United States: Texas Federal Court Blocks New Salary Restrictions For Exempt Employees

On November 22, 2016, a federal court in the Eastern District of Texas issued a preliminary injunction blocking the Department of Labor from enforcing new regulations that would have drastically reduced the number of white collar employees who are exempt from overtime. The disputed regulations were set to take effect on December 1.

The Fair Labor Standards Act generally requires that each employee receive at least the minimum wage of $7.25 for each hour worked, plus overtime pay at one and one-half the employee's regular rate of pay for all hours worked beyond forty in any workweek. However, the FLSA also exempts certain employees from this overtime requirement. In particular, "any employee employed in a bona fide executive, administrative, or professional capacity" is exempt. These are the so-called "white collar" exemptions.

The FLSA authorizes the DOL to determine which employees are "executive," "administrative," and "professional" by defining those terms in the agency's regulations. In 2004, the DOL issued regulations establishing a test—employees are exempt if they (1) perform work that is executive, administrative, or professional in nature (as defined by the regulations), and (2) are paid at least $455 per week on a salary basis. This $455 minimum salary test is meant to screen out employees who are obviously nonexempt.

President Obama issued an executive order in March 2014 directing the DOL to revise these definitions, writing that the exemptions "have not kept up with our modern economy." The regulations enjoined this week were the result of that rulemaking process. The new rules mostly follow the same structure as the current ones, but would have raised the minimum weekly salary for exempt white collar employees from $455 ($23,660 annually) to $921 ($47,892 annually). They would also have adjusted this minimum automatically every three years to account for changes in the labor market. Sheppard Mullin covered the new regulations in detail earlier this year.

A group of more than 20 states challenged the regulations in the Eastern District of Texas. They argued that such a dramatic increase in the minimum salary exceeded the DOL's authority under the FLSA because the statute describes exempt employees solely in terms of their work duties. The DOL responded that because the statute refers to employees working in an executive, administrative, or professional capacity, it should be read to include a certain white collar "status" for which a minimum weekly salary of $921 is a valid proxy.

The court sided with the state plaintiffs. It looked to dictionary definitions for the terms "executive," "administrative," and "professional" and found that the terms described function, not status. In other words, the language used by Congress when enacting the white collar exemptions describes only a type of work to be performed, not a level of compensation to be paid. The court concluded that the new higher salary minimum exceeds the DOL's authority because it effectively takes precedence over the duties test for millions of workers—the regulation explicitly excludes any employee whose salary is too low even if he or she performs work that is executive, administrative, or professional in nature. Because Congress used plain and unambiguous language to exempt from overtime any employee performing executive, administrative, or professional duties without reference to a minimum salary, the court concluded that the new regulation is likely invalid. The court issued a preliminary injunction prohibiting the DOL from enforcing the new rule because the added cost of either raising state employees' salaries to keep them exempt or paying overtime would have impaired the states' ability to provide key public services in light of the states' limited budgets.

The November 22 ruling is good news for employers in some ways. However, it also creates significant uncertainty. First, the court only issued a preliminary injunction. This means the DOL cannot enforce the new rule on December 1 as planned, but it is just a temporary measure to allow the court more time to reach a final decision. This leaves room for the court to decide later that the regulation is, in fact, valid. The court's reasoning in its November 22 order suggests that the rule is unlikely to survive, but that outcome remains possible.

Second, even though the case is not yet over, the DOL has the right to appeal this ruling to the Fifth Circuit immediately. It could also seek review on an emergency basis—something the Obama administration did in 2015 after a district court in the Fifth Circuit issued an injunction blocking the enforcement of an executive order meant to grant amnesty to certain undocumented immigrants. In that case, the Fifth Circuit issued an order denying an expedited ruling within a month and issued its final ruling about nine months later. If that timeframe holds in this case, the Fifth Circuit could theoretically reverse the trial court's order before the end of the year, giving the DOL a green light to enforce the regulation. There could be further delay and uncertainty if either side dislikes the outcome on appeal and seeks review from the Supreme Court.

Finally, there is a very real chance that the incoming Trump administration would direct the DOL to abandon the new rule and any pending litigation over it. If that does happen, it is unknown whether the DOL would return to the status quo of the 2004 rule or adopt something different.

In short, it remains unclear whether the new rule is dead for good and, if it is not, when it would be implemented. This puts employers in an awkward position. Some have already reclassified employees as nonexempt or raised salaries to comply with a rule they expected to take effect on December 1. Reversing these changes could be costly and bad for employee morale, and there is always the risk that these employers would have to reverse course again if the rule is found to be valid later. Other employers have communicated to their workers that they plan to make changes on December 1, but have not yet actually reclassified employees or raised salaries. These employers might face similar challenges if they now decide to wait to raise salaries and/or pay overtime.

Deciding how to proceed in light of this ruling will require careful consideration of each employer's unique situation. One thing we do know is that employers nationwide will be watching developments in the Eastern District of Texas closely until the fate of the new exemption rule is decided. Sheppard Mullin will continue to provide updates as events unfold.

The case is State of Nevada v. U.S. Dep't of Labor, Case No. 4:16-CV-00731, in the Eastern District of Texas.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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