By Adriana Cara
Although California labor and employment law practitioners understand the importance of keeping abreast of federal wage and hour laws, they have traditionally focused on state law developments to appropriately advise their clients on how to compensate employees. Why? Because, until recently, attorneys relied on the fact that California legislation, including the Industrial Wage Commission wage orders, would impose the most stringent legal requirement on employers.
However, California attorneys, like their colleagues in every other state, were taken aback when in May 2016, the U.S. Department of Labor (“DOL”) introduced its “revamped” definitions of the white collar exemptions under the Fair Labor Standards Act (“FLSA”), notoriously known among employers nationwide as the “DOL Overtime Rule.”
Two weeks ago today, employers across the nation breathed a collective sigh of relief when a federal district court in Texas struck down the DOL Overtime Rule on the ground that the Labor Department acted beyond its power in implementing it. However, as set forth below, the Labor Department has not thrown in the towel on this issue just yet.
Exempt vs. Non-Exempt Employees
In order to appreciate the economic impact that the DOL Overtime Rule would have had among employers across the nation, it is important to first understand the nature of white collar exemptions as they currently exist. These exemptions apply to employees working in bona fide executive, administrative, or professional capacities, and who earn a minimum salary of $455 per workweek or $23,660 annually. The “duties” component of these exemptions requires employees to perform “exempt” duties, such as manage at least two or more employees, or exercise independent judgment. If appropriately classified as exempt, these individuals are entitled to overtime pay, regardless of how many hours they work in a workweek.
California has its own white collar exemptions, which are set forth in the IWC Wage Orders. Like federal law, exempt employees must also primarily perform exempt duties. However, they must also earn at least twice the state’s minimum wage rate (currently $10.50 per hour for employers with 26 or more employees), which amount comes out to $43,680 annually.
The DOL Overtime Rule
The DOL Overtime Rule, published in May 2016, was scheduled to take effect on December 1, 2016. Its introduction triggered widespread concern among small and large employers alike, because it would have:
• Raised the FLSA minimum salary threshold to qualify for exempt status from $23,660 to $47,476 per year (more than twice the federal remuneration requirement and thousands of dollars over California’s minimum salary threshold);
• Automatically adjusted (likely increased) the minimum salary threshold every three years starting January 1, 2020; and
• Been implemented in December 2016 – only months after it was announced.
The significant legal, payroll and accounting costs employers would have had to expend to comply with the DOL Overtime Rule, and on such short notice, would have been astronomical.
Federal district court in Texas invalidates the DOL Overtime Rule
In response to the DOL Overtime Rule, a number of state governments and business groups filed suit in the federal district court in Texas in an effort to block the rule. The state governments asked the court to grant a preliminary injunction to maintain the status quo pending the district court’s decision on the matter, and the business groups sought a summary judgment on the grounds that the DOL Overtime Rule was an impermissible exercise of the DOL’s powers.
Much to the relief of employers, the Texas district court granted the preliminary injunction on November 22, 2016, which meant that enforcement of the rule was stayed. In response, the Labor Department appealed the court’s ruling to the U.S. Court of Appeal for the Fifth Circuit; oral argument on that appeal was scheduled to be heard in October. In the interim, the state governments decided to join in the business groups’ motion for summary judgment.
The district court granted the motion for summary judgment on the ground that doubling the salary component of the white collar exemptions would “categorically exclude those who perform ‘bona fide executive, administrative or professional capacity’ duties based on salary level alone.” In sum, the exempt nature of an employee’s duties would be irrelevant if the employee’s salary were to fall below the higher salary threshold. The court determined that this was not what Congress intended.
The district court also determined that the updating mechanism that was to adjust the minimum salary level every three years was unlawful since the DOL Overtime Rule itself was invalid.
Take-aways for employers
Although the federal district court’s decision is certainly a victory for employers, they may want to hold off on breaking open the champagne.
Although the court invalidated the DOL Overtime Rule, as written, it acknowledged that the Labor Department does have the statutory authority to modify the salary level threshold for white collar exemptions.
The Labor Department is, therefore, expected to propose a revised version of the rule in the near future. Based on the district court’s ruling, it is safe to assume that the Labor Department will not be proposing to more than double that minimum salary threshold. Nevertheless, employers should expect an increase in that amount since the Labor department has already asked for public input on the minimum salary test.
Adriana Cara is a partner in the Employment, Labor and Benefits Department at Dinsmore & Shohl, a San Diego law firm.