New FLSA Regulations Dealt a Knock-Out Blow

As we reported in November 2016, a federal court issued a preliminary injunction halting the implementation of the proposed changes to the FLSA’s overtime exemptions just before they were to take effect on December 1. On August 31, 2017, the same court issued another decision definitively holding that the Department of Labor exceeded its authority in issuing those regulations and thereby permanently enjoining them. In doing so, the court clarified its prior holding and gave the new Administration a clear license to go back to the drawing board and draft new regulations consistent with the underlying law.

The November preliminary injunction was in response to a case brought by 21 states. At that time, a companion case also challenging the legality of the new regulations was pending before the same court. That case was brought by a variety of business groups and chambers of commerce from across the nation, spearheaded by the U.S. Chamber of Commerce. The business groups had filed a motion for summary judgment in its case last year, but the court did not rule on that motion until last week. The states joined in that motion, and therefore the ruling applies to both cases before that court.

While granting the business groups’ motion for summary judgment, the court concluded that the Department of Labor had exceeded its authority. The primary basis for its holding is that the new salary level (i.e., $47,476)—which was more than double the salary level in the existing regulations (i.e., $23,660)—served to make the salary level the primary determiner of exempt status. This outcome violated the FLSA, the court held, because it supplanted the duties tests for executive, administrative and professional status, and Congress intended that those performing the duties of those classifications were to be exempt. The salary level in the new regulations would have converted more than 4.2 million employees from exempt to nonexempt, despite the Department’s admission that, but for the new salary level, they would otherwise be exempt. The court also held that a salary level could be legally used by the Department in defining who may be considered exempt, but not if it is so high that it essentially becomes the sole test for the exemption. Thus, the court concluded that, while a salary level could be incorporated in regulations defining the exemption, the salary level in the new regulations was excessively high.

The earlier preliminary injunction was appealed by the former Administration to the Fifth Circuit Court of Appeals. In that appeal, the new Administration asked the court to recognize that a salary level is a permissible component of the exemption tests, but still strike down the regulations because of the amount. Concurrently, the new Administration has announced its intent to revisit the use and magnitude of the salary level test, and has asked for comments with respect to how it can be better tailored going forward.

With this decision, the case before the Court of Appeals is likely moot and the future of the regulations will hinge on whether or not the new Administration will appeal that decision. In fact, the Department of Labor today asked the Court of Appeals for permission to withdraw its appeal. Further, given that the district’s court new decision aligns with the Administration’s position before the Court of Appeals, the conventional wisdom is that an appeal is unlikely. Instead, the Department will likely simply proceed with the process for revisiting the salary level question and eventually promulgate new regulations. Secretary Acosta has indicated a view that the new rate would be more reasonable and appropriate if it hovered near $33,000, but that given the request for comments recently issued by the Department, other factors may come into play for small business, non-profits, rural business, and other employers who would be hard hit by a greatly increased salary level. Another issue “on the table” is whether any new salary level should somehow be indexed to automatically increase without having to exhaust the regulatory process.

Much is still up in the air, but the decision should bring a sigh of relief to employers. It appears that the enjoined regulations are officially dead, but there are still a few procedural and regulatory issues technically in play.  

Importantly, though, this case does not affect wage and hour laws at the state level. Employers in states with higher minimum wages or exemption thresholds, such as California (currently $10.50 per hour with an exempt salary threshold of $3,640 per month or $43,680 per year for employers with 26 or more employees, but scheduled to increase to $11.00 per hour with exempt thresholds of $3,813.33 per month or $45,760 per year effective January 1, 2018), must continue to follow the higher applicable rates, as well as observe the stricter “duties tests” imposed in their particular states.

If you have any questions about the information in this alert, please contact Robert Boonin (313-568-6707), Arlene Switzer Steinfield (214-462-6442), Jack Schaedel (213-457-1766), or your Dykema relationship attorney.