Federal Court in Texas Holds That the Department of Labor’s Final Rule Changing the White Collar Exemptions Invalid

On August 31, 2017, the United States District Court for the Eastern District of Texas (the “Court”) invalidated the United States Department of Labor’s (“DOL”) changes to the Fair Labor Standards Act’s (“FLSA”) overtime exemption rules (the “Final Rule”).  The Final Rule was scheduled to go into effect on December 1, 2016 before the Court issued a nationwide injunction blocking the implementation of the Final Rule.  In that case, captioned “State of Nevada, et al. v. United States Department of Labor et. al., Case No. 4:16-cv-00731-ALM”, the plaintiffs questioned, among other things, whether the Final Rule was lawful, whether the DOL had the authority to promulgate the Final Rule and whether the mechanism for automatic updates to the salary level under the Final Rule were permissible.  The Court agreed with the plaintiffs, finding that the Final Rule is invalid.

By way of brief background, the FLSA provides that unless an individual is subject to an exemption, employees must be paid overtime for all hours worked over 40 hours in a workweek.  There are, however, numerous exemptions to the FLSA’s overtime requirements including, but not limited to, the executive, administrative and professional exemptions (the “White Collar Exemptions”).  The FLSA has always set 3 requirements for application of the White Collar Exemptions: (1) the employee must earn a salary (or fee) that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary basis test”); (2) the salary or fee must be in the requisite minimum amount (the “salary level test”); and (3) the employee’s job duties must involve executive, administrative or professional duties as defined by the applicable regulations (the “duties test”).  The Final Rule sought to change the salary level test for the White Collar Exemptions; however, the salary basis and the duties tests were to remain unchanged.  The Final Rule sought to increase the minimum salary required from $23,660 to $47,476 annually ($913/week).  The Final Rule also sought to increase the required annual salary for highly compensated employees from $100,000 to $134,004.  Significantly, the Final Rule also provided for automatic updates to the salary and compensation levels every three years beginning January 1, 2020 to account for inflation.

The Court found that when enacting the relevant provisions of the FLSA, Congress unambiguously intended for the White Collar Exemption to apply to employees who perform bona fide executive, administrative or professional duties.  That said, the DOL did not have the authority to implement a salary level test that could effectively eliminate the duties test proscribed by the statute.   The Court also noted that the Final Rule more than doubled the DOL’s previous minimum salary level, and could make an employee’s actual duties irrelevant if his/her salary were below the new threshold.  Judge Mizzant was clear that the DOL “has exceeded its authority and gone too far with the Final Rule” and the Final Rule was found to be invalid.  The Court’s decision ends months of speculation about whether the Final Rule, heralded as a major accomplishment of President Obama’s administration, would survive Donald Trump’s presidency.

Now that the Final Rule has been invalidated and compliance is moot, barring appeal or further administrative action, employers should take the opportunity to check the requirements of state law to see if their states impose different exemptions than those imposed by the FLSA.  By way of example, New Jersey adopts the FLSA White Collar Exemptions, and the salary level test is the same.  New York, however, increased the executive and administrative salary exemption thresholds effective December 31, 2016.  In New York City “large employers” invoking a “white collar exemption” must meet the salary threshold of $825/wk.  For “small employers” the salary threshold is $787.50/week.  These levels, however, are set to increase over the next few years and the amounts will differ in other parts of the State.

Employers should check here often for additional updates concerning the FLSA and changes to the exemption rules in New York and New Jersey.

As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

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