Texas Two-Step: Overtime Ruling Does Not Completely End the Obama Rule Dance

On August 31, 2017, Judge Amos Mazzant of the United States District Court for the Eastern District of Texas, issued an order invalidating the Obama-era overtime rules. Finding that the Department of Labor rule exceeded its statutory authority under the Fair Labor Standards Act, the district court appeared to end the saga that had employers furiously determining whether they were going to adjust the pay of a wide swath of their workforces last Fall. However, the decision does not close the books on whether changes to the FLSA white collar exemptions are on the horizon.

What the Overtime Rule Attempted to Change

After issuing a Notice of Proposed Rulemaking, the previous administration issued sweeping overtime regulations on May 18, 2016.  The Agency pressed forward with a significant increase in the salary level test and established automatic indexing for the salary levels.  Employers, however, were spared changes to the duties test. Specifically, the final rules sought to:

  • increase the salary test level from $23,660 to $47,476;
  • add a three-year automatic indexing component to the salary basis level;
  • allow employers to satisfy the salary level test with non-discretionary bonuses, commissions or other incentives as long as they are paid quarterly and do not exceed 10% of the $47,476 salary level and;
  • increase the salary level for the Highly Compensated Employee exemption from $100,000 to $134,000 if the employee performs any one or more of the exempt duties or responsibilities of the white collar exemption.

The rule was set to take effect on December 1, 2016.

How the Rule Became Derailed

On November 22, 2016, Judge Mazzant granted a request for a nationwide preliminary injunction enjoining the Department of Labor “from implementing and enforcing” the new regulations.  The Obama-led DOL appealed the preliminary injunction to the Fifth Circuit.  However, after the new administration took office, the preliminary injunction order posed a dilemma for the government.  The order broadly questioned whether DOL could make any change to the salary test. Faced with a decision foreclosing any rulemaking on the salary test, the current administration took the narrow position in the appeal that the Department broadly had the authority to change the salary test. However, the administration did not explicitly support the salary level proposed in the Obama rule. In the meantime, the district court matter was not stayed pending appeal and continued to move forward.

Last week, Judge Mazzant granted the States and business groups plaintiffs’ motions for summary judgment and invalidated the regulation. The court initially considered the States’ Constitutional arguments that the Fair Labor Standards Act (FLSA) did not apply because the Tenth Amendment limited Congress’s ability to govern state affairs including setting wages.  Judge Mazzant rejected this argument finding that the Supreme Court’s decision in Garcia v. San Antonio Metropolitan Transit Authority, 469 U.S. 528 (1985) confirmed that the Commerce Clause allows the FLSA to govern minimum wage and overtime requirements for states.  Judge Mazzant  then considered the rule under the deference rubric set forth in Chevron, U.S.A. Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 842-43 (1984).  Chevron enunciates a two-step test governing agency actions.  The first step determines “whether Congress has directly and unambiguously spoken to the precise question at issue.” The second question asks whether the Agency’s interpretation is based on a permissible construction of the statute.  Looking to the first question, the district court considered whether Congress intended that the FLSA’s executive, administrative and professional (EAP) exemptions apply to employees who perform EAP duties. Answering this question in the affirmative, the district court determined that the Agency exceeded its authority by increasing the salary test in a manner that effectively eliminated the duties test.  Recognizing that entire categories of workers performing EAP duties would no longer fall within the exemption because of the significant increase of the salary test, the district court determined that the rule exceeded the statute’s intent.  Judge Mazzant used the same reasoning to determine that the regulation was not a permissible construction of the statute.  As the significant increase in the salary test was contrary to the statutory intent, the district court determined that it was not a reasonable interpretation of the statute.  Notably, the decision backed off the earlier indication that any change in the salary test would be contrary to the FLSA and limited itself to the Obama-level changes. The district court also addressed the automatic indexing portion of the rule and summarily determined that it was unlawful under Chevron.

In response to the decision, the Department has turned its efforts back to the regulatory process. On September 5, 2017, the Justice Department requested that the Fifth Circuit drop the appeal as the administration appears satisfied that the district court adequately addressed the salary test authority issue.  The next steps will be for DOL to review the comments on the Request for Information that are due on September 25, 2017.  This will perhaps begin a new rulemaking process which will take at least two years. The outcome is not certain but the Department has signaled that some small increase may be on the horizon as the Secretary has stated that the current level is outdated.

What the Decision Means for Employers

At this point, the Obama-era overtime rules appear dead but employers should continue to monitor whether the current administration will continue to move forward with changes to the white collar exemptions.  For employers that already implemented changes last year in anticipation of the rule taking affect, we recommend that those employers take a cautious approach before immediately rolling back those changes. It is highly unlikely that we will see a return to the extreme increase in the salary basis test and any changes will take at least two years to take effect. Nonetheless, there may be more to come as the Department continues to look at the white collar exemptions overall.