Yesterday, a group of 21 states filed a lawsuit in the United States District Court for the Eastern District of Texas challenging the Department of Labor’s new overtime rule, which is set to take effect on December 1, 2016. The group challenging the rule is led by Texas and Nevada, and includes the following states: Alabama, Arizona, Georgia, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Michigan, Mississippi, Nebraska, New Mexico, Ohio, Oklahoma, South Carolina, Utah, and Wisconsin. The lawsuit names as Defendants the DOL and its Wage and Hour Division, Secretary of Labor Thomas Perez, and Wage and Hour Administrator David Weil, and Assistant Administrator for Policy Mary Ziegler.
As most know by now, in May 2016, the DOL issued its final rule establishing a new minimum salary threshold for the white collar exemptions (executive, administrative, and professional) under the Fair Labor Standards Act (FLSA). This new threshold of $913 per week ($47,476 annualized) more than doubles the current minimum weekly salary threshold of $455 per week ($23,660 annualized), and is scheduled to increase every three years.
The crux of the states’ claim is that the new rule will force many businesses, including state and local governments, to unfairly and substantially increase their employment costs. For state governments in particular, the rule allegedly violates the Tenth Amendment by mandating how state employees are paid. The states allege that by implementing this new rule, the federal executive branch will “wreck State budgets” and “commandeer, coerce, and subvert the States” by mandating the wages state employees are paid, what hours these employees will work, what compensation will be provided to employees working overtime, and the overall structure of payment at the State level.
In addition, the states challenge the mechanism for automatic increases in the salary threshold every three years, asserting that it fails to acknowledge Congress’s intention that the “activities” in which employees engage be the distinguishing factor between exempt and non-exempt employees, not salary levels. The states further allege that the rule is arbitrary and capricious in violation of the Administrative Procedure Act (“APA”) and failed to follow the required procedure of the APA, and thus must be declared invalid and set aside.
When changes to the overtime rule were first proposed in June of 2015, the DOL received nearly 300,000 comments from businesses, employees, and other interested parties expressing concern that the proposed changes did not take into account the varying costs of living across states, which greatly impacts compensation rates. Many business owners expressed concern that they would not be able to comply with the rule if implemented, or that it would cause businesses to close or lay-offs.
After making a few changes to the rule, the DOL issued its final rule in May of this year. Although the proposed salary threshold decreased from the $970 per week (or $50,440 annualized) in the proposed rule, the doubling of the $455 per week minimum salary to $913 per week remained a point of concern for employers. Noting this concern, Texas Attorney General, Ken Paxton, stated yesterday that the implementation of the DOL’s final overtime rule is just another example of “President Obama . . . trying to unilaterally rewrite the law,” indicating that this time the consequences may be “disastrous” for the economy.
While the states’ claims that the new rule violates the Tenth Amendment may not offer any relief to private employers or local governments, other arguments raised by the states could in theory result in the rule being blocked altogether. However, most legal observers have not put much stock in potential legal challenges to the new rules, and continue to recommend that employers assume the new rules will take effect on December 1, 2016 as scheduled. Because this lawsuit is far from certain to succeed, we likewise encourage employers to continue preparing to comply with the new rules by December 1. We will continue to follow this case for you and provide updates as new developments arise.