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By Joy Waltemath andPamela Wolf, J.D. — Nevada, joined by 20 other states, has filed a lawsuit in Texas—undoubtedly perceived as friendly after the success of the recent litigation over immigration reform—challenging Department of Labor’s final overtime rules under the Tenth Amendment of the U.S. Constitution and the Administrative Procedure Act. Nevada Attorney General Adam Paul Laxalt led the coalition of states in filing the suit. In addition to arguments that the final rule contradicts the statutory text of the exemption, as well as Congressional intent, the complaint raises the specter of the federal executive depleting state budgets in an effort to impose its policy will on the states.
And, the DOL is facing a second lawsuit challenging the lawfulness of its final overtime rules. Filed the same day as the complaint filed by 21 states, a second suit disputes the validity of the final rule under the Administrative Procedure act in a three-count complaint filed by the U.S. Chamber of Commerce, leading a broad coalition including the Texas Association of Business, National Automobile Dealers Association, the National Association of Manufacturers, National Association of Wholesaler Distributors, National Federation of Independent Business, National Retail Federation, and more than 50 other national and Texas business groups. The suit filed by the states raises similar APA challenges as well as Tenth Amendment questions.
The final overtime rules
Salary floor raised. The final overtime rules on the FLSA exemption for executive, administrative, professional, outside sales, and computer employees—the so-called “white collar” or “EAP” overtime exemption—made significant changes to the current rules. The regulation raises the floor below which overtime must be paid from $455 to $913 a week, or stated annually, from $23,660 to $47,476, as projected for 2016.
Side-stepping the duties test. Instead of analyzing and permitting for notice and comment about the duties that employees actually perform in our modern economy, the complaint on behalf of the states alleges, the Labor Department “simply doubled the current ‘salary basis test’ that must be satisfied before an EAP employee is ineligible for overtime, and rendered virtually irrelevant any inquiry into whether an employee is actually working in an executive, administrative, or professional capacity.” The plaintiffs criticize the DOL’s belief that salary level, not the type of work actually performed, ‘is the best single test of exempt status for white collar employees.”’
Accordingly, under the guise of updating FLSA-related regulations, the Labor Department “disregarded the actual requirements of the statute and imposed a much-increased minimum salary threshold that applies without regard to whether an employee is actually performing ‘bona fide executive, administrative, or professional’ duties,” according to the complaint.
Proposed rule sought stakeholder input. When the DOL issued its proposed regulations, it sought input on the following questions for consideration in the final version of the regulations.
What, if any, changes should be made to the duties tests?
Should employees be required to spend a minimum amount of time performing work that is their primary duty in order to qualify for exemption? If so, what should that minimum amount be?
Should the Department look to the State of California’s law (requiring that 50 percent of an employee’s time be spent exclusively on work that is the employee’s primary duty) as a model? Is some other threshold that is less than 50 percent of an employee’s time worked a better indicator of the realities of the workplace today?
Does the single standard duties test for each exemption category appropriately distinguish between exempt and nonexempt employees? Should the Department reconsider our decision to eliminate the long/short duties tests structure?
Is the concurrent duties regulation for executive employees (allowing the performance of both exempt and nonexempt duties concurrently) working appropriately or does it need to be modified to avoid sweeping nonexempt employees into the exemption? Alternatively, should there be a limitation on the amount of nonexempt work? To what extent are exempt lower-level executive employees performing nonexempt work?
The DOL said that it was also contemplating the inclusion of examples of additional occupations in the regulations in order to provide further guidance in administering the white-collar exemption provisions, seeking comments on what specific additional examples of nonexempt and exempt occupations would be most helpful to include.
The Department also sought feedback on whether employers should be able to factor in nondiscretionary bonuses (like productivity or profit-sharing bonuses) in calculating the higher salary threshold.
Final rule leaves other tests untouched. However, the final overtime rules did not alter any of the existing job duty requirements to qualify for exemption. The DOL said that it anticipated that the standard salary level set in the final rule, along with the automatic updating, will work effectively with the duties test to distinguish between overtime-eligible workers and those who may be exempt. Because of the change to the salary level, the number of workers for whom employers must apply the duties test to determine exempt status is reduced, thereby simplifying the exemption, according to the Labor Department. Both the standard duties test and the highly compensated employees duties test remained unchanged.
Contrary to statutory text and Congressional intention. According to the states that are challenging the final overtime rules, the DOL’s use of, and emphasis on, the salary test in the final rule is contrary to the statutory text for the exemption at 29 U.S.C. 213(a)(1), Congressional intent, and common sense. “One would think—as the statute indicates—that actually performing white collar duties (i.e. being ‘employed in a [white collar] capacity’) would be the best indicator of white collar exempt status,” the complaint asserts. “Instead, DOL relegates the type of work actually performed to a secondary consideration while dangerously using the ‘salary basis test,’ unencumbered by limiting principles, as the exclusive test for determining overtime eligibility for EAP employees.”
Automatic indexing ‘inappropriate.’ The plaintiffs also challenge the automatic indexing mechanism in the final overtime rules, which they allege the DOL uses “to ratchet-up the salary level every three years without regard for current economic conditions or the effect on public and private resources.” The indexing purportedly both “evades the statutory command to delimit the exception from ‘time to time’ and the notice and comment requirements of APA,” as well as ignoring the Labor Department’s own “prior admissions that ‘nothing in the legislative or regulatory history … would support indexing or automatic increases …. The Department believes that adopting such approaches in this rulemaking is both contrary to congressional intent and inappropriate’”—a statement the DOL made in on April 23, 2004.
Deliberately exhausting state budgets to impose federal policy? The complaint in addition contends that the final rule exceeds Constitutional authorization because under it, “States must pay overtime to State employees that are performing executive, administrative, or professional functions if the State employees earn a salary less than an amount determined by the Executive Branch of the Federal Government. And there is apparently no ceiling over which DOL cannot set the salary level. The threat to the States’ budgets and, consequently, the system of federalism, is palpable.” Here, “by committing an ever-increasing amount of State funds to paying State employee salaries or overtime,” the federal executive “can unilaterally deplete State resources, forcing the States to adopt or acquiesce to federal policies, instead of implementing State policies and priorities.”
The plaintiffs point to the possibility that under these circumstances, the federal executive “could deliberately exhaust State budgets simply through the enforcement of the overtime rule.” Through the final rule, they say, “by forcing many State and local governments to shift resources from other important priorities to increased payroll for certain employees, will effectively impose the Federal Executive’s policy wishes on State and local governments.” The Constitution, according to the plaintiffs, “is designed to prohibit the Federal Executive’s ability to dragoon and, ultimately, reduce the States to mere vassals of federal prerogative.”
Relief sought. The challenging states are asking the Texas court to enter declaratory judgment that the final overtime rules and regulations are substantively unlawful under the Constitution; are “in excess of statutory jurisdiction, authority, or limitations, or short of statutory right” under the APA; must be set aside as actions taken “without observance of procedure required by law” under the APA; are arbitrary and capricious under the APA; and are unlawful as applied to the states. The states are also seeking temporary or preliminary relief enjoining the new overtime rules and regulations from having any legal effect, and a final, permanent injunction preventing the their implementation, application, or enforcement.
“The Department of Labor’s new overtime rule is the latest in a series of unlawful, overreaching and unilateral actions taken by President Obama’s administration,” Laxalt said in a statement. “Longstanding federal law requires an overtime exemption for ‘bona fide executive, administrative, or professional’ employees. Ignoring this federal law, the Department of Labor by executive fiat is forcing State, local and private employers to pay overtime to any employee who earns under a certain amount, regardless of whether that employee is actually performing ‘executive, administrative, or professional’ duties.”
Laxalt continued, “Worse, this unlawful rule will automatically increase the salary cutoff every three years, ensuring that its pernicious effects last long after this President leaves office in a few months. This rule, pushed by distant bureaucrats in DC, tramples on state and local government budgets, forcing states to shift money from other important programs to balance their budgets, including programs intended to protect the very families that purportedly benefit from such federal overreach.”
Other states joining the litigation against the final overtime rules inhclude Texas, Alabama, Arizona, Arkansas, Georgia, Indiana, Kansas, Louisiana, Nebraska, Ohio, Oklahoma, South Carolina, Utah, Wisconsin, Kentucky, Iowa, Maine, New Mexico, Mississippi, and Michigan.
Business coalition suit
DOL exceeded its authority under FLSA. The business coalition asserts that the final overtime rules, slated to be effective December 1, exceeds the Labor Department’s authority under the FLSA and that it is also arbitrary, capricious, and contrary to procedures required by law. The rule will impair the plaintiffs’ rights to treat as exempt from overtime millions of previously exempt executive, administrative, professional, and computer employees, causing economic harm to both the employers and many of the employees who will be subject to the new overtime requirements, according to the complaint.
Drastic, unjustified change. The final rule “drastically alters” the minimum salary requirements for the exemption, increasing the minimum by 100 percent, which imposes “new overtime payment requirements on businesses of all sizes and employers that employ millions of individuals who have historically been considered to be exempt from overtime,” the plaintiffs allege. The final rule “defies the mandate of Congress to exempt executive, administrative, professional, and computer employees from the overtime requirements of the FLSA,” and raises “the minimum salary threshold so high that the new salary threshold is no longer a plausible proxy for the categories exempted by Congress.” That means that “the exemption is effectively lost for entire categories of salaried executive, administrative, professional, and computer employees whose job duties qualify them to be treated as exempt, in a manner that is inconsistent with and departs from more than 75 years of congressionally approved regulation by the Department,” according to the business coalition. And, urges the complaint, the DOL’s justifications for the new minimum salary purportedly are not the result of a permissible construction of statutory terms and are based on reasoning that is arbitrary, capricious, and otherwise contrary to law.
Salary basis test amendment meaningless. The complaint also asserts that the DOL implicitly acknowledged that the new salary threshold would otherwise exclude many employees that Congress intended to be treated as exempt executive, administrative, professional, or computer employees when the department amended the salary basis test, for the first time, to permit employers to count nondiscretionary bonuses, incentives, and commissions toward up to 10 percent of the minimum salary level for exemption. But this provision, according to the business coalition, is so restricted by the DOL as to be rendered meaningless to the vast majority of employers. Why? Because the final rule arbitrarily excludes nondiscretionary bonuses, incentives and commissions paid less frequently than quarterly, and also arbitrarily excludes other types of compensation, such as discretionary bonuses, profit-sharing, stock options, employer-funded retirement benefits, and deferred compensation.
Unprecedented ‘escalator’ provision. The plaintiffs contend that the final rule in addition violates the FLSA and exceeds the DOL’s regulatory authority by establishing what they called “an unprecedented ‘escalator’ provision” that they say will dramatically increase the minimum salary over time. “This provision not only departs from the terms of the FLSA, it does so without additional notice and comment required by the APA,” the complaint states, adding that the DOL’s justifications for “this departure from three-quarters of a century of administrative practice” are arbitrary, capricious, and otherwise contrary to law.
Harm to employers and employees. The new overtime rules will injure employer members of the plaintiff associations, as well as their previously exempt employees across many industries, job categories, and geographic areas, the complaint alleges. “The costs of compliance will force many smaller employers and non-profits operating on fixed budgets to cut critical programming, staffing, and services to the public. Many employers will lose the ability to effectively and flexibly manage their workforces upon losing the exemption for frontline executives, administrators, and professionals. Millions of employees across the country will have to be reclassified from salaried to hourly workers, resulting in restrictions on their work hours that will deny them opportunities for advancement and hinder performance of their jobs—to the detriment of their employers, their customers, and their own careers.”
The DOL’s failure to provide a phase-in period for what the business coalition called “the radical increase in the minimum salary level required for exemption” under the final rule, and the inclusion of an “unprecedented escalator provision,” exacerbates the significant impact that the rule will have on both small and large businesses that will be harmful to the economy as a whole, according to the complaint. For these reasons, the final rule should be vacated to protect the rights of the plaintiffs and their members and employees, as well as the interests of the public.
Relief sought. Among other things, the business coalition is asking the court to vacate and set aside the final rule, as well as to declare that the rule was promulgated by the DOL (and Secretary Thomas Perez and Wage and Hour Administrator David Weil) in excess of statutory jurisdiction, authority, or limitations under 5 U.S.C. Sec. 706(2)(C); is arbitrary, capricious, or otherwise contrary to law within the meaning of 5 U.S.C. Sec. 706(2)(A); and was promulgated without observance of procedures required by law within the meaning of 5 U.S.C. Sec. 706(2)(D). The plaintiffs are also asking the court to enjoin implementation of the final rule and postpone its effective date and to maintain the status quo pending the court’s review of this case.
“The DOL went too far in the new overtime regulation,” Randy Johnson, senior vice president of Labor, Immigration, and Employee Benefits for the U.S. Chamber, said in a statement. “We have heard from our members, small businesses, nonprofits, and other employers that the salary threshold is going to result in significant new labor costs and cause many disruptions in how work gets done. Furthermore, the automatic escalator provision means that employers will have to go through their reclassification analysis every three years. In combination, the new overtime rule will result in salaried professional employees being converted to hourly wages, and it will reduce workplace flexibility, remote electronic access to work, and opportunities for career advancement.”
Like the lawsuit filed by the states, the plaintiffs Plano Chamber of Commerce v. Perez filed their complaint in the Eastern District of Texas, Sherman Division; the case is No. 4:16-cv-00732,
Secretary of Labor Thomas Perez released this response to the suits challenging the final overtime rules: “We are confident in the legality of all aspects of our final overtime rule. It is the result of a comprehensive, inclusive rule-making process. Despite the sound legal and policy footing on which the rule is constructed, the same interests that have stood in the way of middle-class Americans getting paid when they work extra are continuing their obstructionist tactics. Partisan lawsuits filed today by 21 states and the U.S. Chamber of Commerce seek to prevent the Obama administration from making sure a long day’s work is rewarded with fair pay. The overtime rule is designed to restore the intent of the Fair Labor Standards Act, the crown jewel of worker protections in the United States. The crown jewel has lost its luster over the years: in 1975, 62 percent of full time salaried workers had overtime protections based on their pay; today, just 7 percent have those protections–meaning that too few people are getting the overtime that the Fair Labor Standards Act intended. I look forward to vigorously defending our efforts to give more hardworking people a meaningful chance to get by.”