Pay Raises Across the Nation? Not So Fast Say Several States and Business Groups: 21 States and 55 Business Groups Challenge New Federal Overtime Rule

On Tuesday, September 20, 2016, twenty-one states filed a complaint in federal court in Texas challenging the new overtime rule finalized by the Department of Labor (“DOL”) in May of this year.  The States seek to prevent implementation of the new rule, which is scheduled to become effective on December 1, 2016.  That same day, fifty-five business groups, including several chambers of commerce, filed a similar lawsuit in Texas federal court to block the rule.

As we previously reported, the new DOL rules contain significant changes for employers, including a drastic increase to the minimum salary level required for administrative, executive, and professional (“white collar”) workers to be exempt from overtime.  Under the new rules, these white collar workers must be paid a salary of $47,476 per year to qualify for the exemption—nearly double the current pay threshold.  In addition, the new rules include automatic indexing of the salary level every three years, which is also likely to result in regular increases to the salary threshold.  Although these changes will be challenging to all employers, the States claim that the substantial increase in employee wages will have huge impacts on their budgets and will result in negative consequences for citizens, like cuts to social programs.  Unlike for-profit businesses that can cut profits or earn additional revenue, the States have no clear avenue to increase revenue to pay the increased wages.  The business groups emphasize in their lawsuit that the changes will increase legal, payroll, and accounting costs, while simultaneously decreasing the flexibility of employees in the workplace who will no longer qualify as exempt.

We also noted previously the legal concerns related to the rules and these lawsuits include similar concerns. The lawsuits challenge the DOL’s authority to establish both the salary test and the automatic salary indexing in the new rules, and requests declaratory judgment on several grounds.  First, the States argue that the rules violate the 10th Amendment to the Constitution and principles of federalism by encroaching on power expressly delegated to the States.  This includes deciding how to allocate resources for State government functions without federal mandates. Second, the States and business groups argue that the sharp increase in salary level is outcome determinative and renders examination of the duties and functions a worker performs irrelevant.  This is contrary to the FLSA’s plain language that “any employee employed in a bona fide executive, administrative, or professional capacity” is exempt because it does not focus on the duties performed. 29 U.S.C. § 213(a)(1).  In addition, the States and business groups allege that automatic indexing exceeds the DOL’s authority and is not authorized by Congress because it does not comply with the FLSA’s directive to define and delimit what a “bona fide executive, administrative, or professional” employee is “from time to time by regulations,” (29 U.S.C. §213(a)(1)), and fails to comply with the APA’s rulemaking procedures because the updates will not go through notice and comment rulemaking.  The States and business groups also seek a ruling that the new rules are arbitrary and capricious.  Finally, the States claim that the DOL is unconstitutionally exercising the legislative powers of Congress to establish a Federal minimum salary for white collar workers.

In addition to declaratory judgment, the States and business groups seek a preliminary and permanent injunction preventing implementation of the new rules. However, the effectiveness of this new litigation is uncertain, and neither the States nor the business groups have filed any motion for preliminary injunction.

The plaintiff States include: Nevada, Texas, Alabama, Arizona, Arkansas, Georgia, Indiana, Kansas, Louisiana, Nebraska, Ohio, Oklahoma, South Carolina, Utah, Wisconsin, Kentucky, Iowa, Maine, New Mexico, Mississippi, and Michigan.  The plaintiff business groups include several Texas chambers of commerce and other business associations in the Texas area.  Both lawsuits name the DOL, Secretary Perez (in his official capacity), the Wage and Hour Division, and David Weil (in his official capacity as Administrator of the Wage and Hour Division) as defendants.  The States also name Mary Ziegler (in her official capacity as Assistant Administrator of the Wage and Hour Division) as a defendant.