Federal Court Strikes Down Overtime Rule

Federal Court Strikes Down Overtime RuleNearly a year after a Department of Labor  (DOL) Final Rule intended to raise the salary threshold for overtime-exempt status was put on hold before it could go into effect, a federal court has struck the exponential increase down for good.  Stating that that the DOL had “gone too far,” the U.S. District Court for the Eastern District of Texas declared the 2016 Final Rule invalid on August 31.

Although the Department of Justice (DOJ) had previously planned to defend some portions of the rule in the Fifth Circuit Court of Appeals, the agency requested on September 5 to dismiss the case as the district court decision rendered the appeal moot. Until further notice, the salary level at which an executive, administrative, or professional employee may be exempt from overtime pay will remain at $455 per week.

 What’s the Overtime Rule?

The federal Fair Labor Standards Act of 1938 (FLSA) requires most covered employees to be paid time and a half for hours worked over 40 in a workweek, but it provides an exemption for workers who are employed in a bona fide executive, administrative, or professional capacity. The law also grants DOL the authority to “define and delimit” these exempt categories through regulation.

Since 1949, DOL regulations have combined a duties test with a minimum salary level intended to “screen out the obviously nonexempt employees.” The reasoning behind this salary test states that employees important enough to qualify as an executive, administrator, or professional will generally “enjoy compensatory privileges,” including a salaried rather than hourly status and significantly higher compensation than lower-level workers.

The 2016 Final Rule raised the minimum salary level for overtime exemption from $455 per week to $913 per week and called for additional increases every three years to keep up with inflation. Prior to this increase the salary threshold had not changed for over a decade, prompting some to suggest that the salary test was out of touch with the modern economy. However, many employers were taken aback at the exponential increase to the salary threshold, which would have resulted in 4.2 million employees becoming eligible for overtime pay after more than a decade of being considered exempt.

Why Was the 2016 Rule Invalid?

Business entities and state governments joined together to challenge the rule in several venues, and in December of 2016 Judge Mazzant of the District Court for the Eastern District of Texas issued a temporary injunction against the rule until hearings could go through. On August 31, the same judge granted a motion for expedited summary judgment submitted by consolidated business plaintiffs, declaring the 2016 final rule unlawful and invalid.

The business plaintiffs argued that by classifying “millions of employees that DOL itself concedes perform ‘executive, administrative, or professional’ duties” as automatically non-exempt, the elevated salary threshold shifted the primary determining factor for exempt status from duties to salary level. Because the new salary threshold was set excessively high, they argued, it no longer served as a reasonable proxy for the high-level duties which qualify for exemption. Instead, it replaced the duties test, making salary the predominant factor in determination of non-exempt status.

The court agreed with this argument, citing the text of the rule itself as substantiation. According to the Final Rule, “White collar employees subject to the salary level test earning less than $913 per week will not qualify for the EAP exemption, and therefore will be eligible for overtime, irrespective of their job duties and responsibilities”(emphasis added). This statement, Judge Mazzant argued, contradicts Congress’ clear intent that “the determination should involve at least a consideration of an employee’s duties.” As such, the Final Rule is invalid and unlawful.

Why Is the Old Salary Test Still Valid?

While some hoped that a federal court would determine any use of a salary test to be invalid, that was always a long shot. DOL has used a salary test as one aspect of determining overtime exemption almost since the FLSA’s inception, and previous judicial decisions have upheld the department’s authority to do so. The court affirmed that the use of a minimum salary test as a screening mechanism is consistent with DOL’s authority under the law.

However, the court’s decision also clarified that while salary “serves as a defining characteristic” when determining whether an employee legitimately performs high-level duties which qualify them for exemption, it cannot be used as the defining characteristic in determining whether an employee is exempt. DOL “does not have the authority to use a salary-level test that will effectively eliminate the duties test.”

What’s Next for Overtime Exemption?

The Justice Department had previously requested that the Fifth Circuit Court of Appeals reaffirm DOL’s authority to use a salary level test in its determinations, while indicating that it did not intend to defend high salary threshold set by the 2016 regulations. Since the district court affirmed that DOL’s use of a salary test is valid within certain conditions, DOJ has no reason to appeal the rule further.

While the 2016 rule is dead, we may see another rule take its place soon. In July of 2017, the Department of Labor issued a Request for Information which asked stakeholders to comment on potential changes to effective overtime regulations, including whether exemption should be based entirely on duties and whether salary thresholds should be determined by region.

The ROI is open for public comment until September 24, 2017.

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