Federal Court Holds Department of Labor Overtime Exemption Rule Invalid

The U.S. District Court for the Eastern District of Texas has issued a final ruling striking down the changes implemented by the Department of Labor during President Obama’s administration to the rules governing employee eligibility for exemption from overtime pay under the Fair Labor Standards Act (the “Final Rule”).  District Court Judge Amos Mazzant found the Final Rule unlawful, and ruled in favor of the Plano Chamber of Commerce and more than fifty-five other business groups that challenged the Final Rule.

Background

The Final Rule, which was set to take effect on December 1, 2016, would have more than doubled the minimum salary necessary for white collar and other highly compensated employees to qualify for exemption from the overtime requirements of the Fair Labor Standards Act (“FLSA”).  The Final Rule also would have created a mechanism to automatically update the minimum salary level for the exemption every three years.  The Department of Labor estimated that the Final Rule would impact 4.2 million workers.[1]  Before the Final Rule could go into effect, a number of business groups (“Business Plaintiffs”) and state governments (“State Plaintiffs”) filed suits in district court, which were later consolidated.  A preliminary injunction was sought by the State Plaintiffs and was issued by Judge Mazzant on November 22, 2016, just days before the Final Rule was set to take effect.  The preliminary injunction decision was appealed to the U.S. Court of Appeals for the Fifth Circuit.  In district court, Business Plaintiffs moved for expedited summary judgment, which the State Plaintiffs joined.

The Decision

The Court first held that the Business Plaintiffs had met their burden of establishing standing.  The Court stated that “it is clear that the Final Rule directly affects both Business Plaintiffs and the employees they represent.”[2]  The Court also held that the challenge to the Final Rule’s automatic updating mechanism was ripe for adjudication, because the questions raised were only legal arguments.[3]

State Plaintiffs made a number of arguments against the applicability of the FLSA to the states, which the Court found unconvincing.  For instance, State 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.”[4]  The Court held that Supreme Court precedent controls the disposition of the issue:  “Congress has authority under the Commerce Clause to impose the FLSA’s minimum wage and overtime requirements on state and local employees.”[5]

Turning to the issue of whether the standards set out in the Final Rule were lawful or not, the Court applied the two-step standard for reviewing agency decisions set forth by the Supreme Court in Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 842-43 (1984).  The first step is to determine whether Congress directly and unambiguously spoke to the precise question at issue.  The relevant inquiry was what constitutes an employee who is employed in a “bona fide executive, administrative, or professional capacity” for the purposes of exemption from minimum wage and overtime requirements (the “EAP Exemption”).  Because the statute does not define those terms, the Court looked to determine the plain meaning of the terms at issue at the time the statute was enacted.  The Court held that after reading the “plain meanings” of the terms, in conjunction with the statute, “it is clear Congress defined the EAP exemption with regard to duties.”[6]  Given this intent to define the exemption based on an employee’s duties, the Court then looked to whether the Department of Labor’s rules gave effect to the intent of the statute.  The Court held that the Final Rule created a test that makes “overtime status depend predominantly on a minimum salary level, thereby supplanting an analysis of an employee’s job duties.”[7]  The Court went on to say that “the Department ignores Congress’s intent” and that “the Department has exceeded its authority and gone too far with the Final Rule.”[8]  The Court also held that the automatic updating mechanism put in place by the Final Rule was similarly unlawful.

Importantly, the Court wrote in a footnote that the opinion is “not making any assessments regarding the general lawfulness of the salary-level test or the Department’s authority to implement such a test.”[9] However, later in the decision, in a second footnote, the Court seemed to clarify that the Department of Labor does have the statutory authority to use salary level as an input criteria in determining EAP Exemptions, so long as the salary level does not become determinative:

During questioning at the preliminary injunction hearing, the Court suggested it would be permissible if the Department adjusted the 2004 salary level for inflation.  In fact, the Court stated in a question, “[I]f [the salary level] had been adjusted for inflation, the 2004 figure, we wouldn’t be here today . . . because [the salary level] would still be operating more the way it has . . . as more of a floor.”[10]

Take Away

Practically speaking, following this decision, it appears that the Final Rule is unlikely to ever go into effect.  Although an appeal was filed by the Obama-era Department of Labor to the U.S. Court of Appeals for the Fifth Circuit of the District Court decision to grant a preliminary injunction, even before this decision the Department of Labor under the new administration had already backed away from defending the precise salary level in the Final Rule. In a reply brief filed in the Fifth Circuit Court of Appeals case, the Department of Labor asked the court to opine on their authority to set a minimum salary level, rather than any specific threshold.  Following this decision, on September 5, 2017, the Appellants filed an unopposed motion for voluntary dismissal of the interlocutory appeal as moot, which was granted on September 6, 2017.  The Department of Labor could file an appeal of the permanent injunction, but it is not clear that they will do so.  Further, as noted in a previous Paul, Weiss client alert, dated August 14, 2017, the Department of Labor has already begun a process to seek input on new rulemaking.  (Responses to the Request for Information issued by the Department of Labor are due no later than September 25, 2017.)

Employers impacted by the overtime rules should keep an eye on developments as the administration makes decisions about next steps, including whether to appeal this ruling and how or if they will proceed with new rulemaking in light of the responses to their Request for Information.

[1]       Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, 81 Fed. Reg. 32,391, 32,393 (May 23, 2016), https://www.federalregister.gov/d/2016-11754.

[2]       State of Nevada, et al. v. United States Department of Labor, et al., 4:16-CV-00731-ALM, at 5 (E.D. Tex. Aug. 31, 2017) (“Decision”).

[3]       Decision at 6.

[4]       Decision at 8.

[5]       Decision at 9 (citing Garcia v. San Antonio Metropolitan Transit Authority, 469 U.S. 528 (1985)).

[6]       Decision at 12 (emphasis added).

[7]       Decision at 15.

[8]       Decision at 17.

[9]       Decision at 13, fn. 5.

[10]     Decision at 16, fn. 6 (alterations and omissions in original).