In a widely publicized move, the U.S. Department of Labor on March 7 proposed an update to the Fair Labor Standards Act (FLSA) regulations governing employees who are exempt from overtime.   The most significant change in the proposal is to raise the minimum salary an employee must earn to qualify as exempt from overtime.  The existing minimum salary is $455 per week; the new proposed minimum salary is $679 per week, a 49 percent increase.    An employee must also satisfy one of the “duties” tests to be exempt from overtime (e.g., executive, administrative, professional), but the proposed rule does not change any of those tests.

Most employers probably remember, with some chagrin, the DOL’s 2016 rule that more than doubled the salary basis to $913 per week.   Businesses were scrambling to adjust their job descriptions and payrolls in anticipation of the new rule’s  December 1, 2016 effective date.   Then, eight days before, on November 22, 2016, a district court in Texas issued a surprise nationwide injunction preventing it from going into effect.   For a refresher on the injunction and its aftermath, see our posts here, here, and here.

On August 21, 2017, the same federal judge, Amos Mazzant, issued a final ruling invalidating the $913 per week salary basis.   Surprising to some, the Department, now with a Trump appointed Secretary, appealed the judge’s final ruling to the U.S. Court of Appeals for the Fifth Circuit.   But, the Court of Appeals agreed to hold the appeal in abeyance while the DOL undertook further rulemaking to consider adjusting the salary basis to something lower than $913 per week in the 2016 Rule, but more than the $455 per week that was previously in effect (and remains in effect today).  Perhaps not coincidentally, the proposed $679 per week proposed salary basis is almost exactly in the middle of $455 and $913.

So, what happens next?   On the rulemaking side, the public will have 60 days to comment on the proposed rule.  The Department will then consider those comments, and issue a final rule, probably sometime in 2020.   More importantly though, what will happen if, as is likely, the DOL’s final rule maintains the $679 per week salary basis?    If challenged, is a court more likely to find a 49 percent increase is valid because it is less of an increase than in the 2016 rule?   Does the validity of the DOL’s rule depend upon something so arbitrary as a federal judge’s opinion about what persons in certain occupations should earn?

Many employers and business advocacy groups agree $455 is probably too low a salary basis given inflation that has occurred since it was established. They can probably also live with the proposed $679 per week (indeed, this salary level was chosen after considerable input from interested parties).   But, despite the DOL’s effort to appease all interested stakeholders, there is a good chance some interest group will file suit to challenge the new rule.   The issue is not so much the amount of the salary threshold, but whether the DOL has the right in the first place to use a minimum salary as part of the test to determine whether an employee is exempt from overtime.    Commenting on Judge Mazzant’s ruling on the Obama era rule, I said in a September 12, 2017 post:

In the ruling on the preliminary injunction, Judge Mazzant questioned whether the DOL has the legal authority to establish a salary basis test.   He reasoned the FLSA itself defines Executive, Administrative, and Professional exemptions only with respect to duties, and says nothing about the employee’s salary.  Therefore, he ruled, Congress did not intend that the amount of an employee’s salary be a factor in determining whether the employee was exempt; only the duties are relevant.   By including a salary basis test in addition to a duties test, Judge Mazzant concluded, at least preliminarily, that the DOL likely exceeded its statutory authority.

It is important to note that, in the final ruling, Judge Mazzant backed away from his initial opinion that questioned the DOL’s authority to use the salary test at all. Instead, he concluded merely that $913 per week too high because it likely would have the effect in many cases of eclipsing the duties test, essentially rendering the duties irrelevant.   In other words, the salary was so high that many employees who satisfied the duties test for one of the executive, administrative, or professional exemptions would still be classified as non-exempt because their salary was less than $913 per week.

In addition to questioning the legal basis for the minimum salary, there are practical reasons the salary basis test should be abandoned.   First, the salary basis applies to the entire country, and does not take into account regional and local economic conditions.   A $679 per week salary means something different in Des Moines than it does in San Francisco or New York.    Second, in the modern era the salary basis has become a political weapon used to benefit favored constituencies, depending upon the party in power.   Third, the proposed rule contains a provision that allows the Department to change the salary basis every three years.   But, the rulemaking process is so slow that it takes at least two years for a rule to get from the proposal to the final stage.  Moreover, once the new salary basis is in place, it could once again be subject to legal challenge.    Lawyers and lobbyists love this process, but whether it actually benefits ordinary employees is questionable.  Finally, lawyer and blogger Jon Hyman makes an excellent point that I have not seen elsewhere, but is important:  that is, the salary basis test simply does not matter.   If an employer pays someone less than $679 per week, that person is probably not the sort of employee who exercises the type of discretion and judgment required to satisfy the duties part of the test.  It is the duties test that employers should really be worried about.

So what’s the takeaway from all this?  Employers, get ready for the new salary basis in 2020, but don’t be surprised if it never goes into effect.

 

On August 31, 2017, Judge Amos Mazzant in the Eastern District of Texas issued a final ruling invalidating the Obama Department of Labor’s increase in the minimum salary for exempt employees under the Fair Labor Standards Act.  This is the same judge that issued the preliminary injunction on November 22, 2016 that prevented the rule from going into effect as scheduled on December 1, 2016.  Even though the DOL appealed the preliminary injunction to the Fifth Circuit, the Court of Appeals did not stay the proceedings in the trial court while the appeal was pending.  Thus, Judge Mazzant issued his final ruling before the Court of Appeals had the opportunity to weigh in on the validity of his preliminary injunction.

You may recall the Trump DOL took the surprising position on appeal that Judge Mazzant erred in issuing the preliminary injunction, and requested that it be reversed.  If the DOL had succeeded it obtaining the relief it requested, the new overtime rules could have gone into effect, which would have caused all kinds of havoc.  Fortunately, on September 5, after Judge Mazzant’s ruling, the Department withdrew its appeal of the preliminary injunction.  At least for the moment, the uncertainty surrounding the status of the minimum salary has been settled.    The fanfare with which the DOL announced the rule last year, the thousands of lawyers hours spent educating our clients about it, and the dread with which employers anticipated its effective date, ended with a relative whimper.

For now, the minimum salary an employer must pay to exempt employees remains $455 per week.   But, it may not stay that way for very long.   The Department of Labor recently requested comments from the public whether it should raise the minimum salary to something more than $455 per week, but less than $913 per week in the now invalid rule.  As of today, the DOL has received over 138,000 comments in response to its request, so there is obviously significant interest in further changes.  The comment period remains open until September 25, so you still have the chance to weigh in if you haven’t already.

All the controversy about the new overtime rule raised an important question that warrants more attention:  that is, should there even be a minimum salary as part of the test for determining whether an employee is exempt from overtime?    In the ruling on the preliminary injunction, Judge Mazzant questioned whether the DOL has the legal authority to establish a salary basis test.   He reasoned the FLSA itself defines Executive, Administrative, and Professional exemptions only with respect to duties, and says nothing about the employee’s salary.  Therefore, he ruled, Congress did not intend that the amount of an employee’s salary be a factor in determining whether the employee was exempt; only the duties are relevant.   By including a salary basis test in addition to a duties test, Judge Mazzant concluded, at least preliminarily, that the DOL likely exceeded its statutory authority.

In his final ruling, Judge Mazzant again cited Congress’ intent that only duties matter.  But, he backed off his preliminary ruling that the DOL lacked legal authority to use salary test at all.  Instead, he concluded merely that the minimum salary in the Obama era rule was too high because it likely would have the effect in many cases of eclipsing the duties test, essentially rendering the duties irrelevant.   In other words, the salary was so high that many employees who satisfied the duties test for one of the executive, administrative, or professional exemptions would still be classified as non-exempt because their salary was less than $913 per week.    So, in the end, the concept of some minimum salary apparently satisfies Congress’ intent, but the amount must still pass Judge Mazzant’s (or some other judge’s) sensibilities to be valid.

Notably, the reason the Department requested the Court of Appeals to reverse Judge Mazzant’s preliminary injunction was this very issue: the DOL did not want to lose the right to establish a minimum salary as part of the test for determining who is an exempt employee.   It appears Judge Mazzant read the Department’s brief and perhaps decided to back off of what seemed to be the logical conclusion of his preliminary injunction ruling.   On the other hand, it appears the Department may still be open to an exemption test that does not include a minimum salary.   One of the questions (No. 7) on which the DOL is seeking public comment is whether an exemption test that relies solely on duties without regard to the employee’s salary be preferable to the current test, and if so, what elements should be included in such a test.

What do you think?  Would exempt employees be harmed if there was no minimum salary as part of the test for determining who is exempt from overtime?   If a minimum salary is essential, what should it be, who should make the determination, and by what criteria?   Is it appropriate that federal judges are the final arbiter of what is or is not an acceptable minimum salary?  Hopefully the Department will be thoughtful in its considerations of these important questions.  Stay tuned…

On November 22, the U.S. District Court for the Eastern District of Texas issued a preliminary injunction prohibiting the Department of Labor from implementing and enforcing the new overtime rule as scheduled on December 1, 2016.

The new rule more than doubled the minimum salary an employee needed to qualify as exempt from overtime under the so-called “white collar” or EAP exemptions (Executive, Administrative, Professional).    The existing minimum salary is $413 per week ($23,460 per year); the new rule increased the minimum to $913 per week ($47,476 per year).    Employers have been scrambling in recent weeks to decide how best to comply with the new rule: whether to increase exempt employees’ salaries to the new minimum or reclassify formerly exempt employees and pay overtime for hours worked over forty per week.    Two lawsuits were filed September 20 challenging the rule but few expected the court to actually stop the rule from going into effect.

What are the practical effects of this ruling?   Most importantly, employers do not have to give raises or re-classify your employees by December 1.   Unfortunately, for many it may be too late.   Some employers have already communicated raises or re-classifications to employees.   There is nothing in the law that prevents those changes from being reversed, but it is difficult to take back what has just been given.

For employers who have not communicated or implemented the changes, the court’s injunction provides some immediate relief.  But, there is still quite a bit of uncertainty about what will happen next.    The future of the overtime rule will be impacted not just by legal but also by political considerations.

On the legal side, it is important to remember this is a preliminary injunction.  That means the court has not entered a final ruling, and it possible (although doubtful) in the end the court will allow the rule to go into effect.     It’s also likely the DOL will appeal this ruling to the U.S. Court of Appeals for the Fifth Circuit, which could result in the decision being reversed.     Neither of those outcomes is likely to occur for many months.   But, if the injunction is dissolved and the rule goes into effect, a thorny question arises: does the preliminary injunction preclude liability under the new rule between December 1, 2016 and the date the injunction is dissolved?   Common sense tells you an employer would not be liable, but that might not prevent employee lawsuits claiming they are entitled to either unpaid overtime or additional salary.

The election of Donald Trump along with a Republican controlled Congress may result in the political branches pulling the plug on the new rule.   That could occur in several ways, some of which take longer than others.    Congress could pass and the president could sign a law repealing the new rule.    The president could direct the Department of Labor to drop an appeal of the injunction and simply let the injunction remain in place.    Finally, the DOL under a new administration could issue rule repealing the new overtime rule.    The first two actions could occur fairly soon after January 20, 2017, while the third is a much longer and more difficult process.

We will continue to monitor the rule and keep you posted.

Employee Availability After Hours Comes at a Price

The Wall Street Journal reports on a potential boom in lawsuits relating to unpaid overtime.  The culprit–company issued smart phones combined with lean workforces requiring fewer employees who handle more responsibility.   With new technology, employees are capable, and often expected, to handle work related communication anytime and anywhere, whether they are off the clock, sick, or on vacation.   The article reports on two recently filed lawsuits claiming unpaid overtime under the Fair Labor Standards Act (FLSA) .  In one case, retail employees of T-Mobile USA claim they were required to use company issued smart phones to respond to messages and customer complaints after hours.  In the second case, a maintenance employee for CB Richard Ellis alleges he was not paid for after hours time spent sending and receiving messages on his cell phone.

Under the FLSA, whether an employee is who is required to carry an employer issued mobile phone, pager, or smart phone after hours remains on the clock depends upon many factors, including the nature of the job and how frequently the employee actually has to use the device for work related purposes.   Depending upon the number of employees involved, failure to comply with FLSA’s overtime requirements can result in substantial financial liability.  To avoid running afoul of these overtime requirements, prudent employers are urged to develop clear practices concerning employee’s use of company issued technology.

Company Officers May Be Held Personally Liable for Unpaid Wages

A bankrupt company does not necessarily relieve corporate officers of liability for unpaid wages under FLSA.  So held the U.S. Court of Appeals for the Ninth Circuit in Boucher v. Shaw, decided on July 27, 2009.   In Boucher, a group of former employees of the bankrupt Castaways Hotel, Casino, and Bowling Center in Las Vegas sued the CEO, Chief Financial Officer, and manager in charge of labor relations, claiming the individual officers and managers were liable for their unpaid wages.  Rather than getting in line with other creditors in the bankruptcy proceedings, the plaintiffs decided to pursue the officers individually.

The Court noted that the definition of "employer" under FLSA is not limited by the common law understanding of the term, but "is to be given an expansive interpretation in order to effect FLSA’s broad remedial purposes".    The test, according to the Court, is whether the individual exercises "control over the nature and structure of the employment relationship", or "economic control" over the relationship.   In this case, the Court noted that the CEO held 70% of the company shares, the manager in charge of labor relations owned 30%, and the CFO had responsibility for cash management.  Under these facts, the Court held the plaintiff’s stated a claim against the individuals under FLSA.   The Court rejected the defendants’ argument that any claims for unpaid wages by former employees belonged in the bankruptcy court. 

While there is no similar precedent in the Eighth Circuit, the Boucher case nonetheless should put company officials on notice that wage claims may exist against them individually, even after the corporation is bankrupt or otherwise defunct.