The Old “New Overtime Rule” and a Possible New “New Overtime Rule”

Published for Coates' Canons on November 16, 2017.

Whatever happened to the “new” FLSA overtime rule that had been due to take effect last December but was stopped when a federal court in Texas issued a nationwide injunction? Employers, many of whom were none too fond it, can be forgiven for wondering whether the 2016 rule is dead. Unfortunately, you can’t put changes to the FLSA salary test behind you yet: in July, the Trump Department of Labor (DOL) issued a Request for Information, apparently signaling an intention to set a new “new” higher minimum salary for overtime exemption, and in October, the Trump DOL appealed the federal court’s final decision in the new rule case. That decision threw the 2016 rule out. Confused? So are a lot of people.

Background to the FLSA’s Overtime Requirements

Under the Fair Labor Standards Act, employees are entitled to overtime premium pay of one-and-one-half times their regular rate of pay after working 40 hours in a week, unless an exemption applies. If an exemption applies, an employee is said to be “exempt” and is not entitled to overtime pay no matter how many hours he or she works in a week. An exemption applies if the employee is salaried and the position meets the requirements of the executive duties test, the administrative duties test, or the professional duties test. But even if the employee is salaried and the position satisfies one of the three duties tests, the exemption does not apply if the employee is paid less than the current threshold amount or $455 per week, or $23,660 on an annualized basis. Such a low-paid, salaried employee is entitled to overtime pay after 40 hours.  For an explanation of the salary basis test, see here. For discussion of the executive duties test, see here, the administrative duties test, see here and here, and the professional duties tests, see here and here.

Background to 2016’s “New” Rule

In May 2016, the U.S. Department of Labor issued a “new” FLSA regulation (the “2016 Rule”) which raised the minimum salary an employee must make to be exempt from overtime from the current $455 per week to $913 per week – an increase of just over 100% from $23,600 annually to $47,476 annually. The new salary minimum was to take effect December 1, 2016.  Also part of the 2016 Rule and also scheduled to take effect December 1 were an increase in the minimum salary necessary for an employee to be exempt from overtime as a highly-compensated employee from $100,000 annually to $134,004 annually; a provision for automatic updating of the salary thresholds every three years; and a new provision allowing employers to include nondiscretionary bonuses in an amount up to 10% of the minimum salary level.

The 2016 Rule made no changes to the duties tests and no changes to any of the other rules regarding compensable time and overtime.

The Lawsuit Challenging the 2016 Rule

In September 2016, a little more than two months before it was to go into effect, twenty-one states joined together in a lawsuit challenging the 2016 Rule in federal court in Texas. They challenged not only the specific salary level set by DOL – $913 per week – but also DOL’s very authority to include any salary level as part of the text for exemption. As part of that lawsuit, the plaintiffs filed a motion for an emergency preliminary injunction, citing the irreparable harm that the states (and particularly their budgets) would suffer if the new rule were allowed to go into effect on December 1.

Federal district judge Amos Mazzant granted the motion for a preliminary injunction on November 22. Although North Carolina was not a party to the lawsuit, the injunction nonetheless applied to North Carolina as the judge found that the 2016 Rule had a nationwide effect. On December 1, 2016, the Obama administration appealed the injunction to the federal Fifth Circuit Court of Appeals, which has jurisdiction over federal courts in Texas.

After a number of delays owing to the transition in administrations and the relatively late confirmation of President’s Trump’s second nominee to head DOL, Alexander Acosta, DOL finally filed its reply brief in its appeal of the preliminary injunction on June 30, 2016. There, DOL revealed that it had decided “not to advocate for the specific salary level ($913 per week) set in the final rule.” It asked that the Fifth Circuit address only the question of whether DOL had authority to set a salary level at all.

DOL went on to say that instead of issuing a new proposed rule setting forth a specific salary level (in testimony before Congress, Secretary Acosta has indicated that he favors a salary level between $30,000 and $35,000), it would instead seek information from stakeholders and issue a proposed rule later when the question of DOL’s authority to set a salary level was settled.  Oral argument before the Fifth Circuit was then set for October 2017.

Judge Mazzant Issues a Final Decision

In the meantime, some of the plaintiffs in the case asked Judge Mazzant to grant them summary judgment. A judge may grant summary judgment in a case, without holding a trial, when the parties agree on all of the relevant material facts in the case and the only thing left to do is to apply the law to the facts. Judge Mazzant granted the plaintiffs’ motion and declared the 2016 Rule invalid on August 31, 2017.

Judge Mazzant found that DOL does have the authority to set a salary threshold as part of the test for determining overtime exemption. But he also found that DOL does not have the authority to set a salary threshold so high that it effectively eliminates the duties tests. The salary threshold of $913 per week, he concluded, did just that. At a level of $913 per week, the salary threshold became the effective and sole test of exempt status. Judge Mazzant also found the automatic updating of the salary threshold to be unlawful based as it was on the $913 minimum salary.

DOL’s immediate response was to ask the Fifth Circuit to dismiss its appeal of Judge Mazzant’s November preliminary injunction, which was no longer relevant. The Fifth Circuit accordingly dismissed. Given that Judge Mazzant’s final ruling was in apparent accord with DOL’s position in its June 30th reply brief, DOL was not expected to appeal the summary judgment decision finding that $913 salary threshold invalid.

In a surprise move, on October 30, 2017, DOL appealed Judge Mazzant’s final decision to the federal Fifth Circuit Court of Appeals. At the same time, however, DOL announced its intention to file a motion with the Fifth Circuit to hold the appeal in abeyance while it undertakes further rulemaking to determine what the salary level should be. It had already begun the process of new rulemaking earlier this summer.

DOL’s Request for Information

On July 27, 2017, while the appeal of the preliminary injunction was before the Fifth Circuit, DOL published a Request for Information (RFI) from the public regarding the regulations that set forth the criteria for exemption from overtime. In the RFI, DOL noted that many employers felt that the salary level set forth in the 2016 Rule was too high and excluded from exempt status a large number of employees whose positions satisfied one or the other of the duties tests. Concluding that additional regulations are necessary, DOL published the RFI to gather information to help it formulate another revision to the overtime rule. Here are some of the issues on which DOL invited comments from the public:

  • What is an appropriate basis on which to update the current salary threshold of $455 per week?
  • Should the inflation rate be the basis?
  • Should the salary level aim to exclude the bottom 20 percent of salaried employees in the South and in the retail industry, which was the method used in updating the salary threshold in 2004?
  • If either of those methods were used instead of setting the salary threshold at the 40th percentile of the wages of all salaried (the method used in the 2016 Rule), should changes also be made to any or all of the duties tests?
  • Should the regulations contain multiple standard salary levels based on size of employer, census region, state or some other criteria or should they adjust for different cost-of-living increases across different parts of the country?
  • Should the regulations set different salary threshold for the executive, administrative and professional exemptions?
  • Should DOL consider the pre-2004 long- and short-test salary levels in setting a new salary threshold?
  • To what extent did employers increase the salaries of exempt employees in order to retain their exempt status, decrease the hours of employees who would be newly nonexempt under the 2016 Rule so that the amount they were paid would remain the same?
  • Would duties tests without a salary test be a preferable way to determine exempt status?
  • Should discretionary bonuses be allowed to count toward the salary threshold?
  • Should the salary threshold be automatically increased on a periodic basis to ensure that it remains an effective way of identifying exempt employees when used in conjunction with the duties test? If so, how should the amount of the automatic increase be measured?

The RFI comment period closed on September 25th and DOL continues to review the thousands of comments it received. Best guess is that we should see a new set of proposed rules sometime in 2018. Stay tuned.

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Topics - Local and State Government