Why it matters

Opponents of the Department of Labor’s (DOL) new overtime rules set to take effect on Dec. 1 have come out swinging. A coalition of 21 states filed a lawsuit in Texas asserting that the rules contradict both congressional intent and the statutory text of the exemption while a separate complaint brought by more than 50 business groups contends that the rule was promulgated in contravention of the Administrative Procedures Act. The controversial final rule raised the floor below which overtime must be paid pursuant to the “white collar” exemption from $455 to $913 per week. The states argued that the significant changes rendered by the rule essentially doubled the current amount “and rendered virtually irrelevant any inquiry into whether an employee is actually working in an executive, administrative, or professional capacity,” while the business groups called the rules “arbitrary, capricious, and contrary to the procedures required by law.” Both suits seek a declaratory judgment that the rules are unlawful as well as an injunction preventing their implementation or enforcement. Not to be outdone, the House of Representatives passed a bill that would provide an additional six months for employers to achieve compliance. While the measure has moved to the Senate, President Barack Obama already indicated he would veto the bill.

Detailed discussion

In May, the DOL published final regulations setting a new salary threshold for the executive, administrative and professional employee exemptions under the Fair Labor Standards Act (FLSA)—known as the “white collar” exemption—at $913 per week, or $47,476 per year.

Set to take effect on Dec. 1, the new threshold more than doubled the current minimum salary level of $455 per week or $23,660 per year. For the first time, employers will be able to use nondiscretionary bonuses and incentive payments to satisfy up to ten percent of the standard salary level, as long as those payments are made on a quarterly or more frequent basis. In addition, the new rules created an automatic adjustment to occur every three years, tracking the 40th percentile of the lowest wage Census Region.

With less than three months before the new rules kick in, opponents filed suit to challenge them. Led by the Attorneys General of Nevada and Texas, a group of 21 states requested that a federal court judge halt enforcement of the regulations and declare them unconstitutional, arguing that the rules violate the Tenth Amendment and contravene congressional intent with regard to the FLSA.

Instead of conducting an inquiry into the duties that employees actually perform to determine their eligibility for the exemption, the DOL simply doubled the current salary threshold “and rendered virtually irrelevant any inquiry into whether an employee is actually working in an executive, administrative, or professional capacity,” the states argued.

The new overtime rule will increase the employment costs of the plaintiff states “significantly,” according to the complaint, forcing them to reduce or eliminate some essential government services and functions, as well as reclassify some salaried white collar workers as hourly employees to reduce their hours and avoid payment of overtime. Iowa, for example, estimated that the new rule will add approximately $19.1 million of additional costs in just the first year while Arizona anticipated a $10 million budgetary impact.

“[E]nforcing FLSA and the new overtime rule against the States infringes upon state sovereignty and federalism by dictating the wages that States must pay to those whom they employ in order to carry out their governmental functions, what hours those persons will work, and what compensation will be provided where these employees may be called upon to work overtime,” the AGs argued. “Left unchecked, DOL’s salary basis test and compensation levels will wreck State budgets.”

In addition, the states questioned whether the final rule truly furthers the intent of the FLSA. “One would think—as the statute indicates—that actually performing white collar duties (i.e. being ‘employed in a [white collar] capacity’) would be the best indicator of white collar exempt status,” the AGs argued. “Instead, DOL relegates the type of work actually performed to a secondary consideration while dangerously using the ‘salary basis test,’ unencumbered by limiting principles, as the exclusive test for determining overtime eligibility for EAP employees.”

Following suit, more than 55 business groups—including the U.S. Chamber of Commerce, the National Retail Federation and the National Association of Manufacturers—relied upon the Administrative Procedures Act (APA) to challenge the rules on behalf of private employers, asserting they exceed the authority of the DOL and are “arbitrary, capricious, contrary to procedures required by law, and otherwise contrary to law.”

“The costs of compliance will force many smaller employers and non-profits operating on fixed budgets to cut critical programming, staffing, and services to the public,” the groups told the court. Further, “the failure of DOL to provide any phase-in period for the radical increase in the minimum salary level required for exemption under the Rule, and the inclusion of an unprecedented escalator provision, exacerbates the significant impact on businesses, both large and small, that will be harmful to the economy as a whole.”

The groups took particular issue with the indexing set to occur every three years, calling it an “unprecedented” change that “not only departs from the terms of the FLSA, it does so without additional notice and comment required by the APA,” after more than 77 years of statutory history without such automatic increases.

Both suits requested a declaratory judgment that the new rules and regulations are unlawful and should be enjoined from having any legal effect.

Lawmakers also got in on the action, passing a bill that would provide an additional six months for employers to prepare for the changes. H.R. 6094, the Regulatory Relief for Small Businesses, Schools, and Nonprofits Act, would delay the Dec. 1, 2016 effective date until June 1, 2017.

The measure passed by a vote of 246 to 177 but appears unlikely to move much farther through the legislative pipeline. In a Statement of Administration Policy, the White House made it clear that President Barack Obama “strongly opposes” the bill and would veto it if it landed on his desk. “While this bill seeks to delay implementation, the real goal is clear—delay and then deny overtime pay to workers,” according to the statement. “With a strong economy and labor market, now is a good time for employers to provide these essential protections for workers, who cannot afford to wait.”

To read the complaint in State of Nevada v. U.S. Department of Labor, click here.

To read the complaint in Plano Chamber of Commerce v. U.S. Department of Labor, click here.

To read H.R. 6094, click here.