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Paul Zimmerman
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21 States Sue Obama Administration Over Controversial New Overtime Rule

The fate of the new overtime regulations governing white collar employees has been thrown into doubt this week, as twenty-one states joined together to file suit in the Eastern District of Texas, alleging that the Department of Labor's new overtime regulations are an unconstitutional exercise of power. The rules are scheduled to take effect on December 1.

The Controversial New Rule

Earlier this year, the U.S. Department of Labor (DOL) published a final rule updating the regulations governing the exemption of executive, administrative, and professional employees from the minimum wage and overtime pay protections of the Fair Labor Standards Act. This rule increases the annual salary threshold that generally determines who qualifies for overtime pay under federal law. The salary threshold will be doubled to $47,476 a year from $23,660.

Since 1940, in order to qualify as an Exempt Employee, an employee must:

  • Be salaried, meaning that they are paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (“the salary basis test”);
  • Be paid at least a specific salary threshold (“the salary level test”); AND
  • Primarily perform executive, administrative, or professional duties, as provided in the Department’s regulations (“the duties test”).

The Department last updated these regulations in 2004, when it set the weekly salary level at $455 ($23,660 annually) and made other changes to the regulations.

The Final Rule focuses primarily on updating the salary and compensation levels needed for employees to qualify as Exempt Employees.  Specifically, the Final Rule does the following:

  • Sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South, which is $913 per week or $47,476 annually for a full-year worker;
  • Sets the total annual compensation requirement for highly compensated employees (“HCE”) subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally, which is $134,004; and
  • Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective tests for exemption.
  • Additionally, the Final Rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the new standard salary level.

The Final Rule makes no changes to the duties tests.

The Effective Date of the Final Rule is December 1, 2016. The initial increases to the standard salary level (from $455 to $913 per week) and HCE total annual compensation requirement (from $100,000 to $134,000 per year) will be effective on December 1.  Future automatic updates to those thresholds will occur every three years, starting on January 1, 2020.

A Partisan Battle Brews

The plaintiffs challenging the DOL’s new overtime rule did not mince words in their criticism of the regulation. Texas Attorney General issued the following statement:  “Once again, President Obama is trying to unilaterally rewrite the law,” Texas Attorney General Ken Paxton said in a statement. “And this time, it may lead to disastrous consequences for our economy. The numerous crippling federal regulations that the Obama administration has imposed on businesses in this country have been bad enough. But to pass a rule like this, all in service of a radical leftist political agenda, is inexcusable.”

The states, led by Texas and Nevada, assert that the overtime rule will force many state and local governments, as well as private businesses, to dramatically increase their employment costs, ultimately resulting in termination of services of employee layoffs. The lawsuit, filed by 21 Republican state officials, alleges that the new rule is too broad in that it is based exclusively on the salary threshold. Such a requirement, the complaint asserts, overlooks the fact that some workers in the designated salary range perform management duties that would make them ineligible for overtime. The states also contend that they will be forced to reclassify some employees as hourly and reduce their hours to avoid paying any overtime while also increasing the workload on those who remain exempt.

We will follow this lawsuit and keep you apprised of future developments.  

This blog post is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.