DOL Overtime Rule Struck Down

A Texas federal court has struck down the Obama-era Department of Labor (DOL) revised overtime exemption rule, which sought to more than double the salary level required for overtime-exempt workers.

The Current Test for Overtime-Exempt Status: In order to be exempt from overtime, a white-collar employee must meet three tests: (1) the salary basis test – the employee must be paid on a salary basis, not subject to reductions for fluctuations in quantity or quality of work; (2) the salary level test – the employee’s salary must currently be at least $455 per week (equaling $23,660 per year); and (3) a duties test – the employee must perform certain duties specific to the executive, administrative or professional exemption in question. There is also a highly-compensated employee exemption under which an employee must currently make at least $100,000 per year and perform at least one exempt duty.

What the Revised Rule Would Have Changed: The DOL’s revised rule would have doubled the salary requirement for white collar (executive, administrative and professional) employees from $23,660 per year ($455 per week) to $47,476 per year ($913 per week). The required minimum salary for the highly compensated employees’ exemption would also have been raised from $100,000 to $134,004. These salary levels would have been subject to automatic adjustments every three years. The new rule did not change the duties test for any of the exemptions.

Challenge to the Revised Rule: The new rule was challenged by 21 states and multiple business groups, arguing that such change was unlawful. On November 22, 2016 – just over a week before the rule was scheduled to take effect on December 1, 2016 – the Texas federal court issued a preliminary injunction that placed the rule on hold. The Obama administration appealed the order to the U.S. Court of Appeals for the 5^th Circuit, but under the Trump administration, the DOL indicated to the 5^th Circuit that, although it believed it had the authority to increase the salary level, it had decided not to pursue a $913 weekly salary level for the exemption. Instead, the Trump DOL issued a Request for Information (RFI) in an effort to determine the appropriate salary level by soliciting input from the public, as we discussed in our July 27, 2017 E-lert, Overtime Rule Revisited by Trump DOL.

In the meantime, the plaintiffs in the Texas lawsuit filed a motion for summary judgment, meaning that they asked the court to decide in their favor based on the undisputed facts and the applicable law. The court granted their motion today.

The Court’s Ruling that the Revised Rule Was Unlawful: At issue was the DOL’s authority to define the terms “bona fide executive, administration, or professional capacity.” The Supreme Court has established a two-step standard, known as the Chevron analysis, for analyzing agency interpretations of federal laws such as this, as follows: (1) whether Congress directly and unambiguously spoken to the precise question at issue; and (2) if not, whether the agency’s interpretation is based on a permissible construction of the statute.

Applying Chevron, the court found that the FLSA does not define the terms. Thus the court determined the meaning of those terms at the time that Congress enacted the statute. Looking at the dictionary definitions, the court found that the terms related to “a person’s performance, conduct or function” and thus Congress clearly intended to define those terms by their duties.

The court then turned to whether the DOL had given effect to Congress’ unambiguous intent. It found that the DOL does not have the authority to establish a salary level test “that will effectively eliminate the duties test.” The court continued, “[n]or does the Department have the authority to categorically exclude those who perform ‘bona fide executive, administrative, or professional capacity’ duties based on salary level alone.” The court found that the DOL had previously incorporated and utilized a permissible minimum salary level to identify categories of employees intended to fall within the exemption. The new salary levels, however, would admittedly exclude previously exempt employees regardless of the duties performed. This, the court stated, was not what Congress intended, and the DOL’s regulation fails the first step of Chevron.

Moreover, even if the intent had been ambiguous, the court found that the regulation would have failed the second step as well, stating, “[i]f Congress was ambiguous about what specifically constituted an employee subject to the EAP exemption, Congress was clear that the determination should involve at least a consideration of an employee’s duties.” The DOL’s regulation did not do so, in that many employees would have been excluded based on salary alone. Thus, according to the court, the DOL’s interpretation was not reasonable.

The court also summarily rejected, as unlawful, the automatic three-year updating procedure.

What This Means for Employers: Employers may continue to apply the current tests for exempt status, while awaiting the DOL’s next steps. DOL Secretary Acosta has stated that he believes that the DOL has the authority to increase the salary level, although he disagreed with the amount of the Obama DOL’s proposed increase. The language of the court’s order would seem to support the DOL’s position that it can implement some increase, but not one of the magnitude previously proposed. We would expect the Trump DOL to propose a more modest increase. We also note that the DOL’s recent RFI sought input as to whether the duties tests should be revised, and thus would not be surprised to see some modification of those tests in future proposed regulations from the DOL.