Just one month after the U.S. District Court for the Eastern District of Texas shut down a Fair Pay and Safe Workplaces final rule, the District Court has enjoined the implementation of the Department of Labor’s (DOL) final rule updating its Fair Labor Standard Act (FLSA) exemptions. Had these gone into effect, they would have had a significant impact on government contractors’ labor costs.

In 2014, President Obama directed DOL to update and modernize its overtime regulations to be consistent with the intent of the FLSA. The FLSA provides for minimum wage and overtime pay protections for those covered by the Act. Exempted employees generally fall into the executive, administrative and professional (EAP) categories, and DOL has used the following three tests to determine whether an exemption applied: salary basis test, salary level test and duties test. “Exempt” employees are not eligible for overtime pay (time and a half) for hours worked over 40 in a work week.

Two years after President Obama’s memorandum, DOL issued a final rule:

  • More than doubling the standard salary level required to be exempt from overtime, increasing it from $455 per week to $913 per week (or $47,476 annually);
  • Increasing the highly compensated employee (HCE) threshold to $134,004;
  • Establishing an automatic update to these salary levels every three years
    • Standard salary level: 40th percentile of earnings of all full-time salaried workers in the lowest-wage Census Region
    • HCE threshold: 90th percentile of full-time salaried workers nationally

The final rule was praised by some as extending the right to overtime pay to approximately 4.2 million workers who were previously classified as exempt.  However, the burden on private sector employers was projected to be $1.5 billion each year, with DOL estimating the average annualized direct employer costs to be $295.1 million, in addition to the expected annual transfer of $1.2 billion of income from employers to employees as a result of the rule. DOL also projected an average annualized “deadweight loss” of $9.2 million, which the agency noted was “small in comparison to the amount of estimated costs.”  Further, costs to state and local governments were expected to be $115.1 million in the first year alone.

Prior to District Court Judge Mazzant’s preliminary injunction, the final rule was to take effect on December 1, 2016. Twenty-one states filed suit against DOL challenging the final rule. Over 50 businesses filed suit against DOL as well, and the District Court consolidated the two matters.

The District Court found DOL overstepped its authority in drafting the final rule. Specifically, the District Court found improper the application of an increased minimum salary level when the plain meanings of “executive,” “administrative” and “professional” read together with the statute, made it clear that “Congress defined the EAP exemption with regard to duties, which does not include a minimum salary level.” By increasing the salary threshold, DOL has created “essentially a de facto salary-only test.” In direct conflict with Congress’ intent, explained the Court, the DOL’s final rule requires employers to extend overtime pay to any employee, regardless of their job duties, whose pay is below the heightened salary level.

The FLSA authorizes DOL to “define and delimit” classifications and types of duties that may exempt an employee; however, the District Court found nothing in this authority to extend the authority to define and delimit with respect to salary level. “[T]he Department exceeds its delegated authority and ignores Congress’s intent by raising the minimum salary level such that it supplants the duties test.”

The District Court noted that the minimum salary level originally established in the FLSA “was purposefully set low” to exclude those workers who were clearly nonexempt. This injunction does not address the lawfulness of a salary-level test in general, but specifically enjoins the application of DOL’s increased salary-level test in its final rule as exceeding the agency’s delegated authority.

The DOL has issued a statement, “strongly disagreeing” with the District Court and that they are “currently considering all of our legal options.” Our Labor & Employment attorneys have provided some additional guidance, and we will provide updates of any new developments. Ultimately, the viability of this rule may depend more on the view the new administration takes of a rule that would impose significant new financial burdens on U.S. businesses than on the judiciary’s view of its legality.