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The Federal Government’s Almost 100% Increase to the Salary Threshold for FLSA Exempt Status is Being Challenged by Nearly Half of the States and by Private Industry Through Two Suits Filed on September 20, 2016

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Many readers may already be aware of the looming effective date (December 1, 2016) for the new Fair Labor Standards Act (“FLSA”) regulations, which significantly change the analysis of who can lawfully be classified as exempt from overtime pay obligations. Previously, most battles on the exempt status question were waged on a separate front – the duties test of the FLSA. However, this new regulation, for most positions, requires the payment of overtime for any employee who earns less than $47,476, paid on a salary basis. The previous amount was $23,600. So the change is significant.

Setting aside opinions about this change as a substantive matter, many are troubled that this change comes through a regulation/ rule (from the executive branch of the government – directed by President Obama through the Department of Labor (“DOL”) – instead of through an amendment to the FLSA itself (from the legislative branch of the government). Many feel that change this significant should come from the legislature or nowhere at all – as the United States supposedly embraces the separation of powers model for governance. The arguments on such issues can get complex (where terms are not defined in a statute and thus are properly delimited by an administrator), but many suggest that the executive branch has gone too far with the new regulations.

At least as applied to the employment of individuals by a state, apparently about half the country is bothered by the new regulations. On September 20, 2016, 21 states, directly or by and through their governor, filed suit in the Eastern District of Texas, including Alabama, Arizona, Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky (technically a commonwealth), Louisiana, Maine, Michigan, Mississippi, Nebraska, Nevada, New Mexico, Ohio, Oklahoma, South Carolina, Texas, Utah, and Wisconsin. A copy of the complaint can be found here.

This suit includes interesting claims that touch on the very fabric of our system of government. Among other arguments, the complaint states as follows:

The threat to the States’ budgets and, consequently, the system of federalism, is palpable. By committing an ever-increasing amount of State funds to paying State employee salaries or overtime, the Federal Executive can unilaterally deplete State resources, forcing the States to adopt or acquiesce to federal policies, instead of implementing State policies and priorities. Without a limiting principle (and DOL has recognized none) the Federal Executive could deliberately exhaust State budgets simply through the enforcement of the overtime rule. But even aside from that possibility, there is no question that the new rule, by forcing many State and local governments to shift resources from other important priorities to increased payroll for certain employees, will effectively impose the Federal Executive’s policy wishes on State and local governments. The Constitution is designed to prohibit the Federal Executive’s ability to dragoon and, ultimately, reduce the States to mere vassals of federal prerogative. Therefore, the new overtime rule must be set aside as violative of the Constitution, the authority given by Congress in 29 U.S.C § 213(a)(1), and the [Administrative Procedure Act].

The complaint also states:

DOL’s use of, and conclusive emphasis on, the salary test defies the statutory text of 29 U.S.C. 213(a)(1), Congressional intent, and common sense. One would think—as the statute indicates—that actually performing white collar duties (i.e. being “employed in a [white collar] capacity”) would be the best indicator of white collar exempt status. Instead, DOL relegates the type of work actually performed to a secondary consideration while dangerously using the “salary basis test,” unencumbered by limiting principles, as the exclusive test for determining overtime eligibility for EAP employees.

On September 20, 2016, private industry groups also filed suit challenging the exemption rule change. A copy of the complaint can be found here. The suit is spearheaded by the U.S. Chamber of Commerce but is joined by many others, including the National Automobile Dealers Association, the National Association of Manufacturers, National Association of Wholesaler Distributors, National Federation of Independent Business, National Retail Federation, and more than 50 other business groups.

The U.S. Chamber Litigation Center has this to say about the matter:

“The DOL went too far in the new overtime regulation,” said Randy Johnson, senior vice president of Labor, Immigration, and Employee Benefits for the U.S. Chamber. “We have heard from our members, small businesses, nonprofits, and other employers that the salary threshold is going to result in significant new labor costs and cause many disruptions in how work gets done. Furthermore, the automatic escalator provision means that employers will have to go through their reclassification analysis every three years. In combination, the new overtime rule will result in salaried professional employees being converted to hourly wages, and it will reduce workplace flexibility, remote electronic access to work, and opportunities for career advancement.”

The suit charges that, by setting an excessively high salary threshold for determining who qualifies as “executive, administrative and professional employees,” the rule departs from the intent established by Congress in the Fair Labor Standards Act and consistently administered by DOL for more than 75 years. Furthermore, DOL ignored regional and industry differences that have previously been acknowledged, resulting in a “one size fits none” salary threshold. The suit also argues that the provision to automatically update the salary threshold every three years without a rule making or taking input from affected parties is not authorized by the Fair Labor Standards Act or any other relevant statute.

The labor and employment attorneys at Connolly Gallagher will keep you informed about this important development.

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