Illinois Bar Journal

January 2017Volume 105Number 1Page 14

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Court halts rule raising wage threshold for exempting workers from overtime

Just days before it was to take effect, a federal district court in Texas issued an injunction against implementing the Department of Labor's new overtime rule.

On December 1, 2016 the Department of Labor's new overtime rule, which raised the wage threshold for workers who are exempt from overtime, was supposed to take effect. (For more about the rule, see the August 2016 LawPulse.) However, on November 22, 2016, the United States District Court for the Eastern District of Texas issued a nationwide injunction against the implementation of the rule. A notice of appeal was filed on December 1, 2016.

The case, which was filed by Nevada and 20 other states, was consolidated with another case filed by the Plano Chamber of Commerce and 50 other business organizations. It is commonly known as State of Nevada v. United States Department of Labor, 4:16-cv-731-ALM (E.D. Tex). Some employers have already brought themselves into compliance with the rule. Others planned to wait until December 1 to implement and requisite changes. With the rule's validity currently at issue, many employers may find themselves in a difficult position.

Pandora's box

Chicago attorney Alisa Arnoff says that the injunction has created a "Pandora's box situation" for some employers. Those who are already complying with the rule risk serious morale problems if they change employee titles, exemption status, and/or compensation back to pre-rule levels. These problems, she says, are compounded by morale problems that may have been caused when employers initially complied with the rule. Some employees may have been disappointed to lose overtime compensation by being given a raise in pay and presumably duties qualifying them as exempt. Others might have been disappointed that they are no longer exempt executive, administrative, or professional employees, and are now simply "hourly," regardless of the potential for overtime pay. Right now, employers are in a "wait and see" position, she notes.

Arnoff, a founding partner at Scalambrino & Arnoff, LLP, says that the ruling is a great read for "administrative law geek[s]." The 20-page opinion is exactly that. After determining that it had jurisdiction over the matter, the court analyzed whether the plaintiffs had met the four-prong test for issuing a preliminary injunction. It spent the majority of its time on the first element of the test - whether the plaintiffs had shown a substantial likelihood of success on the merits of their lawsuits. The states argued that allowing the rule to set wages forced budget changes that adversely affect the states. They also argued that the Tenth Amendment limited Congress's power to apply the FLSA's minimum wage and overtime protection to the states. The district court found that the Supreme Court's ruling in Garcia v. San Antonio Metropolitan Transit Authority, 469 U.S. 528 (1985) controlled. Garcia holds that Congress has the authority under the Commerce Clause to impose the FLSA's requirements on state and local employees.

Chevron analysis

The district court then dove into an extensive Chevron analysis of the DOL's construction of the FLSA. The Chevron test of whether courts are required to defer to agency interpretations of statutes has two prongs: 1) whether Congress has spoken directly to the question at issue and 2) if Congress has not expressed its intent, whether the agency interpretation is arbitrary, capricious, or manifestly contrary to the statute. The court looked to section 213(a)(1) of the FLSA, which exempts executive, administrative, and professional employees from minimum wage and overtime requirements. It found that the question at issue was "What constitutes an employee employed in an executive, administrative, or professional capacity?" The district court examined the plain meanings of "executive," "administrative," and "professional," determining that job duties, not salary, defined whether an employee was subject to the FLSA's EAP exemption. Because the court found that the language of the statute was unambiguous, it held that the Final Rule "does not meet Chevron step one and is unlawful." "If Congress intended the salary requirement to supplant the duties test, then Congress, and not the Department, should make that change."

Not stopping there, the court also determined that "the Final Rule does not comport with Congress's intent." Guiding the court's analysis was a 1949 report stating that the salary level was set low to "screen[] out the obviously nonexempt employees, making an analysis of duties in such cases unnecessary." By significantly increasing the salary component of the Final Rule, the DOL "creates essentially a de facto salary-only test," the court ruled. It pointed to the Department's estimate that 4.2 million workers would become eligible for overtime under the new rule as further evidence of this position. "Therefore, the Final Rule should not be accorded Chevron deference because it is contrary to the statutory text and Congress's intent."

Turning to the other elements required to issue a preliminary injunction, the court determined that the plaintiffs had demonstrated the likelihood of irreparable harm. States pointed to their cash-strapped budgets and the cost of complying with the Final Rule. The court held that "agencies with budget constraints…have relatively few options to comply with the Final Rule-all of which have a detrimental effect on government services that benefit the public." Given that these injuries could not be remedied at a later date, the court determined that the second prong was met. Similarly, the court found that, when balancing the hardships between the parties, the plaintiffs prevail. Finally, it held that the public interest was best served by delaying the enforcement of the Final Rule. Until the Department of Labor's appeal is ruled upon, the status of the Final Rule will remain in limbo.

Matthew Hector
Matthew Hector is a senior associate at Woerthwein & Miller.

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