For the time being, we will have to wait to find out whether these new rules will be effective. But what do these rules really mean? As it turns out for many employers, quite a lot.
New overtime rules have been gestating for some time now, with President Obama issuing a memorandum directing the Secretary of Labor to “modernize and streamline the existing overtime regulations for EAP employees” in March 2014. 79 Fed. Reg. 18, 737, 18,737 (March 13, 2014, https://obamawhitehouse.archives.gov/the-press-office/2014/03/13/presidential-memorandum-updating-and-modernizing-overtime-regulations) (last visited June 13, 2017). The Obama administration sought to update the existing “white collar” exemptions to the Fair Labor Standards Acts minimum wage and overtime requirements that had “not kept up with our modern economy.” Id. Indeed, the existing regulation had not been updated since the Bush presidency.
The DOL finalized the new rules to be effective December 1, 2016, increasing the minimum salary level for exempt employees from $455 per week ($23,660 annually) to $913 per week ($47,892 annually). 29 CFR part 541.600. Additionally, the salary basement would automatically amend every three years to correct to the 40th percentile of salaries in the country at that time. The Final Rule states that “[w]hite collar employees subject to the salary level test earning less than $913 per week will not qualify for the EAP exemption, and therefore will be eligible for overtime, irrespective of their job duties and responsibilities.” In other words, unless an employee’s salary is greater than $913 per week ($47,892 annually), then no other exemption consideration is even made. Every exempt EAP employee making less than $913 per week would instantly become eligible for overtime compensation. Employers would either be forced to increase salaries by at least 67%, or start paying their employees overtime. The impact on employers around the country is easy to see. And corporate America is not alone. Academia, for instance, could be hugely impacted as well.
Numerous state governments filed suit against the DOL shortly before the rules were set to take effect, arguing that placing a salary-level test, or an automatic updating mechanism, to determine eligibility for the EAP exemptions to FLSA was beyond the authority granted to the agency under 29 U.S.C. § 213. See Nevada, 2016 WL 6879615, at *9. In simplified terms, the argument is that the United States Code allows for an exemption to FLSA overtime rules for “executive, administrative, and professional” employees. However, the Code does not go so far as implementing a minimum salary requirement. The plaintiffs sought an emergency injunction, which required the court to preview the likelihood of success at trial. The court granted the emergency injunction, agreeing that DOL overstepped its authority. Nevada, 2016 WL 6879615, at *9. Section 213 authorizes the DOL to define and delimit the EAP classifications. Nevertheless, the court found that section 213 already defined EAP employees based on job duties, and the DOL’s salary requirements went fundamentally beyond those definitions. Id. at *6. In lawyerly fashion, the analysis centered on the definition of “define” under section 213. Id. at *6. The court ultimately determined that section 213 allowed DOL to define the EAP classifications by the types of duties that might qualify an employee for the exemption, but it did not authorize the agency to define the EAP classifications by salary level. Consequently, the automatic updating function of the new rules was also found to go beyond the authority granted by section 213.
On appeal, the DOL argues that salary-based limitations have been utilized for 75 years, and that prior Fifth Circuit precedent has acknowledged DOL’s wide authority to define limitations under section 213, including by salary. See App. Brief at 12-13. The state plaintiffs have made similar arguments as were made in the lower court. DOL has, however, moved to extend their reply deadline on multiple occasions, largely due to changes in administration and the lack of a labor secretary until Mr. Alex Acosta was sworn in on April 28, 2017. This delay could, as many have speculated, signal that DOL no longer has an appetite to continue litigating the matter. However, no official statement on the issue has been made.
The DOL rules have the potential to significantly alter the EAP landscape for businesses and institutions around the country alike. And while DOL’s arguments on appeal could be worth consideration, they may never even see the light before the Fifth Circuit as the Trump Administration works out its labor policy. To date, DOL has been content to delay and the Fifth Circuit equally content to allow it. Employers will have to do the same, but given the magnitude of the result, the Nevada case is one to watch in 2017.