By Abad Lopez, Dykema (email@example.com)
On April 2, 2018, the United States Supreme Court in Encino Motor Cars, LLC v. Navarro, Justice Thomas writing for the majority, held that car dealership “service advisors” are “salesm[e]n… primarily engaged in… servicing automobiles” and therefore are exempt from the FLSA’s overtime requirements under 29 U.S.C. § 213(b)(10)(A). Significantly, in addition to issuing a ruling that is favorable to auto dealerships, the Court also provided useful language to all employers based on its view of how FLSA overtime exemptions should be construed.
In its ruling, the Court held that the service advisors’ activity of selling services makes them salesmen in the “ordinary meaning” of the term. Even though they don’t directly service automobiles, the Court pointed to the broad range of tasks they perform and that they “are integral to the servicing process.” Although “service advisors do not spend most of their time physically repairing automobiles,” the Court noted that the same is true of partsmen. The inclusion of partsmen in the statute means that “the phrase ‘primarily engaged in… servicing automobiles’ must include some individuals who do not physically repair automobiles themselves but who are integrally involved in the servicing process.”
Relying on longstanding precedent, the Ninth Circuit Court of Appeals denied the auto dealership’s exemption for its auto service advisors under Section 213(b), stating that exemptions should be “construed narrowly.” The Supreme Court rejected this canon of construction, noting that nothing in the FLSA mandates this narrow construction and thus there is “no reason to give [the exemptions] anything other than a fair interpretation.” The Court also noted that “the FLSA has over two dozen exemptions in § 213(b) alone… Those exemptions are as much a part of the FLSA’s purpose as the overtime pay requirements.” The Court also rejected the notion that the “remedial purpose” of the FLSA was paramount to its other provisions or that it should be pursued at all costs. Rather, the FLSA’s exemptions should be construed plainly, and without favor to grant or deny any such exemption.
The Supreme Court’s pronouncement lies in stark contrast to judicial opinions from lower courts premised on the “narrow construction” of the FLSA’s exemptions while expanding the statute’s remedial purposes to its outer limits. This narrow interpretation often resulted in an unpredictable and unfair bent against employers. In Encino Motor Cars, LLC, the Supreme Court puts to rest once and for all the argument that the FLSA’s exemptions should be construed narrowly. Even further, the Court’s decision may be used to reign in the canons of construing statutes liberally or using legislative history to achieve a preordained result, versus simply relying on a fair reading of the statutory text.
The best reading of the FLSA is a fair reading, not a liberal construction in favor of employees, particularly where the sole justification for such liberal construction is based on amorphous canons or legislative history. With this case, the Supreme Court has dispensed with an oft-cited but critically flawed canon for construing the FLSA’s exemptions under § 213(b) narrowly to favor employees. In doing so, employers have been provided with a strong rebuttal to litigants seeking to apply the FLSA broadly, where the statutory text would not otherwise allow.
By Robert A. Boonin, Dykema Gossett PLLC, firstname.lastname@example.org
In 2009, shortly after the prior administration first took office, it pulled-back 17 Wage & Hour Opinion Letters that were finalized near the end of the Bush Administration. On January 5, 2018, the DOL republished all of those Opinion Letters, and by doing so, the DOL has firmly gotten back into the Opinion Letter business.
THE USE AND HISTORY OF WAGE AND HOUR OPINION LETTERS
The FLSA provides that opinions issued by the Wage and Hour Administrator, if relied upon by employers and if directly applicable to the employers’ circumstances, are absolute defenses to claims for back pay and liquidated damages for overtime violations. In other words, if the Opinion Letter applies AND was relied upon, the employer can get a “free pass” even if the DOL is later found by a court to have reached the wrong opinion. Thus, for decades, the availability and use of Opinion Letters had been widely used and served to not only limit liability, but perhaps more importantly, allowed employers to be assured that – at least in the DOL’s opinion – a pay plan being used or considered was consistent with the FLSA’s often-times nuanced provisions.
In 2009, as the Bush Administration was winding down, the Wage and Hour Administrator announced that it was publishing a number of Opinions, Opinions that had been pent-up in the process for being finalized. Almost immediately after taking office, though, the Obama administration put a hold on or withdrew many of those Opinions, and its “hold” was never released. The DOL did not issue any FLSA Opinion Letters thereafter, and in March 2010, the new Wage and Hour Administrator announced that Opinion Letters would no longer be provided. Instead, the DOL announced, it would only periodically issue Administrator Interpretations (AIs) on the FLSA, and these AIs would be more generic in form than the fact-specific Opinions previously issued.
THE OPINION LETTER CONCEPT IS RESTORED BY SECRETARY ACOSTA
Soon after taking office last year, Labor Secretary Acosta announced that he would be restoring the use of Opinion Letters. This announcement was welcomed by many in the employer, and even some in the employee, community since these letters do provide a level of certainty needed as play plans are developed, particularly pay plans that are creative or being adjusted to reflect the realities of the modern economy. On January 5, 2018, the DOL delivered on the Secretary’s promise and activated all 17 Opinions put on hold in 2009.
Among the new Opinions are:
- A clarification that deductions are permissible to salaries of a salaried/exempt employee, in that if the employee is absent for a full-day but only has a partial day of paid leave available to cover the absence, the employee can be docked for the balance of the day (FLSA2018-14);
- If job bonuses are provided for a day’s work, that bonus must be rolled into the employees’ regular rates of pay for overtime pay calculation purposes (FLSA2018-11);
- When calculating a year-end bonus as a percentage of all straight time and overtime earned over the year, the employer can exclude previous payments made that are otherwise excludable from the regular rate of pay (FLSA2018-9);
- School athletic coaches who are volunteers or are not otherwise employed by the school in an non-teaching capacity, may be treated as exempt from the Act’s pay requirements since they are effectively still exempt “teachers” under the Act (FLSA2018-6);
- On call time spent by ambulance personnel who work 30 hours per week, but who may be on call for another 40 hours, is not compensable in light of the frequency of calls and the time needed to take the calls, and that conclusion is not changed by the fact that the personnel have to appear when called within 5 minutes and in uniform, in light of the totality of the facts presented (FLSA2018-1); and
- Based on the facts present, the follow employees were viewed as being exempt from overtime pay: construction project superintendents (FLSA 2018-4), client service managers for an insurance company (FLSA2018-8), and consultants, clinical coordinators, coordinators and business development managers employed by a medical staffing company (FLSA2018-12), but helicopter pilots were found to be nonexempt (FLSA2018-3).
It is anticipated that new Opinion Letters will be published in the near future, particularly once a new Wage and Hour Administrator is confirmed by Congress.
On Friday, January 5, 2018, the U.S. Department of Labor (“DOL”) adopted a revised view of what constitutes an “intern” for private sector employers. In short, this revised guidance makes it much easier for employers to take on unpaid interns without incurring substantial risk that the DOL will later find those supposed interns actually were employees who are entitled to back pay. Going forward, the DOL will use the “primary beneficiary” test, which was adopted by several appellate courts to determine whether interns are employees under the FLSA.
Prior to the January 2018 revision, the DOL took the position that internships in the “for profit” private sector most often constitute employment for which compensation is due under the Fair Labor Standards Act. A narrow exception existed if an employer could show that:
- The internship, even though it included actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
- The internship experience is for the benefit of the intern;
- The intern does not displace regular employees, but works under close supervision of existing staff;
- The employer providing the training derives no immediate advantage from the activities of the intern; on occasion the employer’s operations actually may be impeded;
- The intern is not necessarily entitled to a job at the conclusion of the internship; and
- The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.
Under this prior set of criteria, it was the employer’s burden to prove all six criteria existed for any supposed interns. And, if the employer was unable to do so, it subjected itself to potential significant back pay liabilities. The net result of the rule was that internships became nearly impossible to find in the for-profit private sector; as such, employers simply were not willing to subject themselves to potential liability in order to have internships available.
This has changed under the new rule. Under revised Fact Sheet #71 (which governs the rules that will be applied by the DOL in examining internship programs), the “primary beneficiary test” applied by many federal courts has been expressly adopted. Under the primary beneficiary test, the question is what the “economic reality” of the internship is so that a determination can be made about who enjoys the primary benefit of an internship. In making that determination, seven factors are considered:
- The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee, and vice versa.
- The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.
- The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
- The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
- The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
- The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
- The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.
This is a more flexible test, in which no one factor is determinative. Rather, the DOL and the courts will consider the facts and circumstances of each internship independently to determine whether it is a disguised employment relationship.
Importantly, the new test should not be interpreted to give employers carte blanche to classify all students working over a summer as interns. That is clearly not the intent, and doing so will likely result in significant liabilities to the overreaching employer. However, the new test clarifies substantially the factors that an employer must consider in making the decision about how to classify an intern and makes intern status much easier for employers to achieve.
In any event, we strongly recommend that any unpaid internship program be reviewed by counsel; they are not without risk. Of course, the risk can be avoided if the “interns” are paid at least the minimum wage, and IF they work overtime, they’re paid the required overtime premium.
Prepared by Jim Hermon of Dykema, email@example.com
This past November, a federal court issued a preliminary injunction halting the implementation of the proposed changes to the FLSA’s overtime exemptions just before they were to take effect on December 1. On August 31, 2017, the same court issued another decision definitively holding that the Department of Labor exceeded its authority in issuing those regulations and thereby permanently enjoining them. In doing so, the court clarified its prior holding and gave the new Administration a clear license to go back to the drawing board and draft new regulations consistent with the underlying law.
The November preliminary injunction was in response to a case brought by 21 states. At that time, a companion case also challenging the legality of the new regulations was pending before the same court. That case was brought by a variety of business groups and chambers of commerce from across the nation, spearheaded by the U.S. Chamber of Commerce. The business groups had filed a motion for summary judgment in its case last year, but the court did not rule on that motion until last week. The states joined in that motion, and therefore the ruling applies to both cases before that court.
While granting the business groups’ motion for summary judgment, the court concluded that the Department of Labor had exceeded its authority. The primary basis for its holding is that the new salary level (i.e., $47,476)—which was more than double the salary level in the existing regulations (i.e., $23,660)—served to make the salary level the primary determiner of exempt status. This outcome violated the FLSA, the court held, because it supplanted the duties tests for executive, administrative and professional status, and Congress intended that those performing the duties of those classifications were to be exempt. The salary level in the new regulations would have converted more than 4.2 million employees from exempt to nonexempt, despite the Department’s admission that, but for the new salary level, they would otherwise be exempt. The court also held that a salary level could be legally used by the Department in defining who may be considered exempt, but not if it is so high that it essentially becomes the sole test for the exemption. Thus, the court concluded that, while a salary level could be incorporated in regulations defining the exemption, the salary level in the new regulations was excessively high.
The earlier preliminary injunction was appealed by the former Administration to the Fifth Circuit Court of Appeals. In that appeal, the new Administration asked the court to recognize that a salary level is a permissible component of the exemption tests, but still strike down the regulations because of the amount. Concurrently, the new Administration has announced its intent to revisit the use and magnitude of the salary level test, and has asked for comments with respect to how it can be better tailored going forward.
With this decision, the case before the Court of Appeals is likely moot and the future of the regulations will hinge on whether or not the new Administration will appeal that decision. In fact, the Department of Labor today asked the Court of Appeals for permission to withdraw its appeal. Further, given that the district’s court new decision aligns with the Administration’s position before the Court of Appeals, the conventional wisdom is that an appeal is unlikely. Instead, the Department will likely simply proceed with the process for revisiting the salary level question and eventually promulgate new regulations. Secretary Acosta has indicated a view that the new rate would be more reasonable and appropriate if it hovered near $33,000, but that given the request for comments recently issued by the Department, other factors may come into play for small business, non-profits, rural business, and other employers who would be hard hit by a greatly increased salary level. Another issue “on the table” is whether any new salary level should somehow be indexed to automatically increase without having to exhaust the regulatory process.
Much is still up in the air, but the decision should bring a sigh of relief to employers. It appears that the enjoined regulations are officially dead, but there are still a few procedural and regulatory issues technically in play.
Importantly, though, this case does not affect wage and hour laws at the state level. Employers in states with higher minimum wages or exemption thresholds, such as California (currently $10.50 per hour with an exempt salary threshold of $3,640 per month or $43,680 per year for employers with 26 or more employees, but scheduled to increase to $11.00 per hour with exempt thresholds of $3,813.33 per month or $45,760 per year effective January 1, 2018), must continue to follow the higher applicable rates, as well as observe the stricter “duties tests” imposed in their particular states.
For more information, contact Robert Boonin at Dykema Gossett, firstname.lastname@example.org or (313) 568-6707
On June 7, 2017, the U.S. Department of Labor withdrew the controversial Administrator Interpretations (“AIs”) issued in 2015 and 2016 regarding its guidance on “independent contractors” and “joint employers.” The announcement reads:
The Department of Labor’s 2015 and 2016 informal guidance on joint employment and independent contractors were withdrawn effective June 7, 2017. Removal of the two administrator interpretations does not change the legal responsibilities of employers under the Fair Labor Standards Act or Migrant and Seasonal Agricultural Worker Protection Act, as reflected in the Department’s long-standing regulations and case law. The Department will continue to fully and fairly enforce all laws within its jurisdiction including the Fair Labor Standards Act and the Migrant and Seasonal Agricultural Worker Protection Act.
While the post-election conventional wisdom has been that the new leaders of the DOL would review these Administrator Interpretations, no one was sure if the anticipated relief to the employer community would be via a rescission or modification, and it was also not expected for any change to occur until after a new Solicitor of Labor and Wage and Hour Administrator took office. (The President has yet to nominate anyone of either of these offices.) Thus, the timing of this announcement – while greatly welcomed by the business community – is also somewhat of a surprise. The two AIs limited the misclassification of workers through a stricter independent contractor test and also expanded the definition joint employer.
THE RESCINDED INTERPRETATIONS
Independent Contractors: The July 2015 AI regarded the issue of misclassifying employees as independent contractors. While claiming to merely summarize existing standards, many viewed the newly proclaimed standards as being based on case law that deviated from the legal mainstream and established an “economic reality” or “dependency” test which minimized the element of control held by the contracting party. The case law up until that point, while weighing economic realities, placed a premium on the extent to which a business controlled the contractor. In contrast, the AI gave the lowest weight to the control factor. The bottom line under this definition emphasizing “dependency”, according to the Wage and Hour Administrator at that time, was that few workers could be properly treated as contractors.
Joint Employers: Under the January 2016 AI, joint employment relationships under the Fair Labor Standards Act could arise under two scenarios: 1) horizontal joint employer relationships; and 2) vertical joint employer relationships. The concept regarding horizontal joint employment (i.e., essentially when related businesses share employees) did not significantly deviate from prior doctrine. Regarding vertical joint employers, however, the DOL again selectively picked among judicial precedent to cobble a newly articulated standard, dramatically altering the doctrine from most courts’ application, , this time favoring emphasis on the “control” factor, e.g., the control a prime contractor may assert over subcontractors, a franchisor may assert over franchisees, and a business may assert over employees supplied by staffing companies. In essence, the AI made it easier for DOL to deem employers doing business together to be joint employers, and thereby make it easier to hold one of the “joint employers” liable for the alleged wrongs solely made by the other “joint employer.”
THE SIGNIFICANCE OF THE RESCISSIONS
After these AIs were published, only a handful of courts had adopted them as being the proper construction of the law. That has not stopped the plaintiffs’ bar from trying to leverage the AIs as support for their cases, nor has it stopped the DOL from applying them in the course of its audits and investigations.
With the rescission of these AIs, the common law as existed prior to 2015 on these issues is again clearly the law of the land. These AIs will no longer serve as a basis for finding liability, and critically, they will not drive the DOL in its investigations going forward. Thus, their rescission signifies is a return to the fairly stable and well established doctrines of the past, which should be welcomed by the business community, although it is likely that the plaintiffs’ bar will still use the arguments contained in the AIs. .
The remaining question is whether this also serves as “writing on the wall” with respect to how the EEOC and the NLRB will address these issues, because under their current composition, they have been heading in the direction now rejected by the DOL. This may also be a sign that other initiatives of the former administration may be rolled-back by the new DOL leadership, but some of those actions will likely await until the other leadership positions within the DOL are filled. For instance, it is anticipated that the new administration will reverse course by no longer issuing formal “Wage and Hour Administrator Opinion Letters,” as well as cease from engaging in the relatively new practice of routinely assessing liquidated damages when resolving pre-suit investigations..
In sum, this withdrawal is a good sign that some of the initiatives of the prior administration which appear hostile to employers may be rolled-back, in part or in whole. However, many of those initiatives, depending on the agency, are still – at least according to those agencies – alive and well. Even if the administration softens the government’s views on these issues, the arguments underlying the AIs and related positions of other agencies will continue to be made by plaintiffs’ counsel in the courts, and these issues will – in the end – be resolved in the courts. Consequently, there is nothing in today’s development which should dramatically alter any employer’s operations in the immediate future.
Earlier this week, the U.S. House of Representatives passed, by a 229-197 margin, passed the Working Families Flexibility Act (HR 1180). The Act, if passed by the Senate and signed by the President, will introduce the concept of “compensatory time” (a/k/a “comp-time”) to the private sector workplace. Under the Fair Labor Standards Act, comp-time has existed in the public sector for many decades, but absent the passage of this Act, it is not permissible in the private sector.
The Comp-Time Concept
The concept of “comp-time” is essentially a way for employees to earn time off with pay in lieu of being paid time and one-half their regular hourly rates for hours worked over 40 during a workweek. This time off is earned at the rate of one and one-half hours for each hour of overtime worked. In the public sector, the FLSA allows employees to accrue 240 hours of comp-time (or 480 hours for public safety employees), to be used or paid per specific federal regulations. The system envisioned by this Act for the private sector is similar to its public sector counterpart, but different in some significant ways. These differences if they survive the passage of the bill may lessen the attractiveness of comp-time programs for private sector employers.
The Comp-Time Structure under the Working Families Flexibility Act
Under the Act as passed by the House, private sector employees could accrue up to 160 hours of comp-time.
- Only employees who have worked at least 1,000 hours during the 12-months preceding the beginning of the comp-time arrangement will be eligible to participate in a comp-time arrangement.
- Participation in a comp-time arrangement must be voluntary (i.e., the employer may not directly or indirectly intimidate, threaten or coerce employees to work under the comp-time arrangement) and initiated only pursuant a collective bargaining agreement, written agreement with the employee or other verifiable record maintained by the employer.
- Any accrued comp-time not used within a designated year must be cashed-out to the employee within 31 days after the year-end at the rate the employee is earning at the time of the payment or when the hours were earned, whichever is higher.
- During the year, the employee also may cash-out any accrued time, at the employee’s discretion.
- During the year, the employee must be allowed to use the comp-time accrued as requested, unless the time-off would unduly disrupt the employer’s operations.
- The employee may also opt-out of the comp-time arrangement at any time by giving the employer written notice. The employer may terminate the comp-time arrangement only by giving the employee 30 days’ prior written notice.
Good News or Bad News?
So is the good for business? It depends. Over the years – beginning in the Clinton era – similar bills have been introduced by both parties in Congress. The premise of the bills has been that allowing employees to earn and use comp-time may be more desirable than earning overtime pay, since the quid pro quo for losing some time with one’s family would be earning the ability to take off even more time at a later date, with pay, to be with one’s family.
To those against the bill, there’s a fear that employees will be coerced to accept comp-time as a condition for working overtime, or that the payment of earned overtime pay will be unfairly deferred. These fears do not appear to be very realistic given the structure of the Act.
Due to the employee’s right to cash-out accrued time at any time and rescind the comp-time arrangement, the advantages of employees working overtime for comp-time in lieu of being paid overtime pay are less clear for employers. Employers like comp-time because they can avoid the out-of-pocket cost of overtime while allowing employees to take off more time during slower times of the year. Under the Act, while these advantages still exist, they can readily lost based on the employee’s whim to cash-out their time and terminated the relationship. Also, by forcing employers to cash-out accrued time not used by the year-end, much of financial savings will be lost to employers while the employees will also lose their ability to bank time for use at later time.
These disadvantages do not exist in the public sector, and it’s unclear as to why the model for the private sector needs to differ than that used in the public sector. Nonetheless, this is the course currently being taken by Congress.
Prospects for Passage?
While the President has endorsed the bill as passed by the House, its future in the Senate is unclear. If the bill moves through committee and to the floor, it is likely that some changes will be made to gather the 60 vote margin needed to avoid a filibuster. If this happens, then what will be shaped in Conference Committee is even more unclear. Time will tell.
Impact on Other Comp-Time Plans
Employers should realize, though, that the concept only applies to overtime worked by non-exempt employees. Under the FLSA, the Act would not apply to permissible comp-time arrangements which may be in place with respect to hours worked beyond a normal workweek of 35 or 37.5 hours, but less than 40, for example, nor does it impact comp-time arrangements in place with respect to exempt employees. Further, as currently drafted, the Act would not apply to public sector employers in any respect.
Late Tuesday afternoon, the United States District Court for the Eastern District of Texas granted a motion brought on behalf of 21 states and supported by business groups led by the United States Chamber of Commerce to preliminarily enjoin the new overtime exemption regulations set to go into effect on December 1, 2016. Those new regulations were announced in May by the United States Department of Labor (“DOL”) and, if they had gone into effect, would have increased the minimum salary threshold for most executive, administrative and professional employees from $455 per week (or $23,660 per year) to $913 per week (or $47,476 per year). The new rules would have jeopardized the exempt status of 4.6 million employees.
The Elements for Preliminary Relief Were Satisfied by the States
At the outset, the court had to determine if the states will “likely succeed on the merits” as the case is further litigated, and if a permanent injunction is on the horizon. The states’ case was premised on both constitutional and statutory grounds. The court concluded that while the states’ constitutional claims were unlikely to succeed, their statutory arguments appeared strong and likely to succeed.
The court noted that the Fair Labor Standards Act (“FLSA”) provides that “‘any employee employed in a bona fide executive, administrative, or professional capacity… as such terms are defined and delimited from time to time by regulations of the Secretary, shall be exempt from minimum wage and overtime requirements.” According to the court, the issue boiled down to what Congress meant by “executive, administrative and professional.” The court concluded that Congress’ focus when the FLSA was enacted was on what these employees actually do, i.e., what are their duties, which, the court concluded, “does not include a minimum salary level.” That is, while the law generally grants administrative agencies great deference as they interpret statutes, “nothing… indicates that Congress intended the Department to define and delimit a salary level.”
Consequently, the court held that the DOL exceeded its authority by imposing a salary level requirement in the tests for these white collar exemptions. Further, the court stated: “Congress did not intend salary to categorically exclude an employee with [exempt] duties from the exemption,” but such an outcome, the court stressed, would happen under the new regulations. Indeed, this outcome was expressly admitted to by the DOL in the preamble to the new regulations, i.e., that the significant salary level increase would, in and of itself, make otherwise exempt employees non-exempt.
The court also held that absent an injunction, the states would be irreparably harmed. That harm would not only include the cost of paying higher salaries, but it would also entail the cost spent on compliance and the redirection of resources from other critical services of the state governments.
Finally, the court found that the public interest would be best served by it issuing an injunction. On this point, the court noted that more time would be needed for it to make a final ruling on the case, and that by issuing an injunction, the only harm to the DOL would be a delay in the implementation of the new regulation. Thus, the court concluded that preserving the status quo while the case continues on the merits is appropriate.
The Injunction’s Scope Is National
In light of the above, the court determined that an injunction was appropriate. The remaining issue regarded its scope. The DOL argued that it should only apply to those states that participated in the case, and established the potential of irreparable harm. The states argued that the injunction should apply nationwide. After noting that injunctions are dictated by the nature of the violation at issue and not its geographical scope, the court agreed with the states and applied its injunction nationwide.
Consequently, the court granted the motion of the preliminary injunction and enjoined the DOL from implementing and enforcing the new salary level regulations on December 1, 2016.
At this time, the new regulations are essentially on hold, subject to further litigation. The current regulations are not enjoined in the meantime. Those may later become an issue as the litigation proceeds, but for now, employers must continue to comply with the regulations currently in effect. Employers operating in states with their own laws and regulations must continue to comply with their states’ laws; nothing in Tuesday’s injunction affects state laws.
To be sure, many employers have already made or announced changes to conform to the regulations set to go into effect in just over one week. Those employers may consider cancelling those changes or retaining some of them. How to proceed will depend on the circumstances and each employer’s assessment of the likelihood that the injunction will become permanent. Another unknown factor is the stance the Trump Administration will take on this matter. The incoming administration could continue to fight for the new DOL regulations, or could simply let the injunction stand so that it can chart its own path in 2017. Time will tell.
Over the course of the last year, the U.S. Department of Labor promulgated two controversial regulations triggering court challenges. One rule – known as the “Persuader Rule” – was set to require employer consultants and lawyers to file disclosure reports of any union avoidance activities they engage in, even if that activity was purely advisory in nature and did not involve direct contact with employees. The other rule regards the changes to the overtime exemption regulations, which are set to increase the salary threshold for exempt status from $455 per week to $913 per week, and then to automatically adjust that threshold every three years.
THE PERSUADER RULE
This past spring a Texas court issued a preliminary injunction on the eve of “persuader” rules’ effective date. If not enjoined, the new persuader rules would have substantially broadened the definition of “persuader” activity and required greater disclosure by law firms regarding their relationships with their clients. Under the current rules, lawyers may give advice to employers regarding union avoidance issues and, so long as they don’t meet with employees directly, their work is not disclosable. The new rules would have made the mere giving of advice reportable. This week, the court made the preliminary injunction enjoining the implementation of the new rules permanent. The only option for the DOL at this point is for it to appeal that ruling to the Court of Appeals. Given the outcome of last week’s election, even if it does appeal the case, the conventional wisdom is that the Trump Administration will abandon the rule and the appeal.
THE STATUS OF THE OVERTIME REGULATIONS
The new FLSA exemption regulations are set to go into effect on December 1, 2016. A few months ago, two lawsuits were filed in another Texas federal court, one by 21 state attorneys general, and the other by a coalition of business groups spearheaded by the U.S. Chamber of Commerce (of which Dykema is a member and serves on its Labor and Employment Committee). The claims in the cases are not identical, but they do overlap and basically contain two themes.
One theme is that the dramatic increase to the salary level jeopardizes the exempt status of 4.6 million workers, employees on November 30 considered to be exempt, but on December 1 would no longer be exempt despite their duties remaining the same. The magnitude of this change is unprecedented and is claimed to run afoul of the statute making these employees exempt based on their duties and not their salaries.
The second theme regards the triennial indexing of the salary level threshold. Both lawsuits assert that the DOL cannot create automatic adjustments to the regulations because the FLSA states that the DOL is only empowered to issue regulations on this matter “from time to time.” The automatic indexing, the plaintiffs claim, serves to change the rules without the “notice and comments” required before administrative agencies may change a rule.
On Wednesday, November 16, 2016, the court heard arguments on the states’ motion for an injunction to stop the December 1 implementation of the new regulations. During the arguments, the court stressed that it would not base its decision on the prospects of the incoming Trump Administration’s disfavoring the new regulations. Rather, the court said it would limit its review to the merits of the new regulations as they currently stand. In that regard, though, the court’s exchanges with counsel from both sides revealed some skepticism on the court’s part, mostly pertaining to the unprecedented loss of exempt status by so many employees and whether the DOL has the right to preclude exempt status as to employees who clearly meet the duties tests for their exemptions. That said, the DOL strongly argued that its right to set a salary level test has been unchallenged in the courts or by Congress for 70 years, and that defining the exemption as it has done was therefore well within its authority.
The court concluded the hearing by stating that it will issue its decision by November 22, 2016. The conventional wisdom is still that there is a high likelihood that the regulations will not be enjoined. Further, if enjoined, the injunction may only apply to state (and local) governments. More importantly, given the perceived skepticism of the court (which may be encouraging to employers), employers should not “take their foot of the pedal” towards complying with the new regulations, but instead, should continue to act with the assumption that the regulations will go into effect on December 1.
Should the court deny the injunction, though, on November 28th the court will hear arguments on the pending motion for summary judgment brought by the business groups. The prospects of success by the business groups on that motion may be better assessed after reading the court’s decision on the injunction.
Dykema and other WHDI firms will continue to monitor these cases and related developments.
On March 14th, the Department of Labor sent its final draft of the new regulations governing the white collar exemptions to overtime pay to the Office of Management and Budget. The OMB’s review is the final step required for a regulation to be published and implemented. Consequently, though the details are still “top secret,” the regulations’ release is more imminent. The OMB’s review may take as long as 90 days, but the review period typically lasts between 30 to 60 days, and sometimes even less.
Once released, the regulations will likely go into effect 60 days thereafter. Some pundits believe that the DOL is targeting Labor Day for an effective date, in which case, they will be published in final form before July 4th. In order for the Administration to foreclose a rare but possible congressional override vis-à-vis the Congressional Review Act, they must be published by early July. Though no one can accurately predict when they will actually be rolled out, based on this latest development it appears that they could be rolled-out as early as late April through early July.
The anticipated impact these regulations will have on employers will be widespread. The DOL appears primed to double the salary threshold for being exempt from overtime, and it may also redefine the types of duties employees may perform to qualify for the exemption. For details, click here. Employers may have to redesign their pay structures and reclassify employees from being exempt, to non-exempt.
Bottom line, employers should plan now to avoid being caught “flat-footed” by waiting and then only having 60 days to react. Experienced counsel should be consulted to weigh options and to make sure all bases are covered.
For months, crystal balls have been working on overdrive trying to predict when the Department of Labor will roll-out the final version of the new white collar overtime pay exemption regulations and what will be in those regulations. While there is no way to accurately make these predictions, there have been some official comments a recently made about what could be expected, and it’s also not too late for employers to prepare for the new regulations even though the details are still uncertain.
First, as to when – the Secretary of Labor is on record saying that “late Spring” is the goal. During a meeting of the American Bar Association’s Federal Labor Standards Legislation Committee mid-winter meeting held this week, Patricia Smith, the Department of Labor’s Solicitor of Labor, suggested that if one is loose as to what constitutes “late Spring,” a realistic roll-out could be made “around late June or early July.”
What is a “roll-out,” though, is subject to some interpretation and a few procedural steps. First, before the final regulations are published, they must be reviewed by the Office of Regulatory Review. The public will know when the DOL submits them to the ORR. The ORR will then undertake its review, which usually takes about 30 days, and in the process, it may make final edits or even substantive changes. During this period, interest groups will aggressively lobby the White House to urge that certain items be included or excluded in the rules they’ve yet to see. If the early July roll-out is a good prediction, we should know that it’s before the ORR by late May or early June. In any event, at that same ABA meeting, the Solicitor of Labor told the audience that the “final rule will not be identical to the proposed rule [of last July].”
Second, after the final regulations are rolled out, i.e., made public, there will have to be some time allowed before they become effective. The conventional wisdom is that the window for these rules will be 60 days. Longer periods have occurred as to some new regulations in the past, and employers are urging for more time to be allowed in this instance. Given the political context, however, more time is not likely. Specifically, new regulations are always vulnerable to congressional overrides vis-a-vis the Congressional Review Act. Under the CRA, Congress has a 90-day period during which it may trump a regulation, subject to presidential signature or veto overrides. Even though such congressional action has been rarely undertaken, let alone successful, to insulate against such a tactic needing presidential action after a new administration takes office in January, the Solicitor implied that the DOL will make sure that this period will close before the end of the year.
As proposed, the regulations would increase the minimum salary level required for salaried employees to be exempt, if they also satisfy one of the “duties tests,” from $455 per week (or $23,660 per year) to $970 per week (or $50,440 per year). In addition, that salary level amount is proposed to annually adjust, but whether it will be indexed to the CPI or some other factor won’t be known until the regulations are finalized.
Further, while the proposed regulations do not include changes to the “duties tests” for exempt status, when it published the proposed regulations the DOL asked for comments on a few ways the duties tests also could be changed. For instance, the DOL invited comments as to whether the “California rule” should be adopted and applied to exempt employees, and thereby require them to solely perform their exempt duties for more than 50 percent of their workweeks, as opposed to the current rule that their exempt duties merely constitute their primary duties even if performed simultaneously with non-exempt duties. On this point, the Solicitor of Labor said that some sort of change to the duties test, whether it be the adoption of the California rule or some other test, should not be ruled out as a potential outcome to the rulemaking process. If this actually occurs, an uproar will likely occur, but the DOL is confident that its legal footing to do so is sound.
WHAT TO DO NOW
Employers should not take a “wait and see attitude.” Instead, they should engage in some serious planning in anticipation of the new rules. For instance:
- Positions should be reviewed to identify which employees or positions are vulnerable to being reclassified as non-exempt due to the new standards;
- Options to increase salaries to retain their exempt status should be weighed;
- If salaries are not to be increased, employers should consider the various ways as to how wages will be set and if schedules can or will be modified, to mitigate against the exposure to paying overtime premiums;
- Communication plans should be developed to explain to employees why they are losing their exempt status and how to address the potential morale problems these changes may cause;
- Plans for training employees being reclassified will need to be developed to make sure these former exempt employees will properly track their work time, not engage in pre- or post-shift work without authorization, not work during lunch, not use their smart phones while not scheduled to work, properly track their travel time, etc.;
- Decisions will have to be made regarding whether employees who lose their exempt status will be impacted in terms of bonus plans, paid time off, and other benefits;
- If employees impacted by the new regulations are covered by collective bargaining agreements are covered by collective bargaining agreements, strategies for either increasing their salaries to retain their exempt status, or converting them to non-exempt, may require negotiations;
- Supervisors will have to be trained as to how to manage the schedules and timekeeping obligations of these reclassified employees; and
- Plans for dealing with budgeting issues as triggered by the new rules, for not only the immediate roll-out, but also future years due to anticipated annual indexing, can be undertaken.
Waiting until the new regulations are finalized may not leave enough time to implement new structures and procedures during the short period anticipated before the regulations become finalized. The regulations, when finalized, could have significant impact on many employers and employees, and the more preparation done now, the better employers will be able to respond. Options exist with respect to many of the areas discussed above, and experienced wage and counsel should be consulted to assist in this planning process.