On November 22, 2016, in the case of State of Nevada, et al. v. United States Department of Labor, et al., Judge Amos L. Mazzant of the United States District Court for the Eastern District of Texas, issued a nationwide preliminary injunction halting the implementation and enforcement of the “Final Rule” promulgated by the Department of Labor (DOL) concerning the minimum salary level necessary, in most cases, for employers to classify employees as exempt from overtime pay under the Fair Labor Standards Act (FLSA).
Background of the Final Rule
As we reported earlier this year, on May 18, 2016, the DOL issued the Final Rule. The Final Rule expanded overtime eligibility by increasing the minimum salary threshold to qualify for the FLSA exemptions for most employees who are employed in a “bona fide executive, administrative, or professional capacity,” commonly known as the primary “white collar” exemptions. The Final Rule would have, among other things, increased the minimum annual salary threshold for qualification under the white collar exemptions from $23,660 to $47,476. The Final Rule also would have increased the salary threshold for qualification as a “highly compensated employee” and provided for an automatic adjustment of the minimum salary thresholds every three years. All of these changes are now on indefinite hold.
For context, for more than half a century, qualification under the white collar exemptions has involved both a “salary test” (with limited exceptions) and a “duties test” component. The “salary test” requires that the employee must be paid on a salary basis and at a level that satisfies a minimum threshold (currently $23,660 per year). The “duties test” involves a substantive analysis of whether the employee performs duties commensurate with classification as a bona fide executive, administrative or professional employee (as applicable). For “highly compensated employees” (currently those earning at least $100,000 per year), a less rigorous duties test applies.
Legal Rationale for the Preliminary Injunction
The court concluded that the DOL exceeded its rulemaking authority in issuing the Final Rule. The court observed that Congress established that the exemption applies to employment in a “bona fide executive, administrative, or professional capacity.” The court interpreted this standard to make the exemption depend on duties rather than salary. It concluded that by more than doubling the minimum salary threshold for the white collar exemptions, the DOL imposed a “de facto salary-only test” that “supplants the duties test.” It stated that “[i]f Congress intended the salary requirement to supplant the duties test, then Congress and not the [DOL] should make that change.” The court stated, however, that it “is not making a general statement on the lawfulness of the salary-level test for the [white collar] exemption.”
Current Legal Status
The court imposed a nationwide injunction. The court’s ruling is a preliminary injunction, which has the purpose of preserving the status quo while a case proceeds to trial.
The DOL is reportedly considering its options, which may involve an emergency appeal. If the injunction is affirmed on appeal and becomes permanent, the Final Rule will not apply. If it is vacated, the Final Rule will go into effect.
If the injunction is vacated after December 1, 2016, that may lead to claims that employers were subject to the Final Rule as of December 1. Indeed, in separate decisions earlier this year, two federal courts came to the conclusion that another DOL rule that was initially vacated was nevertheless effective as of the originally established effective date after the decision vacating the rule was reversed on appeal.
Specifically, in 2013, the DOL issued a rule modifying the regulations concerning the FLSA’s companionship services exemption, with a stated effective date of January 1, 2015. That rule was vacated by a federal district court decision. However, in August 2015, that decision was reversed. Even though the DOL then issued guidance stating that it would not enforce the new rule until November 2015, plaintiffs in two cases were successful in arguing that the rule went into effect on January 1, 2015, and that damages would be due from and after that date. Therefore, employers cannot be certain that they will avoid liability if the injunction barring the Final Rule is vacated after December 1, 2016.
The minimum salary threshold of $23,660 and highly compensated threshold of $100,000 continue to apply.
Employers should remain cognizant that some state wage and hour laws impose higher thresholds. Some do not include any highly compensated threshold.
Many employers have been preparing to implement classification and/or compensation changes by December 1, 2016. Some have already done so. Those employers that have not yet implemented classification and/or compensation changes may decide to wait and see whether the injunction remains in effect.
Employers should take into account a few considerations before deciding to wait and see whether the injunction remains in effect:
- The injunction may be vacated after December 1, 2016. As explained above, if that occurs, courts may find the effective date of the Final Rule remained December 1, 2016 despite the injunction.
- Employers should ensure that their salary levels for exempt employees comport with state law standards.
- Some employers have planned to make changes in classifications effective on December 1, 2016 because comprehensive wage and hour audits that were prompted by the Final Rule revealed possible vulnerabilities in classifications based on the duties tests. Since the injunction does affect the duties tests, employers should not reverse course on compliance efforts based on the duties tests.
- To the extent that pay increases and job changes have been communicated to employees, rolling those back could have a negative impact on employee morale and possibility breed litigation.
For any questions concerning the Final Rule or the injunction, please contact a member of Goodwin’s Labor & Employment Practice.