Uncertainty Regarding the Department of Labor’s Salary and Overtime Regulations

Brian C. Zaldivar

By Brian C. Zaldivar

A federal district court in Texas has delayed the enforcement of the Department of Labor’s changes in overtime regulations.

In May 2016, the Department of Labor published a final rule that has caused a fury of scrambling amongst employers, in both the public and private sectors, to review their employee’s salary levels and exempt statuses. This final rule relates back to the Fair Labor Standards Act (“FLSA” or the “Act”), enacted in 1938, which set minimum wages and provided for overtime pay for hours worked above 40 in a week. Section 213(a)(1) of the Act, however, exempted overtime provisions for any employee employed in a bona fide executive, administrative, or professional capacity. This is known today as the “EAP” or “white collar” exemption. The Act also gave the Department of Labor regulatory authority to “define and delimit” those exemptions.

The current regulations concerning the white collar exempt status, promulgated in 2004, required an employee to meet three criteria. First, an employee must be paid on a salary basis (the “salary-basis test”). Second, an employee must be paid at least the minimum salary level established by the regulations (the “salary-level test”). And third, an employee must perform executive, administrative, or professional duties (the “duties test”). See “It’s Almost Time: DOL Overtime Exemption Rules Effective Dec. 1, 2016” for more information on the current regulations.

The final rule, previously scheduled to be enforced December 1, 2016, revamped the white-collar exemption by increasing the salary-level test from $23,660 to $47,476. Any employee earning less than the new amount, but still paid on a salary basis and meeting the duties test, would be entitled to overtime pay at one and one-half times the employee’s regular rate of pay for all hours worked above 40 in a week.

Employers had a few options to become compliment with the final rule and avoid paying overtime, most popular were:

  • Raise the salaries of salaried employees to above $47,476; or
  • Reclassify salaried employees as hourly employees and cap those employees at a 40 hour work week.

On Tuesday, November 22, 2016, Judge Mazzant halted the enforcement of the final rule by issuing a nationwide preliminary injunction to preserve the status quo while the court ponders the legality and enforceability of the final rule. Judge Mazzant’s analysis centered around determining what constituted an employee employed in an executive, administrative, or professional capacity. After reviewing the plain meaning of those positions together with the statute, Judge Mazzant opined Congress intended the white collar exemption to apply to employees actually in such positions, without the need for a minimum salary level test. The court also noted it was not making a general statement on the lawfulness of the salary-level test for the exemption; rather the court was evaluating only the salary-level test as amended in the final rule. This provides no guidance as to whether there should be a salary level test, and if so, at what amount.

Judge Mazzant’s opinion held the final rule in direct conflict with Congress’s intent because the language of the final rule stipulates, irrespective the employee’s duties, if the employee’s salary is below the salary-level test, that employee does not fall within the white collar exemption. Such language transformed the final rule into a de facto salary-only test. The original purpose of the low salary level, according to Judge Mazzant, was to screen out the obviously nonexempt employees, making the analysis of duties in such cases unnecessary.

The Department of Labor has appealed the injunction to the Fifth Circuit. However, the Fifth Circuit is also the same court that upheld an injunction blocking President Obama’s plan to grant quasi-legal status to millions of illegal immigrants. It is uncertain how the Fifth Circuit will rule, but if nothing happens before January 20th, there is a possibility that the Department of Labor will withdraw its appeal and let the injunction stand.

Even if the Fifth Circuit reverses the injunction, the incoming Republican-controlled Congress has tools to thwart this rule yet again – the likely vehicle would be the Congressional Review Act (“CRA”). The CRA, passed in 1996, authorizes Congress 60 legislative days from the date an agency rule becomes final to enact a “resolution of disapproval.” A resolution of disapproval invalidates the rule.

Additionally, the newly minted Trump Administration and Department of Labor thereunder could issue a revised regulation – altering the rule even further to potentially set a new minimum salary level. It is likely a new salary level would receive bipartisan support because it is widely accepted that $23,660 is too low. The current salary level falls below the federal poverty level for a family of four many and is below the minimum wage standard for those cities and states that’ve approved a $15 minimum wage.

So, now what?

For those employers who have already given the salary increases, they might have a higher employee retention rate if those salary increases remain intact. There is also state law to consider. For example, employers in Missouri must give written notice to employees of any reduction in pay rates 30 days before such reduction is implemented. The sole remedy for this notice violation is a $50 per employee (RSMO 290.100).

If employees were scheduled to be reclassified to nonexempt, but haven’t yet reclassified, employers could postpone the reclassifications until the current litigation provides a clearer picture into the future.

Employers can still follow the existing regulations, but it would behoove them to continue reviewing their employee exempt and non-exempt statuses and employee handbooks/manuals regarding overtime compensation policies (to include, travel/non travel compensation polices) as this preliminary injunction is just as it sounds, preliminary. The injunction is far from a permanent ban and may still be implemented, although it is unlikely as currently written.

Posted by Attorney Brian C. Zaldivar. Zaldivar is a member of Danna McKitrick’s transaction team. He focuses on assisting clients with matters related to business transactions and estate planning.


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