FLSA Exempt Salary Adjustment Update
On Thursday, Judge Amos Mazzant of the Eastern District of Texas issued an order concluding that the Department of Labor's amendments to the FLSA—increasing the minimum salary threshold from $23,660 annually to $47,476.00 in order to qualify as exempt—were invalid. Specifically, the Memorandum Opinion and Order found the plaintiffs had standing, the issue was ripe for review, and then reviewed each of the plaintiffs' arguments in support of the position that the amendment was invalid.
First, Plaintiffs argued that the "FLSA's overtime requirements violate the Constitution by regulating the States and coercing them to adopt wage policy choices that adversely affect state priorities, budgets, and services." The court disagreed and found that the FLSA was applicable to the states. Plaintiffs next argued that "the FLSA does not apply to the States based on the clear statement rule," which provides that there must be unmistakably clear language in a statute of the intention to alter the balance between state and federal government if the statute could lead to an imbalance between the two. The court also rejected this argument. Third, Plaintiffs argued that the "revision to the minimum salary threshold exceeds the Department's authority under Section 213(a)(1)." Here, the court found that the Department of Labor's
[a]uthority is limited to determining the essential qualities of, precise signification of, or marking the limits of those 'bona fide executive, administrative, or professional capacity' employees who perform exempt duties and should be exempt from overtime pay. With that said, the Department does not have the authority to use a salary-level test that will effectively eliminate the duties test as prescribed by Section 213(a)(1). . . . Nor does the Department have the authority to categorically exclude those who perform 'bona fide executive, administrative, or professional capacity' duties based on salary level alone.
Accordingly, the Court focused on the fact that the significant increase in the salary level supplanted any analysis of the individual employee's job duties and found that this time of change was outside of the Department of Justice's authority.
Today, the United States Department of Justice filed an Unopposed Motion for Voluntary Dismissal of Interlocutory Appeal as Moot as a result of the District Court's entry of final judgment in Plaintiffs' favor on August 31, 2017. The DOJ could seek an appeal from the District Court's entry of final judgment, however considering that the Department of Labor is already reconsidering the rule, it is expected that no such appeal will be taken.
The reconsideration comes in the form of the Request for Information that was published in the Federal Register on July 26, 2017, and accordingly permits comments to be filed up until September 24, 2017. The request asks for comments as to the following questions:
- Would updating the 2004 salary level for inflation be an appropriate basis for setting the standard salary level and, if so, what measure of inflation should be used? Alternatively, would applying the 2004 methodology to current salary data be an appropriate basis for setting the salary level? Would setting the salary level using either of these methods require changes to the standard duties test and, if so, what change(s) should be made?
- Should the regulations contain multiple standard salary levels? If so, how should these levels be set: by size of employer, census region, census division, state, metropolitan statistical area, or some other method? For example, should the regulations set multiple salary levels using a percentage-based adjustment like that used by the federal government in the General Schedule Locality Areas to adjust for the varying costs of living across different parts of the United States? What would the impact of multiple standard salary levels be on particular regions or industries, and on employers with locations in more than one state?
- Should the DOL set different standard salary levels for the executive, administrative, and professional exemptions as it did prior to 2004 and, if so, should there be a lower salary for executive and administrative employees, as was done from 1963 until the 2004 rulemaking? What would the impact be on employers and employees?
- In the 2016 Final Rule, the DOL discussed in detail the pre-2004 long- and short-test salary levels. To be an effective measure for determining exemption status, should the standard salary level be set within the historical range of the short-test salary level, at the long-test salary level, or between the short- and long-test salary levels, or should it be based on some other methodology? Would a standard salary level based on each of these methodologies work effectively with the standard duties test or would changes to the duties test be needed?
- Does the standard salary level set in the 2016 Final Rule work effectively with the standard duties test or, instead, does it in effect eclipse the role of the duties test in determining exemption status? At what salary level does the duties test no longer fulfill its historical role in determining exempt status?
- To what extent did employers, in anticipation of the 2016 Final Rule's effective date of December 1, 2016, increase salaries of exempt employees in order to retain their exempt status, decrease newly nonexempt employees' hours or change their implicit hourly rates so that the total amount paid would remain the same, convert worker pay from salaries to hourly wages, or make changes to workplace policies either to limit employee flexibility to work after normal work hours or to track work performed during those times? Where these or other changes occurred, what has been the impact (both economic and noneconomic) on the workplace for employers and employees? Did small businesses or other small entities encounter any unique challenges in preparing for the 2016 Final Rule's effective date? Did employers make any additional changes, such as reverting salaries of exempt employees to their prior (pre-rule) levels, after the preliminary injunction was issued?
- Would a test for exemption that relies solely on the duties performed by the employee without regard to the amount of salary paid by the employer be preferable to the current standard test? If so, what elements would be necessary in a duties-only test, and would examination of the amount of nonexempt work performed be required?
- Does the salary level set in the 2016 Final Rule exclude from exemption particular occupations that have traditionally been covered by the exemption and, if so, what are those occupations? Do employees in those occupations perform more than 20% or 40% nonexempt work per week?
- The 2016 Final Rule for the first time permitted nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the standard salary level. Is this an appropriate limit or should the regulations feature a different percentage cap? Is the amount of the standard salary level relevant in determining whether and to what extent such bonus payments should be credited?
- Should there be multiple total annual compensation levels for the highly compensated employee exemption? If so, how should they be set: by size of employer, census region, census division, state, metropolitan statistical area, or some other method? For example, should the regulations set multiple total annual compensation levels using a percentage-based adjustment like that used by the federal government in the General Schedule Locality Areas to adjust for the varying costs of living across different parts of the United States? What would the impact of multiple total annual compensation levels be on particular regions or industries?
- Should the standard salary level and the highly compensated employee total annual compensation level be automatically updated on a periodic basis to ensure that they remain effective, in combination with their respective duties tests, at identifying exempt employees? If so, what mechanism should be used for the automatic update; should automatic updates be delayed during periods of negative economic growth; and what should the time period be between updates to reflect long-term economic conditions?
Comments can be submitted here. To further discuss your obligations under the FLSA, contact a member of Verrill Dana's Labor and Employment Practice Group.
