On August 31, 2017, a federal judge in the Eastern District of Texas ruled the Department of Labor (“DOL”) exceeded its authority by more than doubling the minimum salary level needed for an employee to qualify for the “executive, administrative, or professional” exemption from federal overtime and minimum wage laws (commonly referred to as the “white collar exemption”). U.S. District Court Judge Amos Mazzant concluded the DOL had “gone too far” by increasing the minimum salary level for exempt employees from $455 per week ($23,660 annually) to $913 per week ($47,476 annually). Nevada v. United States Dep’t of Labor, No. 4:16-CV-731, 2017 WL 3837230, at *7 (E.D. Tex. Aug. 31, 2017).

The Fair Labor Standards Act (“FLSA”) exempts from both minimum wage and overtime requirements “any employee employed in a bona fide executive, administrative, or professional capacity.” 29 U.S.C. § 213(a)(1). In enacting the FLSA, Congress did not define the terms “bona fide executive, administrative, or professional capacity” and instead delegated the power to define and delimit these terms to the Secretary of Labor through regulations, which the Secretary of Labor delegated to the DOL.

Beginning in 1938, the DOL published regulations setting out the scope of the white collar exemption, with the most recent revisions occurring in 2004. For an employee to qualify for the white collar exemption under the DOL’s revised 2004 regulations, he or she must (1) be paid on a salary basis; (2) be paid at least $455 per week ($23,660 annually); and (3) perform executive, administrative, or professional capacity duties as established by the regulations.

On July 7, 2015, the DOL published a Notice of Proposed Rulemaking in the Federal Register. 80 Fed. Reg. 38,515 (July 6, 2015). On May 23, 2016, the DOL published the final version of its revised regulation (“Final Rule”) which increased the minimum salary level for exempt employees to $913 per week ($47,476 annually). The Final Rule’s effective date was December 1, 2016.

On September 20, 2016, Texas and more than fifty-five national business groups filed suit against the DOL and asked the District Court to declare the Final Rule invalid. The Plaintiffs argued the Final Rule’s revision to the minimum salary threshold exceeded the DOL’s authority under Section 213(a)(1) of the FLSA. On August 31, 2017, the District Court agreed.

The court held the DOL “does not have the authority to use a salary-level test that will effectively eliminate the duties test as prescribed by Section 213(a)(1).” Id. The court noted the Final Rule would cause approximately 4.2 million workers to automatically become eligible for overtime compensation without a change in their duties. The court concluded the Final Rule’s significant increase in the minimum salary level “effectively eliminates a consideration of whether an employee performs ‘bona fide executive, administrative, or professional capacity’ duties.” Id. at *9.

While the federal salary basis level will not be increasing, California’s salary basis test, which is equivalent to two times the State minimum wage on an annual basis, increases with each minimum wage hike. Currently, California employers with 26 or more employees must pay a salary of at least $43,680 annually to exempt employees (and ensure the employee satisfies the duties test) to qualify for the white collar exemption. This minimum annual salary threshold will increase to $45,760 on January 1, 2018. In welcome news for California employers, the California Legislature did not pass proposed legislation that would have increased the salary basis test for all employers in California to $47,472 (AB 1565).

Employers with questions regarding the exempt employee tests may contact one of the authors or their counsel at AALRR.