On November 22, 2016, a federal court in Texas ruled that the U.S. Department of Labor (DOL) unlawfully issued its Final Rule raising the minimum annual salary threshold for most “white collar” overtime exemptions under the Fair Labor Standards Act (executive, administrative and professional) from $23,660 to $47,476 and granted a request for a nationwide injunction barring implementation of the Final Rule. State of Nevada v. U.S. Department of Labor, No. 4:16-CV-00731 (November 22, 2016). This means that the Final Rule did not become effective, as scheduled, on December 1, 2016.

Background

On May 18, 2016, the DOL issued its Final Rule. The Final Rule focused primarily on the salary basis requirements of the “white collar” exemption:

  • The minimum salary increased from $455 per week to $913 per week or $47,476 annually for a full-year worker;
  • Employers were permitted to use nondiscretionary bonus, incentive, and/or commission payments to satisfy up to 10 percent of the required annual salary under the salary basis test ($91.30 per week); however, this requirement had to be met quarterly, which means the employee’s salary must equal at least $821.70 per week and the nondiscretionary bonus, incentive, and/or commission payments must equal at least $1,186.90 per quarter (the employer could issue a one-time make-up payment in the payroll period immediately following the end of the quarter to fulfill any deficit from that quarter);
  • The total annual compensation requirement for highly compensated employees subject to a minimal duties test is increased to $134,004; and
  • The foregoing salary and compensation levels were to be automatically updated every three years to maintain the levels at specifically articulated percentiles and to ensure they continue to provide useful and effective tests for exemption.

Shortly after the Final Rule was issued, 21 states challenged it, arguing that: the DOL did not have the authority under the FLSA to set a salary level for exempt employees that ignored their duties; the Final Rule’s automatic update of the salary threshold every three years violated the Administrative Procedure Act’s notice-and-comment requirements; and the rule violated the 10th Amendment by requiring states to pay overtime in accordance with the new rules.

Additional challenges to the Final Rule came from business groups, led by the U.S. Chamber of Commerce, who raised similar arguments. The lawsuits were consolidated and the plaintiffs asked the court to issue a nationwide injunction barring the new rules from becoming effective.

Court’s Ruling

The court agreed with the plaintiffs’ first argument – that the FLSA did not authorize the DOL to use a salary threshold that ignored an employee’s duties. The court acknowledged that the FLSA granted the DOL authority to define the “executive,” “administrative” and “professional” (EAP) exemptions provided for in the FLSA, but determined that the DOL exceeded that authority by raising the minimum salary threshold to qualify for those exemptions because “Congress intended the ‘white collar’ exemption to depend on an employee’s duties rather than an employee’s salary.”

The court found that the Final Rule conflicted with Congress’ intent because the rule states that, “[w]hite collar employees subject to the salary level test earning less than $913 per week will not qualify for the [“white collar”] exemption, and therefore, will be eligible for overtime, irrespective of their job duties and responsibilities.” The court concluded that in essence, the Final Rule improperly created a “de facto salary-only test” for determining which workers fall under the “white collar” exemption. Accordingly, the court ruled that 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,” and therefore, the Final Rule is unlawful.

The court also issued a nationwide preliminary injunction barring the DOL from implementing the Final Rule. The court reasoned that the “Final Rule is applicable to all states. Consequently, the scope of the alleged irreparable injury extends nationwide. A nationwide injunction protects both employees and employers from being subject to different EAP exemptions based on location.”

Impact of Ruling

The court’s decision blocked the DOL from implementing the Final Rule nationwide; however, the decision is not yet final and may be appealed. Nonetheless, with the new Administration, the likelihood of an appeal by the DOL is uncertain.

Significantly, the court noted that it “was not making a general statement on the lawfulness of the salary-level test for the EAP exemptions. The Court is evaluating only the salary-level test as amended under the Department’s Final Rule.” However, the court’s rationale would seem to undermine the use of any salary threshold, as the same argument could apply to the current salary threshold of $455 per week which, by its terms, excludes consideration of the duties performed by employees who are not paid on a salaried basis or are paid a lower salary.

Finally, in addition to the court’s ruling, there may be another opportunity for opponents of the Final Rule to challenge it. Pursuant to the Congressional Review Act, any regulation finalized within the last 60 days of a legislative session by either the House or the Senate can be revisited in the next Congressional session and nullification legislation can be adopted and sent to the President. Thus, so long as the House or Senate adjourns the current session by December 9, 2016, Congress can consider this option in its next session.

Next Steps

As a legal matter, employers need not apply the Final Rule that was to commence on December 1, 2016, but must continue to honor the current federal $455 per week salary threshold and the current duties tests (both still apply at this point) to insure employees are exempt from overtime, at least until a further ruling is issued in this case.

Moreover, if an employer has invested considerable effort into being ready to comply with the increased salary threshold, it may elect to continue down that path voluntarily, but should inform its employees that is the case so as to garner some HR goodwill.