One of the most significant developments in employment law in 2017 was a federal district court in Texas declaring invalid the Obama Administration’s controversial new overtime rule that would have more than doubled the minimum salary level required to qualify for certain overtime exemptions under the FLSA. Although the business community won this battle, employers should be prepared for the U.S. Department of Labor (DOL) to issue a new rule in 2018 that increases the minimum salary level.
Before considering what the DOL may do in 2018, it is important to consider what happened to the 2016 Final Rule. In March 2014, President Obama issued a memorandum directing the Secretary of Labor to “modernize and streamline the existing overtime regulations for executive, administrative, and professional employees, which are commonly referred to as the “EAP” exemptions. The regulations had not been updated since 2004. Under the Final Rule announced in May 2016, the minimum salary level for exempt employees more than doubled from $455 to $913 per week, which was based on the 40th percentile of weekly earnings of full-time salaried workers in the South. The Final Rule also included an automatic updating mechanism that adjusted the minimum salary level every three years. In 2016, 21 states and more than fifty-five Texas and national business groups filed separate lawsuits against the DOL in the U.S. District Court for the Eastern District of Texas to challenge the Final Rule. The cases were later consolidated. State of Nevada et al. v. U.S. Department of Labor et al., Docket No. 4:16-cv-731. On November 22, 2016, the district court issued a preliminary injunction blocking the new rule from going into effect on December 1, 2016.
The problem with the Final Rule was not the dramatic increase of the salary level in and of itself, but rather that the increase eclipsed the analysis of the employee’s duties in determining exemption status. Section 213(a)(1) of the FLSA grants authority to the DOL to “define and delimit” the terms “bona fide executive, administrative, or professional capacity,” which are not defined in the statute. Based on the plain meanings of those terms, Congress intended the exemptions to apply based on an employee’s duties, not salary. By making the salary level the determining factor in whether an employee qualified for an exemption, irrespective of their job duties and responsibilities, the DOL acted contrary to congressional intent. For this reason, the district court granted summary judgment to the plaintiffs and declared the Final Rule invalid on August 31, 2017.
Before the district court granted summary judgment, the DOL under the Trump Administration had abandoned its defense of the 2016 Final Rule. On July 26, 2017, the DOL issued a Request for Information (RFI) in support of a new proposed rule. The DOL invited responses to eleven questions, including whether updating the 2004 salary level for inflation should be an appropriate basis for setting the salary level. Most questions the DOL posed went beyond the proposed increase in the salary level, including whether the salary level should vary based on the size of the employer, geographic region, or and other method, and whether the DOL should return to the pre-2014 long and short test salary levels. Based on the questions posed, the DOL may be amenable to permitting non-discretionary bonuses and incentive payments to satisfy a percentage of the salary level, which was a component of the 2016 Final Rule.
The DOL received more than 140,000 comments before the comment period closed on September 25, 2017. In all likelihood, the DOL will make its position known in 2018 through a Notice of Proposed Rulemaking (NPRM). When that happens, plan on the salary level increasing, but the number should be closer to $455 than $913.