DOL’s new overtime rule may face legal challenges: Should employers wait and see?

“It’s déjà vu all over again.” Yogi Berra’s famous words seem apt, as the Wage and Hour Division of the U.S. Department of Labor (DOL) published a notice of proposed rulemaking (NPRM) on Sept. 8 proposing changes to the minimum salary thresholds to qualify as exempt under the Fair Labor Standards Act (FLSA) that are eerily similar to the 2016 regulations that were enjoined just days before they were slated to take effect.

The NPRM proposes a more than 50% increase to the minimum salary thresholds to be classified as exempt from overtime under the white-collar exemptions (i.e., executive, administrative and professional) and a more than 30% increase to qualify for the highly compensated employee exemption. And similar to the ill-fated 2016 regulations, the NPRM calls for “automatic” updates to the minimum salary threshold every three years.

The DOL estimates that the proposed regulations would cause 3.4 million employees to lose their exempt status under the white-collar exemptions, while 248,900 employees would no longer qualify as exempt under the highly compensated employee exemption. In the NPRM, the DOL indicates that were its proposal to take effect, it would cost employers $664 million over the first 10 years and result in annualized transfers from employers to employees of $1.3 billion. Comments on the proposed regulations are due by Nov. 7, and the DOL recently announced that the deadline would not be extended. As with the 2016 regulations, if the NPRM is adopted, legal challenges are likely.

Key provisions of the proposed regulations

The DOL’s NPRM proposes the following:

• An increase to the minimum salary threshold for the executive, administrative and professional exemptions from $684 per week ($35,568 annualized) to at least $1,059 per week ($55,068 annualized). This number is pegged to the 35th percentile of weekly earnings for full-time salaried workers in the lowest-wage census region (the south). While the DOL arrived at $55,068 by using 2022 data, updated data will be used when the final rule is issued. The DOL projects that the 35th percentile could be as high as $1,140 per week ($59,285 annualized) by the third quarter of 2023 and $1,158 per week ($60,209.00 annualized) by the first quarter of 2024.
• An increase in the minimum salary threshold for the highly compensated employee exemption from $107,432 to at least $143,988. This number is keyed to the 85th percentile of full-time salaried workers nationally. And as with the estimated salary level for the white-collar exemptions, the DOL will use updated data to set this level at the time a final regulation is issued.
• An “automatic” update of the minimum salary thresholds every three years. On a tri-annual basis, the DOL would set a new minimum salary threshold for the white-collar exemptions, using the 35th percentile of weekly earnings for full-time employees in the lowest earning census region based on data for the four most recent quarters for which data is available. The DOL likewise would increase the highly compensated employee exemption to the 85th percentile of full-time salaried workers at the time of the update. The DOL would publish the new salary levels at least 150 days before they are implemented and would have the discretion to temporarily delay automatic updates when unforeseen economic or other conditions warrant doing so.
• Unlike the 2016 regulations, the NPRM includes a severability provision which states that, “if one or more of the provisions … is held invalid or stayed pending further agency action, the remaining provisions would remain effective and operative.” Therefore, if, for example, a court issues a preliminary injunction with respect to the “automatic” updates provision only, the increase in the minimum salary thresholds would be unaffected.
• The NPRM proposed no changes to any of the duties tests to qualify as an exempt executive, administrative, or professional employee.
• The NPRM also proposed no changes to how bonuses are counted toward the minimum salary threshold for the white-collar exemptions.

Legal challenges to proposed rulemaking and beyond

Absent significant changes to the proposed regulations, legal challenges are expected when a final rule is issued. After the DOL issued a final rule in 2016 that would have raised the minimum salary thresholds from $455 per week to $913 per week, 21 states and 55 business groups sought to enjoin the DOL from doing so. That effort succeeded. In Nevada v. United States Department of Labor, No. 4:16-cv-00731 (E.D. Tex. Nov. 22, 2016), the U.S. District Court for the Eastern District of Texas granted a nationwide injunction that prevented the regulations from taking effect just days before their effective date. The district court concluded the plaintiffs’ argument (i.e., the final rule was invalid) was likely to succeed on the merits because the DOL exceeded the authority Congress delegated to it “by raising the minimum salary level such that it supplants the duties test.” The district court reasoned that the FLSA exempts employees who are executive, administrative, and professional employees, and the meaning of those terms “related to a person’s performance, conduct, or function without suggesting salary.” Although the DOL has included a salary requirement since 1940, the district court characterized previous salary requirements as “screening out the obviously nonexempt employees.” In contrast, the 2016 final rule, the district court reasoned, drastically raised the salary threshold such that it supplanted the duties tests. Of note, unlike the current NPRM, the 2016 final rule did not have a severability provision. The legal challenge followed by the change in presidential administration doomed the final rule in 2016, paving the way for a new final rule setting the minimum salary thresholds in 2019 at far lower levels ($684 per week) than the 2016 regulations ($913 per week).

One likely challenge if the final regulations advance similar salary thresholds to the NPRM is to rely on the reasoning of the U.S. District Court for the Eastern District of Texas’s 2016 opinion that was the death knell for the 2016 regulations, i.e., that the substantial increase to the minimum salary thresholds will supplant the duties requirements. Another potential legal challenge would take the 2016 argument one step further by arguing that the DOL has no authority to set salary levels at all. A federal district court in Texas recently heard such a challenge and rejected it. The U.S. District Court for the Western District of Texas in Mayfield v. U.S. Department of Labor, No. 1:22-cv-792 (W.D. Tex. Sept. 20, 2023) held that the DOL had authority to adopt a salary requirement in its 2019 final rule, deferring to the agency under the Chevron doctrine.

However, if Mayfield or a case bringing a similar challenge to the final rule reaches the U.S. Supreme Court, the challengers may find a receptive audience. One case pending before the Supreme Court this term, Loper Bright Enterprises v. Raimondo, may undermine the foundation of Mayfield when it takes up whether to overrule Chevron and with it the deference accorded to agency rulemaking. Last term in Helix Energy Solution Group v. Hewitt, 598 U.S. 39 (2023), the court addressed whether a “day rate” satisfies the salary basis requirement to qualify for any of the white-collar exemptions. Justice Brett Kavanaugh wrote in his dissenting opinion, “it is questionable whether the [DOL’s] regulations—which looks not only at an employee’s duties but also at how much an employee is paid and how an employee is paid—will survive if and when the regulations are challenged as inconsistent with the FLSA.” Litigants also may challenge the “automatic” updates, arguing that they circumvent the notice and comment rulemaking process required to amend the FLSA’s regulations.

At this point it is of course impossible to know whether any of the above legal challenges (or others) will prevent the regulations when they are issued in final form from taking effect. In the interim, employers should anticipate a possible significant salary level increase and begin the process of analyzing its impact on their organizations.

Next steps employers can take

Comments to the NPRM are due by Nov. 7, and can be submitted through this link: https://www.federalregister.gov/documents/2023/09/08/2023-19032/defining-and-delimiting-the-exemptions-for-executive-administrative-professional-outside-sales-and. Employers can submit letters or a formal comment in a text box on the website, explaining how the proposed regulations would impact their businesses. The DOL will consider the comments and then publish a final rule with an effective date that is at least 30 days after the date the DOL publishes the final rule, although it likely will be significantly longer. With the 2024 presidential election looming on the horizon, the DOL will want to publish its final rule as early in 2024 as possible.

In terms of next steps employers can begin to take in reviewing their workforces:

• For current exempt employees earning close to $60,209, should this level go into effect, employers will need to determine whether to increase salary levels to maintain exempt status or to reclassify employees. One key consideration is whether these employees are working substantially more than 40 hours per week. If not, the employer should consider reclassifying them as nonexempt. The automatic tri-annual updates should be a part of this analysis. Given those automatic updates, increasing the salary in response to the NPRM is not a permanent solution. Should this provision survive legal challenge, employers may find themselves in the same position in three years. Therefore, employers should forecast whether increasing the salary to meet the minimum threshold will be viable when the next update is due. Reclassifying the employee as nonexempt would help mitigate that uncertainty.
• For current exempt employees earning less than $60,209 whose salaries are not raised (should this level hold), employers will need to reclassify them as nonexempt. Employers should begin tracking those employees’ hours, if they are not already, to determine how much overtime the newly classified employees are likely to work and determine an hourly wage rate which takes into account those considerations.
• Consider changes in job duties that would result in reducing the hours for newly reclassified employees and increasing the hours for exempt employees consistent with their exempt status.
• If employers will reclassify a significant number of employees, they should consider how they will track the time for this newly nonexempt group of employees and whether the company will need to increase personnel in other areas like human resources or payroll.
• Assess the impact of reclassifying employees on other workplace policies. For example, the availability of remote work may change upon reclassification, and employers should determine whether changes to those policies are necessary.
• Messaging to employees regarding reclassification will be critical. Some employees may interpret a job reclassification as a demotion. Employers will want to explain that the changes are being made to comply with new government regulations.
• Consider staffing patterns to identify opportunities for efficiency, including hiring additional workers to reduce the need for overtime hours by non-exempt employees.
• Revise financial forecasting and budgeting models to account for changes in staffing and potential increases in overtime expenses.
• Although the NPRM does not impact the duties tests for the exemptions, employers certainly can, as part of the process of working to comply with the forthcoming final regulations, analyze job duties to ensure proper classifications.
• Consider and address unintended consequences of complying with the DOL regulations, including potential salary compression.

Related: New overtime rule: Biden proposes to raise the salary threshold to $55,000

Organizational change of this magnitude takes a tremendous amount of time to plan and effectuate. While the regulations remain in proposed form, employers should begin considering their potential impact.

Andrea M. Kirshenbaum is a shareholder with Littler Mendelson. Her practice focuses on providing counsel on compliance with wage-and-hour laws and defending employers in federal and state courts against litigation under the Fair Labor Standards Act (FLSA) and state laws relating to wages, pay practices and worker classifications.

Tanner McCarron is an associate with Littler Mendelson. He practices management-side employment litigation and counseling.