Hold the Phone: Most of the New FLSA Rule Enjoined!

Happy Thanksgiving Employers! A preliminary injunction issued late on November 22, 2016 stops most of the new Fair Labor Standards Act rule—often called the new overtime rule. The injunction maintains the status quo under the current FLSA regulations. Most of the new rule will not become effective on December 1, 2016. The injunction applies nationwide even though it was decided by a federal district court in Texas. 

The Rule

Most employers don’t need a reminder that the Department of Labor’s rule would have raised the minimum salary required for white collar exemptions from $455/week to $913/week. It allowed employers to use non-discretionary bonuses to account for up to 10% of the new minimum salary. And it also instituted automatic increases to the minimum salary level beginning in January 2020. These three provisions of the new rule are on hold, at least temporarily, thanks to joint requests for emergency relief that were filed in two now-consolidated lawsuits—one filed by 21 Republican Governors and the other filed by several business groups. 

The Injunction’s Reasoning

Congress exempted bona fide executive, administrative, and professional (“EAP”) employees from the overtime pay provisions of the FLSA in 1938, and left it up to the DOL to define and delimit what that meant.  In its first set of regulations, the DOL only adopted a duties test for the EAP exemption. But in 1940, with the first revision to its regulations, the DOL added a salary test. This two test requirement for EAP exemptions has been in the DOL’s regulations ever since. 

Seventy-six years later, Judge Amos Mazzant, an Obama appointee, held that “Congress intended the EAP exemption to depend on an employee’s duties rather than an employee’s salary.” (emphases added) While previous minimum salaries may have been acceptable because they were quite low, Judge Mazzant found that the DOL “exceeds its delegated authority and ignores Congress’s intent by raising the minimum salary level [so high] that it supplants the duties test.”  He also held that the new rule “creates essentially a de facto salary-only test” which cannot stand because “Congress did not intend salary to categorically exclude an employee with EAP duties from the exemption.” 

Judge Mazzant gave the indexing provision of the new rule short shrift. “Because the Final Rule is unlawful, the Court concludes the [DOL] also lacks the authority to implement the automatic updating mechanism.”

Certainly there will be appeals, probably all the way to the Supreme Court. But, if this reasoning holds up on appeal, the salary test may vanish altogether or remain at such a low level that it has little meaning. 

HCE Total Comp Changes Remain

Interestingly, the increase to the total compensation level for the Highly Compensated Employee (HCE) exemption from $100,000/year to $134,004/year and it’s indexing starting in January 2020 were not enjoined! Although Judge Mazzant did not specifically mention it in his ruling, he listed the sections of the new rule that were enjoined, and this section about the HCE exemption was not among that list—leaving that part of the new rule intact. 

The increased minimum salary required for the motion picture industry, and its automatic indexing, also were not enjoined. 

Watch Out for the Duties Test

With the weight placed on the duties test by this ruling, it is reasonable to anticipate that the DOL will turn its attention to strengthening the duties test in the future.  Indeed, Judge Mazzant found that Congress gave the DOL “significant leeway to establish the types of duties that might qualify an employee for the exemption, [although] nothing in the EAP exemption indicates that Congress intended the Department to define and delimit with respect to a minimum salary level.”

As high as the new minimum salary was going to be, it provided a bright line rule for half of what it took to be EAP exempt.  The duties tests, on the other hand, are difficult to understand and apply. If employers are left with only a duties test, and if the DOL tightens up those duties tests, then the DOL may win the war in a few years, even if it loses this battle. 

Employer Takeaways

• Exempt employees who truly meet the duties tests for at least one exemption, but who are not making at least $455/week in salary, do not have to have their pay increased to $913/week on December 1. 
• No matter what they are paid, currently Exempt employees who truly DO NOT meet the duties tests for at least one exemption should still be converted to Non-Exempt status, regardless of this ruling. Begin tracking these employees’ work hours and paying them overtime when they work it.
• Employees currently Exempt under only the HCE Exemption must be paid a salary of at least $455/week (this part is subject to the injunction) and receive total annual compensation of at least $134,004/year (this part is not subject to the injunction). You can pro-rate these employees’ total compensation for 2016 (11 months at the current levels and 1 month at the new levels). 
• Stay tuned for more, because this story isn’t over yet.

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.

- Jill Jensen-Welch