Overtime Rule Blocked

November 28, 2016

Neal D. Mollen & Daniel J. Emam

The Obama Administration’s regulatory effort to rewrite the Department of Labor’s (DOL) Rule for applying the Fair Labor Standards Act’s (FLSA) administrative, executive, and professional exemptions will not take effect on December 1 as expected. A federal district judge in Texas has enjoined implementation of that Rule, finding that it sought to rewrite, rather than “define,” those statutory exemptions. As the Obama Administration gives way to its successor, the fate of the Rule is highly uncertain. Employer vigilance to these developments is imperative.

Background

In 1938, Congress enacted the FLSA, which set minimum wages and provided for overtime pay for hours worked above 40 in a week. Section 213(a)(1) of the FLSA, however, exempted from the Act’s overtime provisions “any employee employed in a bona fide executive, administrative, or professional capacity.” The Act also gave DOL regulatory authority to “define and delimit” those exemptions.

Over the years, DOL used that authority to define the circumstances in which the exemptions would apply. In 1949, DOL established two different “duties” tests, one applicable to those in positions paid at or above a specified salary level, and the other, more rigorous duties test, to lower-paid positions. In 2004, DOL replaced these tests with a single “standard duties” test, which declared that the exemption could only be applied to employees paid a salary of $23,660 or more per year.

The Obama Regulation

The Obama Administration concluded that this salary level was too low—that it excluded from overtime protection too many low-wage workers. Thus, on May 23, 2016, DOL published a Final Rule that would have increased the minimum salary level for exempt employees from $23,660 to $47,892 annually, a figure pegged to the 40th percentile of weekly earnings of full-time salaried workers in the lowest wage region of the country. The Rule also established an automatic updating mechanism to adjust the minimum salary level every three years. The Final Rule was scheduled to take effect on December 1, 2016.

New Rule Incompatible With Plain Statutory Language

Several state governments and business groups sued DOL, arguing that by determining the application of the exemptions by salary level, instead of the work the employees at issue actually do, the Rule impermissibly altered the duties-based scheme designed by Congress in 1938. Judge Amos Mazzant of the Eastern District of Texas agreed. The court held that unmistakably, “Congress intended the [executive, administrative, and professional] exemption to apply to employees doing actual executive, administrative, and professional duties.”[1] By using salary level as a threshold determinant for application of the exemption, the court held, the Final Rule abandoned the language of the statute and erected in its place a compensation-only test. Judge Mazzant also concluded that the plaintiffs would suffer irreparable harm in the absence of an injunction, and that DOL would suffer no comparable harm by a delay in the effective date of the Final Rule.

What’s Next?

The injunction comes as the Obama Administration is in its final days, and as the new administration is being formed. This contributes to the substantial uncertainty facing the Rule. Judge Mazzant granted a preliminary injunction only; the court still has pending motions for summary judgment and no appeal by DOL on the merits is currently possible. DOL could (and may well) seek an immediate stay of the injunction, but a ruling by the Fifth Circuit seems unlikely before December 1, the effective date of the regulations. If a stay is issued after December 1, the Final Rule would become effective immediately, presumably forcing employers to implement the new regulations virtually overnight. The government could also ask Judge Mazzant to enter final judgment against it immediately, allowing an appeal on the merits now, but an appeal would not automatically result in any change in the status quo; DOL would still have to seek a stay pending appeal in order for the Rule to go into effect. Time is rapidly running out for the Obama Administration to accomplish such a result.

There is also some uncertainty about how a new Trump Administration—currently without even a Secretary or Solicitor designee—would handle any litigation it inherits from its predecessor. If DOL files an appeal now, the new Administration could support the Rule before Judge Mazzant or in the Fifth Circuit, or it could simply confess error and allow the injunction to remain in place. It might then seek to promulgate a new Rule of its own, or it might choose to leave the prior 2004 regulation in effect for some period of time; that Rule would almost certainly be subject to the same attack.

Finally, the new Congress might have its say on the matter. In 1996, Congress passed the Congressional Review Act (CRA),[2] a law that allows Congress to disapprove federal agency regulations before they go into effect. The CRA provides Congress 60 legislative days from the date an agency rule becomes final to enact “a resolution of disapproval.”[3] If the resolution of disapproval is passed by both houses of Congress and signed by the President—or if two-thirds majorities in both houses are able to override a presidential veto—then the agency rule becomes invalid.[4] In practice, the CRA is most relevant in times of presidential transition.[5] Unified Republican control of Congress and the White House in 2017 makes it possible that the party will use the CRA as a vehicle to strike down a variety of regulations promulgated by the Obama Administration, including this overtime Rule. The CRA could conceivably apply to any rule that became final in late May of 2016 or thereafter. Whether the Obama Overtime Rule is within that statutory time window is subject to debate,[6] and even if it is, Speaker of the House Paul Ryan would have to orchestrate the legislative calendar between now and January 20 carefully to preserve Congress’ ability to use the CRA to dispose of the Rule

These developments will be challenging for employers to manage. The new Rule might become effective on a moment’s notice, or it may die a sudden death. Many employers have already announced pay raises and reclassification decisions in advance of the Rule’s effective date; in light of the uncertainty surrounding the Rule, they will now have to decide whether to allow those changes to go into effect on December 1, retract those anticipated changes, or put them on hold while waiting for the matters to be resolved. Paul Hastings will keep its clients apprised as circumstances change.

[1] Nevada v. U.S. Dep’t of Labor, No. 4:16-cv-00731, at 11 (E.D. Tex. filed Nov. 22, 2016).

[2] 5 U.S.C. §§801-803 (2012).

[3] Id. at §801.

[4] Id.

[5] See Richard S. Beth, Cong. Research Serv., The Congressional Review Act and Possible Consolidation into a Single Measure of Resolutions Disapproving Regulations, n.5 (2009), https://www.fas.org/sgp/crs/misc/RL34633.pdf.

[6] Memorandum from Maeve P. Carey, Christopher M. Davis, and Casey Burgat, CRS, “Major” Obama Administration Rules Potentially Eligible to be Overturned under the Congressional Review Act in the 115th Congress (Nov. 17, 2016).

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