The Employer's Legal Resource: Court Enjoins DOL From Implementing or Enforcing Majority of the Overtime Regulations Set To Take Effect December 1

11.23.16

Late on November 22, a federal district judge in Texas entered a nationwide preliminary injunction in a case contesting the validity of the Department of Labor's new overtime regulations. As you know, the DOL issued new regulations in May which, among other things, raised the minimum salary level required before an employee could be considered for a "white collar" exemption (i.e., executive, administrative, professional). We addressed the regulations and their application in our June and July newsletters.

Most employers have spent the summer and early fall preparing for the December 1 deadline. Now, days before the regulations are set to go into effect, they come to a screeching halt. What does that mean for employers?

Status of the Texas Case

First, the decision is a preliminary injunction "pending further order of the court." It is not a permanent injunction of this court. However, given the 20 page opinion, it is reasonably likely this Judge is foreshadowing his opinion of the case and its outcome.

The preliminary injunction is immediately appealable to the Fifth Circuit Court of Appeals. It is likely the DOL will take this step, though not certain. How long the process will take until the Fifth Circuit rules is anyone's guess.

Then of course there is the political reality that President-elect Trump will likely have different priorities than President Obama, such that, once Trump is inaugurated, his administration may choose not to pursue defense of the DOL's regulations as vigorously.

There is much speculation, to be sure, as to what comes next.

What Specifically Was Enjoined?

Despite a very interesting judicial opinion and what will inevitably result in many news stories, the actual court opinion did not change the law or even enjoin the entirety of the pending overtime regulations. The Court enjoined the DOL from implementing and enforcing certain regulations as proposed to be amended effective December 1. These include the regulations which changed the minimum salary level from $455 per week to $913 per week for the white collar exemptions.

The Basis of the Court's Decision

Quite simply, the Court found that the DOL overstepped its bounds. Congress enacted the Fair Labor Standards Act in 1938. The FLSA provides for the payment of a minimum wage and requires that persons receive overtime payments for time worked in excess of forty hours in a single work week. Congress also enacted laws stating that there were certain positions "exempt" from those requirements. What has come to be known as the collective "white collar exemption" is written in the law as referring to "any employee employed in a bona fide executive, administrative, or professional capacity...." 29 U.S.C. § 213(a)(1). According to the Court, "[t]he plain meaning of 'bona fide' and its placement in the statute indicate Congress intended the [white collar] exemption to apply based upon the tasks an employee actually performs" such that the exemption "depend[s] on an employee's duties rather than an employee's salary." State of Nevada v. DOL, Civil Action 4:16-CV-731, p. 11-12 (E.D.Tex. Nov. 22, 2016).

The updated DOL regulations at issue had two predominant features: (i) they raised the current requisite salary level from $455 per week to $913 per week; and (ii) they established an automatic updating mechanism to adjust the minimum salary level every three years.

The Court held that the FLSA – specifically, the definition of who is exempt under the white collar exemption – did not contemplate a minimum salary. The Court noted that Congress in enacting the FLSA focused on the duties of the positions at issue, not their earnings. Therefore, the DOL went beyond its authority by requiring a minimum salary level. With regard to the earlier salary level test ($455 per week), the Court opined that that salary level was set low to "'screen[] out the obviously nonexempt employees, making an analysis of duties in such cases unnecessary.'" State of Nevada v. DOL, Civil Action 4:16-CV-731, p. 13-14 (E.D.Tex. Nov. 22, 2016)(citation omitted). But by raising the minimum salary earlier this year ($913 per week), the DOL effectively "supplants" the duties test, "creates essentially a de facto salary-only test," and "categorically excludes" employees with eligible white collar duties from the exemption, contrary to Congressional intent. Id.

What Parts of the Regulations Remain in Tact and Will Go into Effect December 1?

Interestingly, and for reasons we can only speculate, there were two sections which were not part of the injunction.

First, § 541.601 which raised the salary level for the "highly compensated employee" from $100,000 to $134,004 was not affected. Was this an oversight which will be corrected by the Court? Perhaps. Or, perhaps the parties to the lawsuit did not raise this section so the Court had no jurisdiction to address that issue. Either way, currently no Court has enjoined the DOL from implementing or enforcing this provision.

Second, there is a specific regulation affecting the "motion picture production industry" which remains viable. Presumably this regulation was not addressed because the parties who brought the case – 21 different states – did not have employees subject to this regulation.

What Do You Do Now?

Take a breath. For employers, this is good news indeed. However, you must think through your next steps and continue to make reasoned decisions.

First, where are you in the process?

»Already implemented

Yes, there are many employers who for various reasons (including the way payroll periods fall) have already implemented changes in connection with the December 1 regulations. Your decisions will be the most complicated. You have already had the meetings, sent the letters, and even perhaps adjusted employees' actual salaries. You will need to think through a host of decisions, including whether it makes sense to change classifications again, adjust employees' salaries again (likely downward), and whether employee morale will tolerate these further changes.

»Almost ready to pull the trigger

Your considerations are similar to the "Already implemented" group. How far down the road are you? One of the biggest issues is whether you have already communicated the changes to your employees (and how did that go)? If you haven't, your position may be more like the "Barely started" group.

»Barely started

You are in a good position. It is really not our advice to wait until the last minute. This decision was unexpected. However, this one time only, it is probably okay that you have not yet rolled out your changes. You have the most flexibility. Still, we always advise that you consider whether your employees are properly classified. Remember, the law considers all employees nonexempt first. It is the employer's responsibility to prove whether a specific exemption applies. For now, we simply know that we are applying the regulations without regard to the December 1 updates (save the highly compensated and the motion picture production industry changes).

Second, even if you want to make changes, do not make kneejerk decisions and move positions back to nonexempt without reviewing them closely.

Although common wisdom in light of a variety of factors is that it is unlikely the regulations will ultimately take effect, please remember it is possible. This decision is not final. It is possible that the Court's decision may be overruled on appeal, or that a permanent injunction will not issue to bar enforcement of the regulations on any lasting basis beyond the immediate future's preliminary injunction.

If the Court's decision ultimately stands, the huge takeaway is the Court's opinion that Congress intended decisions about whether a person is exempt be made primarily on the "duties" test. What many employers may have discovered over the last six months of working through the new regulations is that they have been remiss in properly analyzing their positions under the duties tests – tests which have been around since 2004.

Because of the Court's focus on the duties test, we are reviving below our July article on this topic (revised to reflect the current state of the minimum salary level) to ensure you focus on this as well. Before you move a job from nonexempt to exempt because the $913 minimum salary level will not go into effect on December 1, be sure the position meets the duties test!

Overview of Nonexempt versus Exempt

No article can answer all your questions, but we are hoping to give you an overview of the most common concepts and questions you will face as you (hopefully) review your positions to determine whether they are nonexempt or can properly be classified as exempt.

First, the law starts with the presumption that all positions are nonexempt. You should too. If you want to pay every person in your organization as a nonexempt employee, you can. Practically speaking, your company probably does not want to do that. Nonexempt positions must be paid no less than minimum wage and must be paid 1.5 times their "regular rate of pay" for all time worked over 40 hours in a single work week. (Note: This article is based upon federal and Oklahoma law. If your employee is in another state, you will need to check that law as well.)

What does "exempt" mean? It means the position is exempt from the requirement to pay overtime.

If an employer believes a position is "exempt," it is the employer's responsibility to prove the position is exempt from the requirement to pay overtime. While there are actually several exemptions, many are rarely used (e.g., employees of amusement or recreational establishments, certain fishermen, etc.). The primary exemptions – often referred to as the white collar exemptions – are: executive, administrative, professional, and computer employees.

As an employer has the burden of proving a position is exempt, it is important to understand each of these exemptions. Each has different rules, standards, and tests which must be met. (Special rules apply for the highly compensated employee.)

Below is a primer on the white-collar exemptions – but this is not an exhaustive description. Within each, there is guidance as to various terms and concepts too detailed for this article.

Executive Exemption: To qualify for the executive exemption, the position must meet all of the following:

  1. the position must be compensated on a salary basis at a rate of not less than $455 per week;
  2. the position's primary duty must be managing the enterprise or managing a recognized department or division of the enterprise;
  3. the position must customarily and regularly direct the work of at least two (2) other full-time employees or FTEs; and
  4. the position must have the authority to hire or fire others; or the position's suggestions and recommendations as to hiring, firing, advancement, promotion of other employees must be given particular weight.

The position must be examined to determine if it meets all four tests before it can be treated as executive exempt. (Note: There is a special rule under this exemption for persons who actually own 20% or more of the equity of the business and actively engage in its management.)

Administrative Exemption: To qualify for this exemption, the position must meet all of the following:

  1. the position must be compensated on a salary basis at a rate of not less than $455 per week;
  2. the position's primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers; and
  3. the position's primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

This is the most difficult exemption to apply. Determining what constitutes "management or general business operations" and quantifying "matters of significance" tend to be the focus of litigation under this exemption.

Professional Exemption: The Professional Exemption is broken down into two subcategories: the learned professional and the creative professional. We will address each.

To qualify for the Learned Professional exemption, the position must meet all of the following:

  1. the position must be compensated on a salary basis at a rate of not less than $455 per week (*note: doctors, lawyers, and teachers are not required to be compensated on a salary basis);
  2. the position's primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character, which includes work requiring consistent exercise of discretion and judgment;
  3. the advanced knowledge must be in a field of science or learning; and
  4. the advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

Generally speaking, this includes doctors, lawyers, most registered nurses, licensed architects, and positions of those types. However, it does not include, for example, a LPN or an ultrasound technologist. There are lists of specific professions addressed in the DOL's regulations and additional cases addressing other professions.

To qualify for the Creative Professional exemption, the position must meet the following:

  1. the position must be compensated on a salary basis at a rate of not less than $455 per week;
  2. the position's primary duty must be the performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.

Generally speaking, this would include actors, musicians, composers, cartoonists, novelists, and the like.

Computer Employee Exemption: To qualify for this relatively new exemption, the position must meet all of the following:

  1. a. the position is compensated on a salary basis at a rate of not less than $455 per week or
    b. the position is compensated on an hourly basis at a rate not less than $27.63 an hour;
  2. the position's must be employed as a computer system analyst, computer programmer, software engineer or other similarly skilled worker in the field performing the duties described below; and
  3. the position's primary duty must consist of:
    a. the application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications;
    b. the design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications;
    c. the design, documentation, testing, creation or modification of computer programs related to machine operating systems; or
    d. a combination of the aforementioned duties, the performance of which requires the same level of skills.

The computer employee exemption is odd in that you can qualify either with the traditional salary basis payment or you can pay on an hourly basis provide you pay every hour not less than $27.63 per hour. Assuming 2,000 hours worked, that would equal $55,260 annually. Paying hourly (and at this rate) applies only to the computer employee exemption – no other exemption.

The other trick to this exemption is not to assume that every employee who works with a computer will qualify. The DOL regulations have a list of specific positions that do not qualify. Employees who manufacture or repair computers do not fit within this exemption. Employees whose work is highly dependent upon computers (e.g., computer-aided design) do not fit within this exemption.

As you can see, determining whether an employee is exempt involves a myriad of questions.

By Kristen L. Brightmire, KBrightmire@dsda.com, and Rebecca D. Stanglein, Rstanglein@dsda.com

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Rebecca D. Bullard

Rebecca D. Bullard

Rebecca represents clients primarily in labor and employment litigation and counsels clients regarding everyday employment matters. 

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