November 28, 2016

Introduction. The Federal District Court for the Eastern District of Texas on November 22, 2016 enjoined the Department of Labor`s (DOL) new Overtime Rule. The Judge held that the twenty-one state plaintiffs (not including Wyoming) had established a prima facie case that the DOL salary level test under its final Rule and the automatic updating mechanism were without statutory authority and invalid.

Background. Congress enacted the Fair Labor Standards Act (FLSA) in 1938. The FLSA requires that employees engaged in Commerce 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 one and one half (1 1/2) times the employee`s regular rate of pay for all hours worked above 40 in a week. When enacted, the FLSA contained a number of exemptions to the overtime requirements. Section 213(a) of the FLSA exempted from both the minimum wage and overtime requirements “any employee employed in a bona fide Executive, Administrative, or Professional capacity.” The Exemption is commonly referred to as the “white collar” or “EAP” Exemption. In issuing its Act, Congress delegated to the Secretary of Labor the power to define and limit these terms through regulations. The DOL or Department`s initial regulations defined Executive, Administrative and Professional employees. While the initial regulations were amended over time, in 2004 the Department changed the exemption definitions and replaced them with a standard duties test which required: (1) that the employee must be paid on a salary basis; (2) an employee must be paid a minimum salary (the current minimum salary level to qualify for the exemption is $455 per week or $23,060 per year); and (3) employees must perform Executive, Administrative or Professional duties.

The Rule. On March 23rd, 2014, President Obama requested that the Department update the existing regulations as the existing the EAP Exemptions had not kept pace with our modern economy. After receiving almost 300,000 comments on the proposed rule, the new rule was issued on May 23rd, 2016 to be effective December 1, 2016. The final rule increased the minimum salary level for exempt employees from $455 per week to $921 per week ($47,892 per annum).

The Court’s Ruling. The Judge, after reading the plain meaning of the FLSA, found it clear that Congress intended the EAP exemption to apply to employees doing actual Executive, Administrative, or Professional duties. In other words, Congress defined the EAP exemption with regard to “duties’, not a minimum salary level. The Judge found that the statute’s use of “bona fide” confirmed its intent and that the salaries test was beyond the authority of the Department. The Department`s authority as delegated from Congress is limited by the plain meaning of the statute. Furthermore, not only is the Department limited in the salaries test, but it cannot implement the automatic updating mechanism. The DOL Overtime Rule was enjoined on a nationwide basis and will not be implemented on December 1, 2016.

Implications. While many employees may have already updated their compensation schedules, the Federal Court has given employers additional time to review their schedules and classifications in to ensure that they comply with the FLSA and its exemptions. While the preliminary injunction isn`t permanent, as it simply preserves the existing overtime rule—until the court has a chance to review the merits of the case, employers must remain cautious and ensure that their classification schemes are consistent with the FLSA. Employers shouldn`t assume that the Overtime Rule will be permanently barred; they should still review existing classifications and have a plan to move forward-if necessary, in the future.

Bruce S. Asay
Associated Legal Group, LLC
(307) 632-2888