New overtime regulations ruled invalid
|Update: On October 30, 2017, the U.S. Department of Labor (DOL) filed a notice to appeal this decision to the U.S. Fifth Circuit Court of Appeals. Once this appeal is docketed, the DOL will file a motion to hold the appeal in abeyance while the department undertakes further rulemaking to determine what the salary level should be.|
The Obama Administration issued new regulations about overtime that were to take effect on December 1, 2016. Just before they were to take effect, a U.S. district court in Texas enjoined the regulations. So since about December 1, 2016, employers have been in legal limbo about what’s going to happen.
On August 31, 2017, that state of limbo was somewhat alleviated when Judge Amos Mazzant of the U.S. District Court for the Eastern District of Texas ruled that the regulations were invalid. So for the immediate future, it’s probably safe to assume that the new regulations will not be going into effect.
Also on August 31, 2017, the U.S. Fifth Circuit Court of Appeals entered an order holding the appeal on the injunction in abeyance. All parties agreed to the motion requesting the order. Holding the appeal in abeyance jibes with the U.S. Department of Labor (DOL) decision to issue a request for information (RFI) about overtime, a decision announced on July 18, 2017.
Furthermore, Secretary of Labor Alexander Acosta indicated in testimony before Congress during his confirmation hearings that he thought the correct amount for the threshold for establishing exempt status from the overtime provisions of the Fair Labor Standards Act (FLSA) should be about $33,000, not the $47,476 set by the Obama Administrations new regulations. The current threshold is $23,660 and remains at that level under the recent court decision. Listen to Acosta’s testimony at 0:54:00.
So this is where we appear to be
The threshold amount will probably be increased from $23,660 to around $33,000 as a result of the Trump Administration’s issuing a revised overtime regulation. And as I’ll explain in the remainder of this post, the Texas court’s decision will probably not hinder this revised regulation.
But a revised regulation will probably take some time because of all the typical legal rigmarole for issuing a new regulation. Meanwhile, if you would like to respond to the RFI, the deadline is September 25, 2017.
Now to my analysis of the Texas court decision.
Congress enacted the FLSA in 1938. The FLSA requires employees to receive no less than the federal minimum wage (currently $7.25 per hour) for all hours worked. Employees are also entitled to overtime pay at 1.5 times the employee’s regular rate of pay for all hours over 40 worked in a week. The FLSA exempts from both minimum wage and overtime requirements any employee employed in a bona fide executive, administrative, or professional capacity. This exemption is commonly referred to as the “EAP exemption.” Although the FLSA did not define the expression “bona fide executive, administrative, or professional capacity,” Congress gave the power to define these terms to the DOL through issuing regulations.
The initial regulations defined EAP employees by the duties they performed in 1938. Two years later, the DOL revised the regulations to require EAP employees to be salaried.
Long and short tests developed
In 1949, the DOL again amended the regulations, creating what were called the “long” test and the “short” test for assessing whether an employee qualified for the EAP exemption. The long test combined a low minimum salary level with a rigorous duties test, which restricted the amount of nonexempt work an employee could do to remain exempt. The short test combined a high minimum salary level with an easier duties test that did not restrict amounts of nonexempt work. After the DOL implemented the long and short tests, Congress amended the FLSA in 1961 to permit DOL to define the exemption “from time to time.”
Threshold amount becomes proxy for exempt status
By adopting this regulation, the DOL made the high minimum salary level—what I’ve called a threshold—a type of proxy for determining exemption. In short, employers had an easy preliminary test to determine whether an employee was exempt: If the employee was paid the threshold amount or more, the employee was probably exempt.
This test probably also made it easy for government employees tasked with enforcing the regulation. As the government employees reviewed millions of pay records, they had a quick and easy way to spot a problem with an exemption: If pay records indicated an employee was paid on a salary basis, but was paid less than the threshold amount, further investigation was merited to determine whether the employee was legitimately exempt.
Adoption of standard duties test
In 2004, the DOL eliminated the long and short tests, replacing them with a “standard” duties test that did not restrict the amount of nonexempt work an exempt employee could perform. In addition, the DOL set the salary level equivalent to the lower minimum salary level previously used for the long test. The 2004 regulations—the ones currently in effect—require an employee to meet the following three tests to be exempt from overtime pay:
- Salary-basis test: The employee must be paid on a salary basis.
- Salary-level test: The employee must be paid the minimum salary level established by regulation. The current minimum salary level is $455 per week or $23,660 annually. (In this post, I have referred to this as the threshold amount.)
- Duties test: The employee must perform executive, administrative, or professional capacity duties as established by regulations. You can find these duties in the slides to my presentation.
Genesis of the Obama Administration’s new regulations
On March 23, 2014, President Obama issued a memorandum directing the Secretary of Labor to modernize and streamline the existing overtime regulations for executive, administrative, and professional employees. In this memorandum, President Obama indicated regulations about overtime requirements for EAP employees had not kept up with our modern economy. After it issued a notice or proposed rulemaking on July 6, 2015, the DOL issued its final rule on May 23, 2016, with an effective date of December 1, 2016.
Under the final rule, the threshold increased from $455 per week ($23,660 annually) to $913 per week ($47,476 annually). The final rule also created an automatic updating mechanism that would have adjusted the minimum salary level every 3 years. The first automatic increase was scheduled to occur on January 1, 2020.
States file suit
Alabama, Nevada, and 19 other states filed suit against the DOL and asked for emergency injunctive relief on October 12, 2016.
Business groups file suit
The Plano Chamber Commerce and other business groups filed another suit and moved for expedited summary judgment on October 14, 2016. Both lawsuits were combined.
The court’s rationale for finding the new overtime rules invalid can be easily summarized by one sentence from its ruling: “The Department [of Labor] has exceeded its authority and gone too far with the Final Rule.” Here is how the court reached this conclusion.
Since Congress didn’t define “bona fide executive, administrative, or professional capacity,” the court had to look at the plain meaning of those terms at or near the time that Congress enacted the statute. The court concluded that these words relate to an employee’s performance, conduct, or function. The court further concluded that Congress wanted the EAP exemption defined in terms of duties.
The court indicated the DOL does not have the authority to use a salary-level test that effectively eliminates the duties test. At another point, the court indicated that the DOL does not have the authority to use a test based solely on salary to define exemption. The court observed that the DOL had said as much when it issued its 2004 version of the overtime regulations.
The court acknowledged that the salary test could be used to identify categories of employees that Congress intended to be exempt so long as the threshold was somewhere near the lower end of the range of prevailing salaries for EAP employees—that such a test acts as a “floor” for determining which employees are exempt.
Because the Obama Administration’s new regulations more than doubled the previous threshold, the court found that it essentially made an employee's duties, functions, or tasks irrelevant if an employee’s salary falls below the new threshold. The court noted that the DOL said as much in its announcement of the new rule: “White 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.” The court found the new regulations make overtime depend predominately on the threshold amount, an approach that supplants an analysis of an employee’s duties.
In other words, Congress wanted employees to be exempt on the basis of their duties, not solely on the basis of how much they got paid.
Important limitations to the court’s decision
In two different footnotes in its decision, the court makes it clear that a salary test (having a threshold amount) is not the issue, but rather the level of the threshold under the new regulation. In footnote 1, the court indicates it is not making a general statement about the lawfulness of the salary-level test, but rather is addressing the lawfulness of the salary-level test under the Obama Administration’s new regulations. In footnote 6, the court points out that during oral briefings, the court remarked that if the 2004 threshold had been adjusted for inflation, the threshold would still be operating as a floor, thereby implying that it would be legal.
So that’s why the Texas court’s decision does not stand in the way of the Trump Administration issuing a revised overtime rule with the threshold set at about $33,000. Indeed, the Trump Administrations RFI asks this question: “Would updating the 2004 salary level for inflation be an appropriate basis for setting the standard salary level and, if so, what measure of inflation should be used?”
See these previous posts about the new overtime rule:
- What’s going on wth the new overtime rule?
- Injunction against new overtime rule appealed
- New overtime rule enjoined
- Will Trump trump the new overtime rule
- States file suit over new overtime rule
- Department of Labor issues new overtime regulations
See these previous posts about misclassification of workers as independent contractors:
- Beware misclassification of workers
- Another reason not to misclassify workers as independent contractors
Items on this web page are general in nature. They cannot—and should not—replace consultation with a competent legal professional. Nothing on this web page should be considered rendering legal advice.