October 26, 2017

[Four days after this article went to press, the U.S. Department of Labor (USDOL) filed a notice to appeal the decision invalidating the “Final Rule” and expressed its intent to ask the appellate court to hold the appeal in abeyance while the USDOL works on revised regulations proposing new salary thresholds. Those numbers remain to be seen, but it is quite likely that they will differ from those set during the Obama era. — Ed.]

Flash back to Fall 2016. With a December 1st deadline looming, many employers reluctantly implemented measures to comply with the “Final Rule” published by the U.S. Department of Labor (USDOL). The Final Rule set out changes to the overtime exemption rules of the federal Fair Labor Standards Act (FLSA), the most significant of which was to more than double the annual salary threshold an employee would need to earn to be deemed ineligible for overtime pay. Employers’ measures included reclassifying as non-exempt certain employees who would no longer qualify for an exemption at their current salary level, thus making them newly eligible for overtime pay and/or increasing salaries of certain employees so that they would continue to qualify for an exemption.

Then, at the eleventh hour, on November 22, 2016, a U.S. district court in Texas granted a nationwide preliminary injunction, blocking the USDOL’s Final Rule. For employers who had already taken steps to comply, this presented a dilemma: 

They could stay the course, but this would increase their payroll costs, not only with respect to the elevated salaries they would pay exempt employees, but also with respect to the increased number of employees who would qualify for overtime pay. 

Or they could unwind the changes already made; however, this could negatively impact morale, both for employees who had been “awarded” salary increases and newly non-exempt employees who were looking forward to the opportunity to earn overtime pay. 

It was quite a Hobson’s choice, and employers’ responses varied considerably, particularly since the injunction, by its very nature, was an interim order that could either become permanent or be lifted after a hearing on the merits. (Of course, many employers had used the specter of the changes to reclassify non-exempt employees who previously had been misclassified as exempt. So for that category of employees, the choice was easy.)

But let’s take a step back, for a brief primer on the exemption rules. In short, the FLSA provides that unless an employee qualifies for an exemption, he/she must be paid overtime for all hours worked in excess of 40 in a workweek. There are several types of exemptions to the FLSA’s overtime requirements, including those known as the “White Collar Exemptions.” For any of the White Collar Exemptions to apply: (a) the employee must be paid on a salary basis, and the salary must meet or exceed a specified threshold, and (b) the employee’s job duties must involve “executive,” “administrative,” or “professional” duties, as defined by the USDOL’s regulations. 

Although the Final Rule did not change the duties tests, it would have (as mentioned above) increased the minimum salary threshold from $23,660 annually ($455/week) to $47,476 annually ($913/week). The Final Rule also would have increased the annual salary threshold for “highly compensated” employees from $100,000 to $134,004. But there’s more: the Final Rule also would have provided for automatic increases to these salary thresholds every three years beginning January 1, 2020. But all of these changes became irrelevant on August 31, 2017. 

On that date, after more than nine months of uncertainty for employers nationwide, the Texas district court ruled that the Final Rule is invalid. In essence, the court determined that the USDOL “exceeded its authority and [has] gone too far with the Final Rule.” Specifically, the court declared that the USDOL does not have the authority to implement changes to salary threshold that, in essence, would eliminate the FLSA’s duties test; i.e., because the Final Rule more than doubled the minimum salary amount, it would make an employee’s actual duties irrelevant if his/her salary was less than the new threshold. 

Although the Final Rule has been struck down, that may not be the end of the story. States and cities may take matters into their own hands. As just one example, effective December 31, 2016, New York City increased the salary threshold for employees to qualify for the executive and administrative exemptions, which now ranges from $787.50/week to $825/week depending on the size of the employer. To complicate matters, the thresholds are different in other New York counties, and all thresholds are set to increase over the next few years, beginning December 31, 2017. Complying with the anticipated patchwork of state and local wage and hour regulations (much like the flurry of varying state and local sick leave laws and ordinances that have been enacted across the nation) may pose additional challenges for employers.

For additional information about the requirements of the Fair Labor Standards Act and/or how your business has classified employees, please contact your Much Shelist attorney.

This article contains material of general interest and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Under applicable rules of professional conduct, this content may be regarded as attorney advertising.