November 22nd, 2016 | David Stephanides
Late on November 22, a federal district court in Texas enjoined nationwide implementation of the Labor Department’s final overtime rule. The rule was to go into effect on December 1. Judge Amos Mazzant, ruling on a consolidated lawsuit brought by 21 states and a business coalition, concluded that the executive, administrative, or professional employee exemption contained in FLSA Sec. 13(a)(1) does not grant the Department the authority to utilize a salary-level test or an automatic salary updating mechanism under the rule. “With the Final Rule, the Department exceeds its delegated authority and ignores Congress’s intent by raising the minimum salary level such that it supplants the duties test. Consequently, the Final Rule does not meet [step one of the] Chevron [deference test] and is unlawful,” the court ruled (State of Nevada, et al v. Dept. of Labor, et al, Dkt. No. 4:16-CV-00731, Nov. 22, 2016).
In 2014, President Obama urged the Labor Department to review severely outdated regulations related to exempt employees. In response, on May 18, 2016, the DOL released the final rule updating overtime eligibility that will automatically extend protection to over four million workers.
Background. The FLSA, passed in 1938, provided equity and fairness to workers by establishing the required minimum wage and overtime regulations. In general, the regulations applied to most employees. However, the FLSA also provided an exemption from these regulations for executives, administrative, and professional employees, commonly referred to as white collar workers. Exempt employees are not entitled to overtime wages. To qualify as exempt, the employees must meet certain tests regarding their job duties (duties test) and must be paid on a salary basis at not less than a “minimum specified amount” (salary level test).
The white-collar exemption was originally intended to apply to highly compensated individuals. But due to inflation, the salary threshold failed to provide protection to an increasing number of workers over the years. In 2004, the weekly salary amount was raised for the first time since the 1970’s, when it was set at $455 ($23,660 annually). The test for exemption was also modified. However, critics argued that even for 2004 standards, the adjustment to the exemption rules remained too low to provide adequate coverage for low-income workers.
Updated rule. The final rule updated the executive, administrative, and professional workers salary and compensation levels as follows:
- The standard salary level was set at the 40th percentile of earnings of full time salaried workers in the lowest-wage Census Region, currently the south ($913 per week; $47,476 annually for a full-time worker).
- The total annual compensation requirement for highly compensated employees subject to the minimal duties test was set to the annual equivalent of the 90th percentile of full-time salaried workers nationally ($134,004); and
- In order to ensure useful and effective tests for exemption and continued worker protection, the salary and compensation levels were to be updated every three years at the above percentile levels.
The final rule also amended the salary basis test to allow employers to satisfy up to 10 percent of the standard salary level with nondiscretionary bonuses and incentive payments such as commissions.