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Federal Court Strikes Down Department of Labor’s Overtime Rule

On August 31, 2017, Judge Amos Mazzant in the United States District Court for the Eastern District of Texas issued an order granting a group of twenty-one states’ and fifty-five business associations’ motion for summary judgment in consolidated cases seeking declaratory and injunctive relief against a May 23, 2016 Department of Labor rule drastically increasing the minimum salary an employee must earn to qualify for the most common exemptions from the federal overtime laws. The rule was originally scheduled to go into effect on December 1, 2016 and would have increased the minimum salary an employee must earn to qualify for the administrative, executive or professional exemption from federal overtime requirements from $455 per week ($23,660 annually) to $913 per week ($47,476 annually). The rule also would have provided for automatic increases to the minimum salary level every three years. Judge Mazzant had issued a nationwide preliminary injunction on November 22, 2016 delaying implementation of the Department of Labor’s new minimum salary rule, finding that it was likely unlawful and would cause irreparable harm to the plaintiff states and business groups. Judge Mazzant’s August 31, 2017 order confirms the findings in the November 22, 2016 preliminary injunction and represents a final decision at the district court level that the Department of Labor’s May 23, 2016 minimum salary rule is illegal and void.

Judge Mazzant specifically held that the new minimum salary rule was unlawful because it exceeded the Department of Labor’s delegated authority under the federal Fair Labor Standards Act (the “FLSA”). The FLSA exempts “any employee employed in a bona fide executive, administrative, or professional capacity” from the general requirement to pay overtime, and authorizes the Department of Labor to promulgate regulations to “define and delimit” these exemptions. Because the statutory language creating the exemptions only describes types of job duties and does not have any minimum salary requirement, the court found that more than doubling the existing minimum salary by administrative rule effectively supplanted the FLSA’s focus on job duties and therefore conflicted with the plain and unambiguous language of the statute. The court held in the alternative that even if the FLSA were ambiguous, the Department of Labor’s drastic minimum salary increase is invalid because it reflects an unreasonable interpretation of the language creating the executive, administrative, and professional exemptions. The court further agreed that the plaintiff business groups had standing to sue and that the dispute was ripe for adjudication.

Notably, the court did not hold that the preexisting minimum salary or the requirement to pay exempt employees on a salary basis is unlawful. The court recognized that prior Fifth Circuit precedent (which binds all federal courts in Texas) permits the Department of Labor to establish a minimum salary for the executive, administrative, and professional exemptions and that a modest minimum salary can serve the purpose of “screen[ing] out obviously nonexempt employees, making an analysis of duties…unnecessary.” The court held that “[t]he use of a minimum salary level in this manner is consistent with Congress’s intent because salary serves as a defining characteristic when determining who, in good faith, performs actual executive, administrative, or professional capacity duties,” but the Department of Labor’s new rule is such a “significant increase” that it “would essentially make an employee’s duties, functions, or tasks irrelevant if the employee’s salary falls below the new minimum salary level.” The court was concerned that such a large increase would make about 4.2 million formerly exempt employees “automatically…eligible [for overtime] without a change to their duties.”

The court also did not decide whether a smaller increase in the minimum salary requirement would be lawful. The court suggested that increases merely tracking inflation would pass muster, but all that the court formally held was that an increase to $913 per week goes too far.

Judge Mazzant’s order was not a complete win for the plaintiffs though. The court rejected the plaintiff states’ arguments that the FLSA cannot constitutionally apply to state employers and that the FLSA does not contain a required “clear statement” that it applies to the states. These arguments were foreclosed by a directly on point Supreme Court case upholding the FLSA’s constitutionality as applied to the states and the clear language of the statute making it applicable to the “activity of a public agency,” defined as “the government of a State or political subdivision thereof.” Finally, the court did not reach whether the automatic increase provisions of the Department of Labor’s rule violated the Administrative Procedures Act, because it was unnecessary to answer this question in light of the court’s invalidation of the rule’s initial minimum salary increase.

Judge Mazzant’s decision is very significant for employers because it has nationwide effect.  If the Department of Labor’s rule had not been declared invalid, it would have required the reclassification of about 4.2 million exempt employees or an increase in salary level that is double the current minimum. The Department of Labor is entitled to appeal the decision to the Fifth Circuit Court of Appeals, but may choose to forgo an appeal in light of the fact that the rule at issue was promulgated by the Obama Administration and President Trump’s Secretary of Labor has already begun efforts to formulate a new rule. The Department of Labor had previously appealed the November 22, 2016 preliminary injunction and filed its final brief on June 30, 2017, but the Fifth Circuit ordered the appeal dismissed as moot on September 7, 2017 at the Department of Labor’s request. The Texas AFL-CIO attempted to intervene in the case and was rejected, but the union might appeal the denial of leave to intervene and try to defend the Department of Labor rule at the appellate level if the Department of Labor abandons the case.

The case in which Judge Mazzant invalidated the Department of Labor’s new minimum salary Rule is State of Nevada, et al. v. United States Department of Labor, et al., Case # 4:16-cv-00731-ALM, which was consolidated with Plano Chamber of Commerce, et al. v. Perez, et al., Case # 4:16-cv-00732-ALM.

Copyright © 2017, Sheppard Mullin Richter & Hampton LLP.

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About this Author

John Ellis, law firm Sheppard Mullins San Francisco, CA Office Labor and Employment attorney
Associate

John Ellis is a special counsel in the Labor and Employment Practice Group in the firm's San Francisco office.

Mr. Ellis Practices in the Following Areas:

Labor and Employment

  • Labor and Employment Counseling

  • Labor and Employment Litigation

    • Wage and Hour Class Actions

    • Wrongful Termination

John Ellis' Education:

  • J.D., University of California, Los Angeles, 2009
  • B.A., University of California, Los Angeles, 2006
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