Jefferson B. Goldman, Senior Associate Attorney

A last minute decision by the U.S. District Court for the Eastern District of Texas has temporarily halted the implrementation of new overtime rules which would have drastically increased the number of employees who qualify for overtime pay.


 

 

 

The preliminary injunction, coming mere days before the new rules were to take effect, has left companies and human resources departments nationwide wondering what to do as the inevitable appeal takes the case for overtime even as political questions threaten to run out the clock.  The Fifth Circuit Court of Appeals has agreed to expedite the appeal, with oral argument to be held as soon as possible after the last briefing is filed January 31, 2017. 

Proposed New Overtime Rules Drastically Expanded the Number Employees Eligible for Overtime Pay

Recently, the U.S. Department of Labor (“DOL”) promulgated new overtime rules, which were to take effect December 1, 2016. Notably, the new rules increased the salary level for exempt employees, under the Fair Labor Standards Act (“FLSA”), from $23,660 ($455/week) to $47,476 ($913/week). This essentially doubled the salary threshold at which certain white collar workers are eligible for time-and-a-half if they work more than 40 hours per week. The DOL estimated that the new rules would have made more than four million additional workers eligible for overtime.

The FLSA recognizes certain categories of exempt employees who are not entitled to recover overtime compensation for hours worked in excess of forty hours.[1] The exception in question is one for white collar employees, described by the FLSA as executive, administrative, and professional employees.  (This is commonly referred to as the “EAP Exemption”).  (The FLSA also provides exemptions for “computer employees” and “outside sales.”[2])

The FLSA provides that an employee employed in a “bona fide executive, administrative, or professional capacity … as such terms are defined and delimited from time to time by regulations of the [Secretary of Labor]” is exempt from minimum wage and overtime requirements.[3]  Since 2004, the test of whether an employee fell under the EAP Exemption was, per DOL regulations, whether the employee:

  1. Has executive, administrative, and professional capacity duties;

  2. Is paid on a salary basis; and

  3. Meets a minimum salary level.[4]

When these regulations were promulgated in 2004, that minimum salary level was $23,660/year.  The proposed new rule would increase it to $47,476/year.

In addition to changing rules on which employees are exempt from overtime pay, the DOL increased civil penalties for willful violations of the overtime provisions set forth in the FLSA. The penalty increased from $1,100 to $1,894 per violation of the FLSA. A willful violation is one where the employer knew that its conduct was prohibited or it showed “reckless disregard” for the requirements of the law. Although more than negligence is required to establish willfulness, courts have found a “strong indication of willfulness” where the employer failed to maintain adequate employee records under 29 U.S.C. § 211.[5]

Salary Was the Only Portion of the Test that Changed; The Duties Portion Remained the Same

Although the salary threshold for overtime pay and the penalties for willful violations have changed, the “primary duty” test appeared to remain intact.  Job duties (along with salary) are important in determining whether an employee qualifies for an exemption.[6] “A job title alone is insufficient to establish the exempt status of an employee.” Id. Rather, to qualify for the claimed exemptions, an employer must show that the allegedly exempt employee’s primary duty was the performance of exempt work.[7] “Primary duty” is defined as “the principal, main, major or most important duty that the employee performs.” Id. Employees who spend more than 50 percent of their time performing exempt work will generally satisfy the primary duty requirement.”[8] Time alone, however, is not the sole test. Id. In determining exemption status, regulations instruct an employer to consider:

[T]he relative importance of exempt duties as compared with other types of duties; the amount of time spent performing exempt work; the employee’s relative freedom from direct supervision; and the relationship between the employee’s salary and the wages paid to other employees for the kind of non-exempt work performed by the employee.[9]

The Department of Labor promulgated this “primary duties” test in 2004. From 1949 to 2004, the regulations had contained two different duties tests for executive, administrative, and professional employees depending on the salary level paid. In the 2004 Final Rule, the DOL replaced the differing short and long duties tests with a single standard test that focused on an employee’s “primary duties.”

An “executive” employee’s “primary duty” is management; he or she supervises two or more other employees, and he or she has input into other employees’ job status. The “professional” exception applies where the employee’s “primary duty” requires advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction such as lawyers, physicians, architects, and registered nurses.[10] The “administrative” exemption is somewhat more complicated. This exemption applies to employees whose primary duties involve the support of the business, such as human resource staff, public relations, or accounting.[11] However, the employee sought to be exempted as an “administrative” employee must perform more than simple clerical work. In determining whether an employee falls into the “administrative” exemption, a court will look to whether the primary duty is office or non-manual work directly related to the management or general business operations of the employer (or employer’s customers) and whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.[12]

Determination of exemption status can be very fact intensive endeavor. Where there is uncertainty, it is best to be proactive in consulting with counsel to promptly address any issues before litigation or DOL audits ensue. While no company is lawsuit proof, proactive steps done before the new regulations come into effect may prove helpful in avoiding costly litigation or audits down the road.

Not So Fast!

On November22nd, 2016, the Eastern District of Texas issued a preliminary injunction blocking implementation of the new rule nationwide, barely a week before it was to go into effect.  Twenty-one states had sued to block the new rule.[13]  Although the preliminary injunction is not a final ruling, the court spent most of its analysis concluding that the states’ suit had a substantial likelihood of success on the merits, indicating that the court will likely not change its mind at the final decision. 

The major change to the regulations, and the one complained of, was that the minimum salary level required to be exempt more than doubled.  The Court had therefore to determine whether the regulations promulgated comported with the authority granted to the DOL by the FLSA; specifically “What constitutes an employee employed in executive, administrative, or professional capacity?”[14]

The court concluded that the exemption was defined with regard to the employee’s duties, “which does not include a minimum salary level.”[15]  In fact, the Final Rule stated that “[w]hite collar employees subject to the salary test earning less than [$47,892/year] … will be eligible for overtime, irrespective of their job duties and responsibilities.”[16] This, the court ruled, “exceeds [the DOL’s] delegated authority and ignores Congress’s intent by raising the minimum salary level such that it supplants the duties test.”[17]

Interestingly, the court made clear that it was not making a blanket determination that salary-level tests for EAP exemption were impermissible, but only as present in the question before it.[18]  This is an interesting qualification- on one hand, the court’s opinion hangs on the idea that determining an employee’s EAP exemption status must be determined by his duties, and a salary test may not short circuit that inquiry.  At the same time, this is what the DOL regulations already provided, albeit at a much reduced level.  If applied consistently, the reasoning which forbids the new rule would invalidate the old rule as well. 

Now What?

The DOL promptly appealed the preliminary injunction to the Fifth Circuit, which has granted an expedited schedule.  The last briefing is due January 31, 2017, and oral argument is to be held at the first available sitting thereafter.  This appeal is likely to effectively decide the whole case; while only the preliminary injunction is on appeal, if the Fifth Circuit (as it probably will) reaches a decision on the preliminary injunction based on the interpretation of the FLSA, its interpretation will control the district court’s interpretation when the final injunction is decided. 

Political changes may decide the fate of the new rules before the courts can do so.  With a new presidential administration being sworn in in January, the new Secretary of Labor will have a great deal of control over their fate.  While he cannot peremptorily reverse the new rules (he would have to follow normal procedures for changing regulations, including a comment period) he can decline to defend them, returning to the status quo ante.  (Your author finds speculation as to what any particular politician may or may not do in the future to be a futile exercise, and declines to do so here.) 

With the rules stayed at the eleventh hour, employers, many of whom had spent considerable time preparing to comply with the new rules, have to decide what to do.  The preliminary injunction is not a final rule; the court’s final judgment could well permit the new rule to go forward.  The Fifth Circuit’s opinion, if it comes before a final decision in the district court, will likely be determinative. 

Many employers have spent extensive time and resources preparing to comply with new rules.  Many had announced new, compliant pay policies to their employees; some may even have begun to comply prior to December 1.  Although no longer legally required to comply with the new rules, some businesses may find it advisable to continue the policies, both for the convenience of not having to switch back, and because employee morale would be damaged from not implementing (or reversing, where the employer was ahead of the pack) a promised pay raise.  On the other hand, in businesses where previously exempt employees had held (and valued) the ability to be flexible with their hours from week to week, employers and employees may both be breathing a temporary sigh of relief.  All employers with employees subject to the new rule will have to wait to see how this politically charged case plays out. 



[1]Gregory v. First Title of Am., Inc., 555 F.3d 1300, 1302 (11th Cir. 2009).

[2]The new regulations have increased the “total compensation” requirement for the “highly compensated employee” from $100,000 to $134,004. There is also a “highly compensated employee exemption.” The employee must “customarily and regularly perform any one or more of the exempt duties or responsibilities of an executive, administrative or professional employee.” 

[3]29 U.S.C. § 213(a)(1). 

[4]State of Nevadaat 13.  WHAT IS THE ACTUAL REGULATION? 

[5]Chen v. C & R Rock, Case No. 14-cv-114, 2016 WL 1117416 (D.N.H. Mar. 22, 2016). 

[6]29 C.F.R. § 541.2.

[7]29 C.F.R. § 541.700(a).

[8]Id. § 541.700(b).

[9]29 C.F.R.  § 541.700(a).

[10]See, e.g., Rieve v. Coventry Health Care, Inc., 870 F.Supp.2d 856 (C.D. Cal. 2012); see also Johnston v. Robert Bosch Tool Corp.,Civil Action No. 3:08CV-33-DW, 2008 WL 4534109 (D. W.D. Ky.  Oct. 7, 2008).

[11]See Davis v. J.P. Morgan Chase & Co., 587 F.3d 529, 533 (2d Cir. 2009).

[12]29 C.F.R. § 541.200.

[13]State of Nevada, et al v. United States Department of Labor, No. 16-cv-731 (E.D.Tx. Nov. 22. 2016).

[14]Id. at p. 10. 

[15]Id. at p. 11.

[16]Id. at p. 12.

[17]Id. at p. 13.

[18]Id. at p. 12, nt. 2.


 

 

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