On April 12, 2018, the Wage and Hour Division of the U.S. Department of Labor (“DOL”) issued the first Opinion Letters since the Bush administration, as well as a new Fact Sheet.  The Obama administration formally abandoned Opinion Letters in 2010, but Secretary of Labor Alexander Acosta has restored the practice of issuing these guidance documents.  Opinion Letters, as Secretary Acosta states in the DOL’s April 12 press release, are meant to explain “how an agency will apply the law to a particular set of facts,” with the goal of increasing employer compliance with the Fair Labor Standards Act (“FLSA”) and other laws.  Not only do Opinion Letters clarify the law, but pursuant to Section 10 of the Portal-to-Portal Act, they provide a complete affirmative defense to all monetary liability if an employer can plead and prove it acted “in good faith in conformity with and in reliance on” an Opinion Letter.  29 U.S.C. § 259; see also 29 C.F.R. Part 790.  For these reasons, employers should study these and all forthcoming Opinion Letters closely.

Opinion Letter FLSA2018-18 addresses the compensability of travel time under the FLSA, considering the case of hourly-paid employees with irregular work hours who travel in company-provided vehicles to different locations each day and are occasionally required to travel on Sundays to the corporate office for Monday trainings.  The Opinion Letter reaffirms the following guiding principles: First, as a general matter, time is compensable if it constitutes “work” (a term not defined by the FLSA).  Second, “compensable worktime generally does not include time spent commuting to or from work.”  Third, travel away from the employee’s home community is worktime if it cuts across the employee’s regular workday.  Fourth, “time spent in travel away from home outside of regular working hours as a passenger on an airplane, train, boat, bus, or automobile” is not worktime.

With these principles in mind, this letter provides two non-exclusive methods to reasonably determine normal work hours for employees with irregular schedules in order to make an ultimate judgment call on the compensability of travel time.  Under the first method, if a review of an employee’s hours during the most recent month of regular employment reveals typical work hours, the employer can consider those the normal hours going forward.  Under the second method, if an employee’s records do not show typical work hours, the employer can select the average start and end times for the employee’s work days.  Alternatively, where “employees truly have no normal work hours, the employer and employee … may negotiate … a reasonable amount of time or timeframe in which travel outside the employees’ home communities is compensable.”  Crucially, an employer that uses any of these methods to determine compensable travel time is entitled to limit such time to that accrued during normal work hours.

Opinion Letter FLSA2018-19 addresses the compensability of 15-minute rest breaks required every hour by an employee’s serious health condition (i.e., protected leave under the FMLA).  Adopting the test articulated by the Supreme Court in the Armourdecision—whether the break primarily benefits the employer (compensable) or the employee (non-compensable)—the letter advises that short breaks required solely to accommodate the employee’s serious health condition, unlike short, ordinary rest breaks, are not compensable because they predominantly benefit the employee.  The letter cautions, however, that employers must provide employees who take FMLA-protected breaks with as many compensable rest breakers as their coworkers, if any.

Opinion Letter CCPA2018-1NA addresses whether certain lump-sum payments from employers to employees are considered “earnings” for garnishment purposes under Title III of the Consumer Credit Protection Act (the “CCPA”).  The letter articulates the central inquiry as whether the lump-sum payment is compensation “for the employee’s services.” The letter then analyzes 18 types of lump-sum payments, concluding that commissions, bonuses, incentive payments, retroactive merit increases, termination pay, and severance pay, inter alia, are earnings under the CPA, butlump-sum payments for workers’ compensation, insurance settlements for wrongful termination, and buybacks of company shares are not.

Finally, Fact Sheet #17S addresses the FLSA’s minimum wage and overtime requirement exemptions for employees who perform bona fide executive, administrative, professional, and outside sales duties (known as the “white collar exemptions”) in the context of higher education institutions.  Specifically, the letter provides guidance as to the exempt status of faculty members, including coaches, non-teacher learned professionals (e.g., CPAs, psychologists, certified athletic trainers, librarians, and postdoctoral fellows), administrative employees (e.g., admissions counselors and student financial aid officers), executive employees (e.g., department heads, deans, and directors), and student-employees (i.e., graduate teaching assistants, research assistants, and student residential assistants).  Of note, the letter confirms that the DOL is undertaking rulemaking to revise the regulations that govern the white collar exemptions.

In a move allowing increased flexibility for employers and greater opportunity for unpaid interns to gain valuable industry experience, the United States Department of Labor (“DOL”) recently issued Field Assistance Bulletin No. 2018-2, adopting the “primary beneficiary” test used by several federal appellate courts to determine whether unpaid interns at for-profit employers are employees for purposes of the Fair Labor Standards Act. If interns are, indeed, deemed employees, they must be paid minimum wage and overtime, and cannot serve as interns without pay. The “primary beneficiary” test adopted by the DOL examines the economic reality of the relationship between the unpaid intern and the employer to determine which party is the primary beneficiary of the relationship. Unlike the DOL’s previous test, the “primary beneficiary” test allows for greater flexibility because no single factor is determinative.

Along with its announcement of this change, the DOL also issued a new Fact Sheet which sets forth the following seven factors that make up the “primary beneficiary” test:

  1. The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee—and vice versa.
  2. The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.
  3. The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
  4. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
  5. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
  6. The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
  7. The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

For more information on the DOL’s adoption of the “primary beneficiary” test and actions employers may want to take given this change, go to our Act Now Advisory on this topic.

Federal regulations have long provided that employees whose wages are subject to a tip credit must retain all tips they receive, with the exception that customarily tipped employees — i.e. front-of the-house service employees — are permitted to share in tips received.

In 2011, the U.S. Department of Labor (“DOL”) amended its tip regulations to limit tip pool participation to front-of-the-house employees regardless of whether a tip credit was applied to their wages.

Employers and hospitality industry advocacy groups reacted by filing lawsuits throughout the country challenging the DOL’s rulemaking authority to extend the scope of tip pooling restrictions to employees whose wages were not subject to a tip credit.

There is currently a circuit split over the validity of the DOL’s 2011 regulation.

In Oregon Restaurant and Lodging Association v. Perez, the Court of Appeals for the Ninth Circuit found that the Fair Labor Standards Act (“FLSA”) does not expressly set forth requirements for employers that do not apply a tip credit against employees’ wages, therefore the DOL is authorized to interpret this absence in the statute through rulemaking.

In contrast, in Marlow v. The New Food Guy, Inc., the Tenth Circuit rejected the 2011 regulation, finding that the DOL is not vested with such rulemaking authority, thus employers may distribute tips to both tip-earning and non-tip-earning employees, e.g. cooks and dishwashers, to the extent a tip credit is not applied to employees’ wages.

The National Restaurant Association has requested the Supreme Court of the United States to hear an appeal of the Ninth Circuit case.  The request is currently pending.

Acknowledging that it may have exceeded its rulemaking authority and in light of the pending petition to the Supreme Court, on December 4, 2017, the DOL issued a Notice of Proposed Rulemaking (“NPRM”) to rescind the portion of the 2011 regulation requiring tip pool compliance with respect to employees whose wages are not subject to a tip credit.  If finalized, this rule would permit employers to regulate tip pooling without restriction as long as employers do not apply a tip credit against its employees’ wages (or if employees are paid at least the current $7.25 federal minimum wage in states that maintain higher minimum wage thresholds and permit the taking of a tip credit).

In its NPRM Fact Sheet, the DOL explained that the proposed rule would allow employers to distribute customer tips to larger tip pools that include non-tipped workers, such as cooks and dishwashers, which would likely increase the earnings of those employees who are newly added to the tip pool and further incentivize them to provide good customer service.

The DOL additionally cited as a benefit greater flexibility to employers in determining pay practices for tipped and non-tipped workers, as well as a reduction in wage disparities among employees who all contribute to the customers’ experience.  Some early critics of the NPRM have voiced concern that it gives employers the unrestricted ability to retain employees’ tips, which would be antithetical to the DOL’s stated purpose for the Rule.

It is important to keep in mind, however, that even if finalized, the NPRM would not preempt state or local laws or regulations that provide for more expansive employee rights regarding tip pooling.  For example, the NPRM would not result in any change in New York under its current regulations, which prohibit tip sharing with back-of-the-house employees.

The NPRM is currently subject to a 30-day comment period with a January 4, 2018 deadline, pursuant to which the DOL will review and consider all comments received before publishing the rule in its final form in the federal register.

In the interim, employers should review and determine whether it is feasible — and, if so, advantageous — to adjust its employees’ wage rates (including increasing front-of-the-house employees’ wage rates to the $7.25 minimum wage threshold or decreasing back-of-the-house employees’ wage rates to the federal minimum wage) and abandon the tip credit to allow for unrestricted tip pooling among all employees.  In addition to considering the potential economic benefits, employers should also consider the potential employee relations concerns in making any such adjustments, including the possibility that employees’ total compensation may decrease on account of any such potential changes.

As we have discussed previously, in early September the U.S. Department of Labor (“DOL”) withdrew its appeal of last November’s ruling from the Eastern District of Texas preliminarily enjoining the Department’s 2016 Final Rule that, among other things, more than doubled the minimum salary required to satisfy the Fair Labor Standards Act’s executive, administrative, and professional exemptions from $455 per week ($23,660 per year) to $913 per week ($47,476 per year).  The DOL abandoned its appeal in light of the district court’s ruling on August 31, 2017 granting summary judgment and holding that the 2016 increase to the salary level conflicted with the statute and thus was invalid, a ruling that rendered the appeal of the injunction moot.

On October 30, 2017, to the surprise of many observers, the DOL filed a notice of appeal regarding the district court’s summary judgment ruling, taking the case back to the U.S. Court of Appeals for the Fifth Circuit.   Four days later, the DOL filed an unopposed motion asking the Fifth Circuit to stay the appeal in light of the Department’s pending rulemaking to update the salary requirement.  On November 6, 2017, the Fifth Circuit granted the motion, staying the appeal pending the outcome of the new rulemaking.

The DOL’s maneuvers may appear confusing. In short, the district court’s summary judgment ruling causes a certain amount of heartburn for the Department because the court in effect concluded that although the DOL has the authority to require a minimum salary for these exemptions, there is a point beyond which the Department cannot go without having the salary level deemed invalid.  The court did not, however, provide a clear standard for identifying the outer limit of the Department’s authority to impose a salary threshold, and this uncertainty creates confusion and a risk of time-consuming and expensive litigation for the Department — and for employees and employers throughout the country.

By appealing the summary judgment ruling, the DOL preserves the option of challenging the decision rather than simply allowing it to remain on the books as a precedent.  Once the Department completes the rulemaking process and issues an updated salary standard, the likely final move would be for the Department to move to dismiss the litigation and to vacate the district court’s order on the basis that the challenge to the 2016 Final Rule has become moot.  Once the new rule is in place and the district court’s summary judgment ruling is no longer on the books, it will be as though the 2016 Final Rule never happened.

We will keep you posted as this matter develops.

Tips Do Not Count Towards the Minimum Wage Unless a Worker Qualified as a “Tipped Employe"It is a common practice for employers to provide their employees with rest breaks during the work day.  (And in some states, like California, it is required by state law.) But under what circumstances is an employer required to pay its employees for break time?

In U.S. Department of Labor v. American Future Systems Inc. et al., the Third Circuit Court of Appeals was asked to decide whether the Fair Labor Standards Act requires employers to compensate employees for breaks of 20 minutes or less during which they are free from performing any work.

The employer in that case produced business publications that were sold over the telephone by sales representatives.  The sales representatives could log off of their computers and take breaks whenever they chose and for any length of time.  They were free to leave the premises.   However, if the employees were logged off their computers for more than 90 seconds, they were not paid for the break time.

The Department of Labor (“DOL”) filed suit against the company.  The DOL relied on 29 C.F.R. § 785.18, which states:

Rest.

Rest periods of short duration, running from 5 minutes to about 20 minutes, are common in industry. They promote the efficiency of the employee and are customarily paid for as working time. They must be counted as hours worked…

The District Court for the Eastern District of Pennsylvania granted partial summary judgment to the DOL, concluding that section 785.18 created a “bright-line rule” and the company violated the FLSA by failing to pay its employees for rest breaks of twenty minutes or less.  The company appealed to the Third Circuit.

The company argued that the DOL was attempting to enforce the wrong regulation, and instead the court should apply 29 C.F.R. § 785.16 to its break policy.  That regulation states:

Off duty.

Periods during which an employee is completely relieved from duty and which are long enough to enable him to use the time effectively for his own purposes are not hours worked.  He is not completely relieved from duty and cannot use the time effectively for his own purposes unless he is definitely told in advance that he may leave the job and that he will not have to commence work until a definitely specified hour has arrived.  Whether the time is long enough to enable him to use the time effectively for his own purposes depends upon all of the facts and circumstances of the case.

The company contended that the “off duty” regulation should apply.  The company pointed out that its policy was completely flexible, allowed employees to take as many breaks as they wanted for as long as they wanted, allowed them to be completely relieved of all duties and created no obligation to return to work.  Therefore, the company argued that under the facts and circumstances of the case, even breaks of less than 20 minutes were not compensable.

The Third Circuit disagreed.  It stated that the “off duty” regulation provides a general rule regarding the compensability of hours worked, but section 785.18 is a more specific regulation that carves out an exception to the general rule.  The Third Circuit held that section 785.18 establishes a bright-line rule that employers must pay their employees for any rest breaks of 20 minutes or less.

To date, it does not appear that any other Circuit Court has weighed in on this issue.  That another Circuit might reach a different conclusion is certainly possible.  And it is also possible that the Supreme Court may have the final word on this issue.

In many industries, sales are subject to ebbs and flows.  Sometimes the fish are biting; sometimes they aren’t.

A common device that employers with commissioned salespeople use to take the edge off of the slow weeks and to ensure compliance with minimum wage and overtime laws is the recoverable draw.  Under such a system, an employee who earns below a certain amount in commissions for a given period of time, often a week, receives an advance of as-yet unearned commissions to bring the employee’s earnings for the period up to a specified level.  Then in the next period, the employees’ commissions pay off the draw balance before the employee receives further payouts of commissions.  Occasionally, employees challenge these recoverable draw pay systems.

In Stein v. hhgregg, Inc., the U.S. Court of Appeals for the Sixth Circuit considered one such draw system.  The employer, a retail seller of appliances, furniture, and electronics at more than 220 stores nationwide, paid its salespeople entirely in commissions.  In weeks where an employee worked 40 or fewer hours and did not earn commissions sufficient to cover minimum wage for the week, the employee would receive a draw against future commissions sufficient to bring the employee’s earnings for the week up to minimum wage.  In weeks where the employee worked more than 40 hours, and did not earn sufficient commissions to cover one and a half times the minimum wage, the employee would receive a draw against future commissions sufficient to bring the employee’s earnings for the week up to one and a half times the minimum wage.  The purpose of this pay structure was, among other things, to achieve compliance with the overtime exemption in section 7(i) of the Fair Labor Standards Act (“FLSA”) for certain commissioned employees of a retail or service establishment.  The company’s policy also provided that upon termination of employment, an employee will immediately pay the company any unpaid draw balance.

Two employees of a store in Ohio brought a putative nationwide collective action under the FLSA, as well as a putative state law class action asserting unjust enrichment with respect to the company’s more than twenty-five locations in Ohio.  They alleged failure to pay the minimum wage or overtime based on the theory that offsetting draw payments against future commissions amounted to an improper kick-back of wages to the employer.  They also claimed that the employer did not pay for certain non-sales activities and encouraged employees to work off the clock.  The complaint did not specifically allege that the two named plaintiffs worked off the clock or that the one plaintiff who was a former employee had to repay a draw balance when his employment ended.  The district court granted the company’s motion to dismiss, concluding that there was no FLSA violation and declining to exercise supplemental jurisdiction over the state-law claims.

On appeal, after reviewing extensive interpretive guidance from the U.S. Department of Labor, the Sixth Circuit rejected the plaintiffs’ central theory that a recoverable draw amounts to an impermissible wage kick-back.  To the court, the key consideration is that under the pay system at issue, “deductions will be made from wages not delivered, that is, from future earned commissions that have not yet been paid.”  Because the company does not recover wages already “delivered to the employee,” the court “h[e]ld that this practice does not violate the ‘free and clear’ regulation.  See 29 C.F.R. § 531.35 (emphasis added).”  (Op. at 9-10.)

The divided panel reversed, however, in certain other respects.

First, the court determined that the FLSA section 7(i) overtime exemption does not apply because although the company’s pay plan provides for a minimum rate equal to one and one half times the minimum wage for any week where an employee works more than 40 hours, the exemption technically requires, among other things, a rate that is more than one and a half times the minimum wage.  (Note: federal minimum wage is $7.25 per hour, and 1.5 times that rate is $10.875 per hour.  Strictly speaking, a wage of $10.875 does not satisfy this aspect of the exemption, whereas $10.88 per hour does.  Perhaps on remand it will turn out that the company actually paid $10.88 per hour rather than $10.875, as it would be very unusual for an employer to use a pay rate that does not round up to the nearest cent.)

Second, the panel majority held that the company’s policy of requiring repayment of a draw balance upon termination of employment violated the FLSA as an improper kick-back.  This part of the decision is interesting because the majority parted ways with the dissenting judge and the district court over the issue of policy versus practice.  The complaint did not suggest that either named plaintiff actually paid back any draw balance, and at oral argument it became clear that the company never enforced that policy and, in fact, had eliminated the repayment policy during the litigation.  The dissenting judge, like the district court before him, believed that because the company had never applied the policy to the named plaintiffs, the policy would not support a claim for relief.  The majority, however, took a more expansive approach to the matter.  “Incurring a debt, or even believing that one has incurred a debt, has far-reaching practical implications for individuals.  It could affect the way an individual saves money or applies for loans.  An individual might feel obligated to report that debt when filling out job applications, credit applications, court documents, or other financial records that require self-reporting of existing liabilities.”  (Op. at 15.)  In short, the court arguably opened the door to allowing plaintiffs to bring FLSA claims even where they have suffered no injury cognizable under the FLSA, so long as the policy they challenge could potentially cause them other types of consequential damages beyond those covered by the FLSA.  This aspect of the ruling appears to be a first of its kind in FLSA jurisprudence.

Third, the panel majority concluded that the plaintiffs adequately alleged minimum wage and overtime violations based on the assertions regarding the company’s knowledge and encouragement of working off the clock.  Although the dissent pointed out that the complaint contained no allegation that either named plaintiff actually suffered a minimum wage or overtime violation as a result of working off the clock, the majority focused on the alleged practice, rather than its specific application to the named plaintiffs, determining that “Plaintiffs have alleged sufficient facts to support a claim that this practice violates the minimum wage and overtime requirements of the FLSA.”  (Op. at 19.)

This decision provides several lessons for employers:

  • Generally speaking, the FLSA allows for the concept of a recoverable draw against commissions.  Recovering a draw against future commissions is not automatically an impermissible wage kick-back.  (Note that there may be certain restrictions under state law, and under some conditions a recoverable draw may violate the FLSA.)
  • When relying on the FLSA section 7(i) exemption, ensure that the policy is clear that an employee will receive more than one and a half times the federal minimum wage for any workweek in which the employer will claim the exemption.
  • Closely review any policies regarding recovery of draw payments (or, indeed, any other types of payments) upon an employee’s termination.  Such policies are often subject to challenge, and they can serve as a trigger for claims by demanding a payment right at the time when a departing employee may cease to have an interest in maintaining a positive relationship with an employer.
  • Be very careful about policies or practices that may arguably encourage employees to work off the clock.  Employers should have clear written policies prohibiting employees from working off the clock, and employees and supervisors should receive periodic training on those policies.

A year ago, employers across the country prepared for the implementation of a new overtime rule that would dramatically increase the salary threshold for white-collar exemptions, on the understanding that the new rule would soon go into effect “unless something dramatic happens,” a phrase we and others used repeatedly.

And, of course, something dramatic did happen—a preliminary injunction, followed by a lengthy appeal, which itself took more left turns following the U.S. presidential election than a driver in a NASCAR race. The effect was to put employers in a constant holding pattern as they were left to speculate whether and when the rule would ever go into effect.

The current status of the overtime rule is but one of several prominent issues to reckon with as wage and hour issues, investigations, and litigation remain as prevalent as they have ever been.

The articles in this edition of Take 5 include the following:

  1. The Status of the Department of Labor’s 2016 Overtime Rule
  2. Recent Developments Regarding Tip Pooling
  3. Mandatory Class Action Waivers in Employment Agreements: Is a Final Answer Forthcoming?
  4. “Time Rounding”: The Next Wave of Class and Collective Actions
  5. The Department of Labor, Congress, and the Courts Wrestle with the Definition of “Employee”

Read the full Take 5 online or download the PDF.

Earlier today, the Ninth Circuit issued its opinion in cases involving the Department of Labor’s (“DOL”) “80/20 Rule” regarding what is commonly referred to as “sidework” in the restaurant industry.  Agreeing with the arguments made by our new colleague Paul DeCamp, among others, the Ninth Circuit issued a decidedly employer-friendly decision.  In so doing, it disagreed with the Eighth Circuit, potentially setting the issue up for resolution by the United States Supreme Court.

As those in the restaurant industry are aware, restaurant workers and other tipped employees often perform a mix of activities in the course of carrying out their jobs.  Some tasks, such as taking a customers’ orders or delivering their food, may contribute directly to generating tips.  Other tasks, such as clearing tables, rolling silverware, and refilling salt and pepper shakers—activity generally known in the industry as “sidework”— arguably generate tips indirectly.

In 1988, the DOL issued internal agency guidance purporting to impose limits on an employer’s ability to pay employees at a tipped wage, which under federal law can be as low as $2.13 per hour, if employees spend more than 20% of their working time on sidework.  This guidance, commonly known as the “80/20 Rule,” has led to a wave of class and collective action litigation across the country, including a 2011 decision from the U.S. Court of Appeals for the Eighth Circuit deferring to the Department’s guidance as a reasonable interpretation of the Fair Labor Standards Act (“FLSA”) and its regulations.

Today, the Ninth Circuit issued a 2-1 decision in Marsh v. J. Alexander’s LLC, concluding that the Department’s attempt to put time limitations on how much sidework an employee can perform at a tipped wage is contrary to the FLSA and its regulations and thus unworthy of deference by the courts.

The Department adopted the 20% limitation as a purported clarification of the Department’s “dual jobs” regulation, which addresses employees who work in separate tipped and non-tipped jobs for the same employer.  The Ninth Circuit explained, however, that the 20% limitation on sidework was inconsistent with the statutory notion of an “occupation,” as well as the regulation’s focus on two distinct jobs.

Because the 80/20 Rule did not in reality stem from the statute or the regulations, the Court determined that it constitutes “an alternative regulatory approach with new substantive rules that regulate how employees spend their time” and thus amounts to a “‘new regulation’ masquerading as an interpretation.”

In reaching this conclusion, the Court disagreed with the Eighth Circuit’s analysis and conclusion, noting that “the Eighth Circuit failed to consider the regulatory scheme as a whole, and it therefore missed the threshold question whether it is reasonable to determine that an employee is engaged in a second ‘job’ by time-tracking an employee’s discrete tasks, categorizing them, and accounting for minutes spent in various activities.”

The plaintiffs in these cases may well seek rehearing en banc, and it remains to be seen what approach the Department will take regarding the 80/20 Rule in response to today’s decision. And the split between the circuits certainly suggests that this is an issue that may well be resolved by the Supreme Court.

Since last November, much of the discussion regarding the Obama-era overtime regulations that, among other things, more than doubled the minimum salary threshold for executive, administrative, and professional employees under the Fair Labor Standards Act (“FLSA”) has focused on the Department of Labor’s appeal of the nationwide preliminary injunction barring implementation and enforcement of the rule.

While everyone is awaiting the oral argument before the Fifth Circuit, currently scheduled for October 3, 2017, Judge Amos Mazzant of the Eastern District of Texas once again issued a bold ruling sure to grab the public’s attention.

On August 31, 2017, Judge Mazzant granted summary judgment in favor of the plaintiffs in the two consolidated cases challenging the overtime rule, holding that the salary level the Department selected in 2016 conflicts with the FLSA, Nevada v. U.S. Department of Labor and Plano Chamber of Commerce, E.D. Tex. No. 4:16-CV-731.

After dealing with preliminary procedural issues including standing, ripeness, and the applicability of the FLSA to the States, Judge Mazzant focused on the substance of the 2016 rule.  Applying the legal framework set forth in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-43 (1984), the Court determined that the statutory language establishing the exemptions, section 13(a)(1) of the FLSA, 29 U.S.C. § 213(a)(1), “is unambiguous because the plain meanings of the words in the statute indicate Congress’s intent for employees doing ‘bona fide executive, administrative, or professional capacity’ duties to be exempt from overtime pay.”  (Slip Op. at 13.)

In the Court’s words, “the Department does not have the authority to use a salary-level test that will effectively eliminate the duties test as prescribed by” the FLSA.  (Slip Op. at 14.)  “Nor does the Department have the authority to categorically exclude those who perform ‘bona fide executive, administrative, or professional capacity’ duties based on salary level alone.”  (Id.)

In short, “[t]he updated salary-level test under the Final Rule does not give effect to Congress’s unambiguous intent.”  (Slip Op. at 14.)  The Court noted that “[t]he Department estimates 4.2 million workers currently ineligible for overtime, and who fall below the minimum salary level, will automatically become eligible under the Final Rule without a change to their duties.”  (Id. at 16.)

The Court held that “the Department’s Final Rule is not ‘based on a permissible construction’ of Section 213(a)(1)” because by “doubl[ing] the previous minimum salary level” the regulation “eliminates a consideration of whether an employee performs ‘bona fide executive, administrative, or professional capacity’ duties.”  (Slip Op. at 16-17.)  For Judge Mazzant, “[t]he Department has exceeded its authority and gone too far with the Final Rule.  Nothing in Section 213(a)(1) allows the Department to make salary rather than an employee’s duties determinative of whether” an employee “should be exempt from overtime pay.  Accordingly, the Final Rule is not a reasonable interpretation of Section 213(a)(1) and thus is not entitled to Chevron deference.”  (Id. at 17.)

The Court also struck down the regulation’s mechanism for automatically updating the minimum salary threshold every three years.  (Slip Op. at 17.)

In a portion of the decision that may have a direct effect on the pending appeal, the Court “acknowledges its injunction order might have been confusing” insofar as some have read that decision as “invalidat[ing] all versions of the salary-level test that the Department has used for the last seventy-five years.”  (Slip Op. at 4 n.1.)

The Court clarified that “the Department has the authority to implement a salary-level test” and that the summary judgment ruling “is not making any assessments regarding the general lawfulness of the salary-level test or the Department’s authority to implement such a test.  Instead, the Court is evaluating only the salary-level test as amended by the Department’s Final Rule, which is invalid under both steps of Chevron.”  (Id. at 13 n.5.)

As a result of Judge Mazzant’s ruling, the pending appeal may be moot.  The Department’s reply brief before the Fifth Circuit expressly disavowed a defense of the salary level selected in the Final Rule, instead asking the Fifth Circuit to rule only on the question of whether the Department has the authority to implement a salary-level test at all.  Judge Mazzant’s decision acknowledges that the Department has that authority, which appears to address the Department’s concern. In light of the decision, the Department may well withdraw its appeal.

In a much anticipated filing with the Fifth Circuit Court of Appeal in State of Nevada, et a. v. United States Department of Labor, et al, the United States Department of Labor has made clear that it is not defending the Obama Administration’s overtime rule that would more than double the threshold for employees to qualify for most overtime exemptions. However, the Department has taken up the appeal filed by the previous Administration to reverse the preliminary injunction issued blocking implementation of the rule, requesting that the Court overturn as erroneous the Eastern District of Texas’ finding, and reaffirm the Department’s authority to establish a salary level test. And the Department has requested that the Court not address the validity of the specific salary level set by the 2016 final rule because the Department intends to revisit the salary level threshold through new rulemaking.

The litigation stems from action taken by the Department in May 2016 to issue a final rule that would have increased the minimum salary threshold for most overtime exemptions under the Fair Labor Standards Act (“FLSA”) from $23,660 per year to $47,476 per year. The rule was scheduled to become effective on December 1, 2016, but a federal judge issued a temporary injunction blocking its implementation just days beforehand.

Section 13(a) of the FLSA exempts from the Act’s minimum wage and overtime pay requirements “any employee employed in a bona fide executive, administrative, or professional [(“EAP”)] capacity * * * [specifically providing,] as such terms are defined and delimited from time to time by regulations of the Secretary [of Labor].” 29 U.S.C. § 213(a)(1). To be subject to this exemption, a worker must (1) be paid on a salary basis; (2) earn a specified salary level; and (3) satisfy a duties test.  In enjoining the 2016 rule, the District Court for the Eastern District of Texas reasoned that the salary-level component of this three-part test is unlawful, concluding that “Congress defined the EAP exemption with regard to duties, which does not include a minimum salary level,” and that the statute “does not grant the Department the authority to utilize a salary-level test.”

In seeking reversal of the preliminary injunction, the Department has argued that the Fifth Circuit expressly rejected the claim that the salary-level test is unlawful in Wirtz v. Mississippi Publishers Corp. In Wirtz, the Court reasoned that “[t]he statute gives the Secretary broad latitude to ‘define and delimit’ the meaning of the term ‘bona fide executive * * * capacity,” and he rejected the contention that “the minimum salary requirement is arbitrary or capricious.”  Further, the Department argues that every circuit to consider the issue has upheld the salary-level test as a permissible component of the EAP regulations.

By many accounts, the Department’s recently-appointed Labor Secretary, Alexander Acosta, has made clear that he does not think the salary level should be at $47,476 per year, but rather set at a more reasonable level between $30,000 and $35,000 per year. While Secretary Acosta may disagree with the salary level of the 2016 rule, the Department’s brief seems to make clear that he wants to ensure that he has the authority to set any salary threshold.

In issuing the preliminary injunction, the District Court did not address the validity of the salary level threshold set by the 2016 rule. Because the injunction rested on the legal conclusion that the Department lacks authority to set a salary level, it may be reversed on the ground that the legal ruling was erroneous. As a result, by requesting that the Fifth Circuit not address the validity of the salary level set by the 2016 rule, should the Court reverse the preliminary injunction without ruling on the salary level’s validity, it is unclear whether the 2016 rule will immediately go into effect pending new rulemaking. Employers need to stay tuned.