On November 22, 2016, a United States District Court in Texas issued a nationwide injunction against the Department of Labor’s (DOL) Final Overtime Rule, which was set to go into effect on December 1, 2016. The Final Rule would have more than doubled the Fair Labor Standards Act (FLSA) salary test for executive, administrative and professional employees from $455 per week ($23,660 per year) to $921 per week ($47,832 per year). White-collar employees earning below the $921 threshold would have been entitled to overtime. The district court also enjoined the DOL’s rule that established a mechanism for the threshold to adjust automatically every three years starting in 2020.
Looking at the plain language of the FLSA, the court found that the statutory “white-collar exemptions” apply to employees performing actual executive, administrative and professional duties. Thus, Congress intended the exemption to depend on an employee’s duties rather than their salary. Therefore, the court held that the entire concept of a salary threshold for exempt status was an anathema to the FLSA. Accordingly, the district court enjoined the DOL nationwide from implementing the increase to the salary threshold for exempt status as well as the automatic three-year adjustment to such threshold.
While this decision is certainly good news for business, there are a number of reasons why employers should remain cautious, as the decision is not a panacea. As an initial matter, the DOL is certain to appeal the decision, and there is no certainty that an appellate court would uphold the decision as the district court took a very aggressive approach when it enjoined implementation of the DOL rules.
Further, many states have their own salary thresholds for exempt status and these thresholds are not impacted by the district court’s decision. For example, as we stated earlier this month, New York is increasing its salary threshold to $825 per week ($42,900 per year) on December 31, 2016, and annually on December 31 thereafter. This means that in New York, in order to be classified as exempt as an executive/managerial or administrative employee, the employer must pay the employee a salary of at least $825 per week starting on December 31. Similarly, in California the salary threshold will increase to $43,680 per year in January. Therefore, it is imperative that employers work with counsel to ensure that they are paying the correct salary to exempt employees under applicable state law.
Additionally, the DOL’s enjoined regulations allowed employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level provided that such nondiscretionary bonuses and incentive payments are paid at least quarterly. New York law does not permit employers to use such remuneration to satisfy the salary threshold; thus, New York employers must pay salaries of at least $825 per week exclusive of any other compensation that might be paid.
Finally, in order to be exempt as an executive, administrative or professional employee, under the FLSA, the employee must satisfy a salary test (now enjoined) and a duties test. The duties test requirement for exempt status under both federal and state law remains unchanged and no part of the duties test is enjoined. As a reminder, in order to be exempt, among other things, employees must perform specific duties. When there has been litigation over whether employees are properly classified as exempt from overtime, it is the duties test and whether the employees have satisfied that test that has been the issue of the litigation, not whether the salary threshold has been satisfied.
As a result of the injunction, employers are not required to pay executive, administrative and professional employees a salary of at least $921 per week starting on December 1. But, employers should be aware that this salary level may be implemented at a later date should an appellate court disagree with the Texas court’s decision. More importantly, however, employers must still comply with the FLSA’s duties test for exempt status as well as state law. For New York employers, this means that in order to have an employee exempt from overtime as an executive and administrative employee, the employer must pay such employee at least $825 per week starting on December 31.
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