The US Department of Labor’s March 7, 2019 Notice of Proposed Rulemaking reset the salary requirements for the Fair Labor Standards Act’s white-collar exemptions. By now we all know the new numbers: the minimum salary threshold will increase from US$455 per week (US$23,660 annually) to US$679 per week (US$35,308 annually) for the executive, administrative, professional, outside sales and computer employee exemptions. The 2019 Proposed Rule also increases the total annual compensation required for the highly compensated employee exemption from US$100,000 to US$147,414 per year. It does not, however, modify any of the duties tests. The DOL anticipates that the 2019 Proposed Rule will affect more than one million workers nationwide.
It will be several months before we know whether the Proposed Rule will become law, and even then, additional legal challenges are possible. First comes a 60-day comment period. After the comment period, the DOL will then issue a Final Rule. Meanwhile, there is a case pending in the US Court of Appeals for the Fifth Circuit with respect to the Obama Administration’s 2016 rule with even higher salaries, a rule many employers reacted to by reclassifying employees to non-exempt and/or raising salaries. How does all this fit together and what should employers do in the interim? Uncertainty is never good for business, but that is where we are.
How does the 2019 proposed rule impact the 2016 rule?
You all no doubt remember the 2016 Proposed Rule that would have increased the minimum salary threshold to US$913 per week (US$47,476 annually). For the highly compensated employee exemption, the 2016 Proposed Rule would have increased the annual total compensation from US$100,000 to US$134,004. These salary thresholds would have automatically increased over time.
This rule was set to go into effect on December 1, 2016, but the US District Court, Eastern District of Texas granted emergency injunctive relief that blocked it in Nevada v. U.S. Department of Labor. Because the 2016 Proposed Rule changed the salary test so significantly, the Court concluded that the DOL exceeded its authority and implemented a rule that was an impermissible construction of the FLSA. In its opinion, the Court made clear that it was the increase in the salary threshold that caused it to issue the emergency injunction. The Court emphasized that the 2016 Proposed Rule made an employee’s “overtime status depend predominately on a minimum salary level,” and that “because the [2016 Proposed Rule] would exclude so many employees who perform exempt duties,” it was unlawful.
The ruling barring the new salary changes from going into effect was appealed to the US Court of Appeals for the Fifth Circuit, but the Fifth Circuit never decided the case. Instead, it granted the DOL’s request to hold the appeal in abeyance—which effectively means the appeal is paused—pending the outcome of new rulemaking, and required the DOL to make periodic reports. We now have the new rulemaking. The DOL’s new update to the Fifth Circuit is due on April 16, 2019.
The future of Nevada v. U.S. Department of Labor
What is likely to become of Nevada v. U.S. Department of Labor as a result of the 2019 Proposed Rule? We anticipate that the Fifth Circuit may ultimately find the appeal to be moot in light of the new rulemaking. This is most likely because the 2019 Proposed Rule formally proposes to “rescind” the 2016 Proposed Rule and goes to great lengths to address the concerns raised by the District Court in Nevada.
In particular, the 2019 Proposed Rule abandons the methodology used in 2016 and returns to the methodology used by the DOL in 2004, which is the last time the salary threshold was successfully changed. In a confusing move, the DOL only returned to the 2004 calculations to determine the new US$679 weekly threshold. The DOL continued to use the 2016 methodology for the highly compensated employee exemption. In fact, the 2019 Proposed Rule actually proposes a larger increase for the highly compensated employee exemption (to US$147,414) whereas the 2016 Proposed Rule only proposed an increase to US$134,004. As a result, it is unclear whether the District Court’s reasoning will still call into question the legitimacy of the 2019 Proposed Rule. It is also not clear whether a new lawsuit will be required to challenge the 2019 Proposed Rule when it is finalized, or whether the Fifth Circuit could simply send the case back to the District Court to consider a 2019 Final Rule instead of dismissing the case as moot. In short, even if the Proposed Rule becomes a final rule, its legal status will remain uncertain.
Next steps for employers and unanswered questions
What does this uncertainty do for employers? During the 60-day comment period, there is certainly no harm in examining your company’s salary levels to determine which employees might be impacted, what the cost of increasing those salaries might be, and whether it makes more sense to reclassify certain positions as non-exempt if overtime can be managed for those positions. However, it is certainly premature to start making changes now. Particularly because we know that reclassification decisions always come with an employee relations cost associated with moving exempt salaried employees to non-exempt hourly status. Likewise, if you made changes anticipating that the 2016 Rule was going to be the law, there is no need to reverse or modify those changes based on the Proposed Rule. That too would be counterproductive.
And it is never a bad time to consider auditing positions that you know may not satisfy the duties tests. A comprehensive legal review of how your employees are classified will always be beneficial, particularly when a regulatory change is on the horizon. Norton Rose Fulbright’s employment and labor team will continue to closely monitor every development in this area and provide additional updates.