Starting last summer, employers began preparing to comply with the Obama administration’s revisions to the Fair Labor Standards Act (FLSA) regulations for the executive, administrative, and professional overtime exemptions (white collar exemptions). If implemented, the revised overtime rule would dramatically expand the number of workers eligible for overtime pay and would impact most U.S. employers. Because of legal challenges to the new rule, however, its validity has been up in the air for nearly a year. And the change from the Obama to Trump administration only created more uncertainty for employers. Right before the Labor Day weekend, a federal court in Texas issued an order invalidating the new overtime rule. Although we expect challenges to the court’s ruling, and the Trump DOL may propose its own revisions, the court’s order provides employers grappling with the proposed changes to the overtime exemptions with some clarity.

Background

Back in March 2014, President Obama announced his intention to "modernize and streamline" the overtime regulations, which were last updated in 2004. Employers then had to wait over two years until May 2016 for the DOL to publish the revised rule. The revised rule contains several key changes to the current FLSA regulations:

  • Increase to Minimum Salary for White Collar Exemptions: The new rule sets the minimum salary required to qualify for the white collar exemptions at USD 913 per week or USD 47,476 annually. This is more than double the current amount required to qualify for the exemption—which is USD 455 per week or USD 23,660 annually.
  • Increase to Minimum Salary for Highly Compensated Employee Exemption: The revised rule increases the total annual compensation needed to exempt highly compensated employees from USD 100,000 to USD 134,004 annually. The new minimum salary is based on the annualized value of the 90th percentile of weekly earnings of full-time salaried workers nationally.
  • Automatic Updates: The revised rule establishes a mechanism for automatically updating the minimum salary and compensation levels for these exemptions going forward. The salary level will increase automatically every three years, starting January 1, 2020—the DOL estimates the salary basis for 2020 will be USD 984 per week, or USD 51,168 annually.

These changes were set to go into effect on 1 December 2016. But the revised rule faced several legal challenges from states and business groups. The plaintiffs argued that the revised 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."  On 22 November 2016, shortly before the rule’s effective date, the same Texas federal court entered a nationwide preliminary injunction against the amendments. So the changes to the overtime rule have been stayed since that time.

The Court's Ruling

On August 31, 2017, the court granted a motion for summary judgment filed by several business groups and invalidated the Obama DOL’s revised rule. According to the court, the DOL’s "significant increase" in the salary requirement for the white collar exemptions "would essentially make an employee’s duties, functions, or tasks irrelevant if the employee’s salary falls below the new minimum salary level."  In other words, the court found it was Congress’s intent that employees who perform "bona fide executive, administrative, or professional capacity" duties should be exempt from overtime pay. However, the court found that the DOL’s revised rule effectively eliminated any analysis of an employee’s job duties, and made the employee’s exempt status "depend predominately on a minimum salary level."  As a result, the court found the revised rule ignored Congress’s intent and went "too far."  It similarly determined that the revised rule’s automatic increases to the salary minimum was also unlawful.

What does this mean for employers?

For now, the salary levels in the 2004 overtime rule remain in place. Employees making USD 455 per week and whose primary duty satisfies one of the white collar exemptions may be classified as exempt. But the court did not rule outright that any salary-level test is improper. It just concluded that the salary threshold in the Obama DOL’s revised rule went too far. In fact, the court suggested that "we wouldn’t be here today" if the DOL had increased the 2004 salary level for inflation. Although the scope of the DOL’s authority is unclear, it appears the court would enforce a more modest adjustment to the salary level. And the Trump DOL may propose its own revisions to the FLSA’s overtime regulations.

Indeed, the DOL is currently accepting comments on the FLSA’s overtime regulations and it seeks comments on issues that go beyond the scope of the proposed changes rejected by the court. The DOL has asked for comments on whether updating the 2004 salary level for inflation would be an appropriate basis for setting the standard salary level, and 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 24 September 2017.

Not only do employers need to monitor potential changes to the FLSA, but they should continue to monitor state and local overtime laws. The Texas federal court’s ruling has no impact on these laws, and some states already have salary levels that are higher than the FLSA’s (e.g., California and New York). Simply put, employers need to continue to comply with these "stricter" overtime laws.

So, what happens to the current litigation in the Eastern District of Texas and the Fifth Circuit Court of Appeals? The Department of Justice (on behalf of the DOL) previously appealed the preliminary injunction to the U.S. Court of Appeals for the Fifth Circuit. That appeal of the preliminary injunction is now moot in light of the court’s recent decision. However, the administration has 60 days from 31 August 2017 to file a notice of appeal of the new judgment. It is uncertain whether the Trump administration will appeal the decision in light of its attempts to roll back many “Obama-era” regulations and rules. But the DOL may appeal to defend itself against a ruling that limits the institution’s rulemaking authority. After all, many expect the Trump DOL to propose its own version of a new overtime rule. Indeed, just in the past few months, Secretary of Labor Alexander Acosta has signaled that he would try to develop a new rule, lowering the salary minimum from the threshold proposed under the Obama DOL’s rule.

In sum, the recent decision provides some much needed clarity for employers. But the court’s ruling may be appealed and the current DOL may propose its own revisions to the overtime regulations. As a result, it’s important for employers to continue to monitor developments closely.

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