The Sophisticated Employer Blog

We have all been watching the lawsuit in Texas carefully, waiting for the court to rule on whether the overtime rule that was to take effect Dec. 1, 2016 would be struck or upheld. 

Well, wait no longer. The federal District Court for the Eastern District of Texas has held that the Department of Labor (“DOL”) overstepped its authority when it more than doubled the threshold salary for exempt employees. Let’s look at how the drama has unfolded for the years.

The Fair Labor Standards Act (FLSA) became law in 1938. It established a federal minimum wage and required overtime pay at the rate of one-and-one-half times the regular rate of pay for all hours actually worked above 40 in a workweek for all employees except those who were exempt from the rule.

Section 213 sets forth the exemptions for employees who are “employed in a bona fide executive, administrative, or professional capacity.” That set of exempt employees is often referred to at the EAP exemption. Originally, the only test to determine eligibility was the duties test. But, shortly thereafter, the DOL revised the regulations introducing the “salaried” compensation requirement.

By 1949, the DOL had created the “long” and “short” tests. The short test set forth a minimum threshold and had a less rigorous duties test than the long test.

In 1961, Congress amended the FLSA allowing the DOL to “define and delimit the exemption ‘from time to time.’” Using its authority in 2004, the DOL again modified the rules, eliminating the long and short tests, creating the “standard” duties test which did not restrict the amount of “nonexempt” work that an exempt employee could perform. The DOL also set the minimum salary level at the amount previously required under the “long” test and it created a new category of exempt employees – the highly compensated employee.

In 2014, President Obama directed the DOL to “modernize and streamline the existing overtime regulations” for the EAP exemptions. The notice of proposed rulemaking resulted in nearly 300,000 comments from businesses, state governments and others. Under the final rule, the minimum threshold for exempt employees more than doubled from $455/week to $913/week. The final rule also provided for automatic adjustments every three years, with the first adjustment to occur in 2020.

Twenty one states filed suit in Texas to block the DOL from enforcing the new rule.  Businesses also filed suit and the actions were joined together. The district court issued a preliminary injunction on Nov. 22, 2016, just days before the new rule would take effect. What a cliff hanger!

As a side note, since that time, a class action lawsuit was filed by plaintiffs in a New Jersey federal court who argued that, while the DOL had been enjoined from enforcing the rule, the rule actually took effect automatically. The plaintiffs asserted they should no longer be classified as exempt (since they do not earn the “new” minimum threshold) and were being denied overtime pay.  It will be interesting to see how they challenge the Texas court’s ruling in the New Jersey case of Alvarez v Chipotle Mexican Grill, Inc. That district court is not bound by the decision issued by the Texas district court. But, I digress. 

Yesterday, the Texas district court held that, while Congress had given the DOL authority to “define and delimit the exemption ‘from time to time.’” it had overstepped its authority by imposing a salary threshold level that would all but effectively eliminate the duties test in Section 213 of the act.

The court explained that the new salary threshold “categorically exclude[s] those who perform ‘bona fide executive, administrative, or professional capacity’ duties based on salary level alone. … While the plain meaning of Section 213(a)(1) does not provide for a salary requirement, the Department has used a permissible minimum salary level as a test for identifying categories of employees Congress intended to exempt. The Department sets the minimum salary level as a floor to ‘screen[] out the obviously nonexempt employees, making an analysis of duties in such cases unnecessary’. Further, the Department acknowledges that in using this method, ‘[a]ny new figure recommended should also be somewhere near the lower end of the range of prevailing salaries for these employees.’ The use of a minimum salary level in this manner is consistent with Congress’s intent because salary serves as a defining characteristic when determining who, in good faith, performs actual executive, administrative, or professional capacity duties.” [Citations omitted]

But the court took issue with the DOL more than doubling the prior threshold because “[t]his significant increase would essentially make an employee’s duties, functions, or tasks irrelevant if the employee’s salary falls below the new minimum salary level. As a result, entire categories of previously exempt employees who perform ‘bona fide executive, administrative, or professional capacity’ duties would [not] qualify for the EAP exemption based on salary alone.

The text of the Final Rule confirms this: ‘White collar employees subject to the salary level test earning less than $913 per week will not quality for the EAP exemption, and therefore will be eligible for overtime, irrespective of their job duties and responsibilities.’” 

The court ruled that this is not what Congress intended. By creating an overtime rule that depends primarily on the new salary threshold, the DOL supplanted the analysis of the employee’s duties. “Because the Final Rule would exclude so many employees who perform exempt duties, the Department fails to carry out Congress’s unambiguous intent.” The DOL exceeded its authority by making the salary level, rather than the duties, the primary test for the EAP exemption. For the same reasons, the court found the automatic three-year adjustments unlawful.

So, what should employers do? Well, if the employer already relied on the higher threshold and reclassified employees who were previously exempt to non-exempt, nothing further needs to be done. Just because an employee can be classified as exempt, does not mean they must be. The opposite, however, is not true and the employer bears the burden of proof that an exempt employee has been properly classified as exempt. 

While it is unlikely that the DOL, now under the Trump administration, will challenge the Texas court’s decision, this legal battle is likely to be continued in the New Jersey case and perhaps by others who will challenge the ruling. 

If you are interested in reclassifying some of your now non-exempt back to exempt status, you should consult with an experienced employment attorney before doing so. Otherwise, sit tight and continue to watch this legal battle unfold!