On November 22, 2016, the U.S. District Court for the Eastern District of Texas granted an emergency request by 21 States for a nationwide preliminary injunction enjoining the United States Department of Labor (Department) from implementing a Final Rule that increased the minimum salary threshold required for status as an exempt executive, administrative or professional employee (EAP employee). While this development may provide a reprieve for many employers nationwide, its impact on employers in New York is tempered by the New York State Department of Labor’s proposed increase in the minimum salary threshold for exempt executive and administrative employees in New York, effective December 31, 2016.
The Texas Federal Court Finds the States’ Challenge is Likely to Succeed
A minimum salary threshold has been part of the EAP white collar exemptions since they were first implemented in 1938. Most recently, in 2004, the Department established that EAP employees must be paid at least $455 per week ($23,660 annually) on a salary basis to qualify as exempt from the federal Fair Labor Standards Act’s (FLSA) minimum wage and overtime requirements. On May 23, 2016, in response to a Presidential directive to “modernize” the overtime rules pertaining to EAP employees, the Department issued a Final Rule that would require employers to pay EAP employees at least $913 per week ($47,476 annually)to maintain their exempt status, beginning on December 1, 2016. The Final Rule also established a system for automatic updates to the minimum salary threshold every three years, with the first automatic update to occur January 1, 2020. The State of Nevada, joined by 20 other States, filed suit against the Department challenging the Final Rule. On October 12, 2016, the States moved for an emergency nationwide preliminary injunction to block implementation of the Final Rule. The Plano Chamber of Commerce, along with numerous other business organizations, also challenged the Final Rule in a separate action, which was consolidated with the States’ action.
The Court found the States are likely to succeed on their claim that the increased minimum salary threshold is unlawful because it effectively created a “de facto salary-only test” that supplanted the duties portion of the exemption (i.e., an employee must perform exempt, administrative or professional duties). A copy of the Court’s decision can be found here. Looking to the plain language of the Fair Labor Standards Act (FLSA), the Court reasoned that “Congress defined the EAP exemption with regard to duties, which does not include a minimum salary level.” The Court also noted that while Section 213(a) authorizes the Department to “define and delimit” the EAP classifications and “give[s] the Department significant leeway to establish the types of duties that might qualify an employee for the exemption, nothing in the EAP exemption indicates that Congress intended the Department to define and delimit with respect to a minimum salary level.” As a result, the Department exceeded its delegated authority and ignored Congressional intent when it created a final rule that disqualifies anyone earning less than $913 per week from exempt status, regardless of their job duties. The Court also found that the States will likely succeed in proving the automatic updating mechanism is unlawful and exceeds the Department’s authority.
What Happens Now?
The Court’s injunction is preliminary and it has yet to make a final decision about whether the Final Rule is unlawful. The decision is also subject to appeal. If the injunction is lifted and/or the Final Rule is not ultimately ruled unlawful, there is a chance that the Department will take the position that the Final Rule can be enforced as effective on December 1, 2016.
However, the delay in implementation created by the injunction creates an opening for other efforts to block the Final Rule, including possible legislative or administrative action to rescind or amend the Final Rule. We will watch any developments closely and provide additional updates as the impact of the Court’s decision and other possible challenges crystalize.
In the meantime, most employers have been scrambling over the past several months to review employees’ exempt status and comply with the increased minimum salary threshold that was set to take effect December 1, 2016. Because that date falls in the middle of a typical payroll period, and due to the Thanksgiving holiday this week, many employers already implemented changes, either by increasing salaries or switching employees from exempt to non-exempt status. Trying to undo those changes may prove difficult, particularly if it means reducing the salary of employees who received raises to bring them up to the minimum salary threshold. It should be less difficult to switch back to exempt status those employees who were moved to non-exempt status merely because they did not hit the required minimum salary threshold. However, employers thinking about doing so should proceed with caution and make sure that those employees are actually performing exempt duties. Moreover, as noted above, undoing any changes now might be risky if the Final Rule ultimately survives legal challenge and the Department enforces the Final Rule as if it took effective December 1, 2016.
New York’s Proposal to Increase the Salary for Exempt Executive and Administrative Employees is Still in Play
Although employers will not have to comply with the Final Rule on December 1, 2016, employers in New York State must still keep abreast of developments at the State level. New York State has wage and hour regulations that go beyond the FLSA’s requirements. For example, until the significant increase in the FLSA minimum salaries reflected in the Final Rule, New York’s minimum salary thresholds for executive and administrative employees have long been higher than the FLSA minimum salaries. The New York State Department of Labor (NYSDOL) recently announced a proposal to increase those minimum salary thresholds, but because the changes called for in the proposal were less than would have been required under the Final Rule, the proposal did not garner much attention. However, if the New York proposal is implemented, New York’s minimum salary threshold, which is currently $675 per week, will rise even further above the current federal threshold of $455 per week.
Under the proposal, beginning on December 31, 2016, employers would be required to pay the following minimum weekly salary to New York employees who are exempt executive or administrative employees:
|
Effective Date |
Upstate New York State |
New York City Large Employers (11+ employees) |
New York City Small Employers (10 or less employees) |
Nassau, Suffolk, and Westchester County Employers |
|
December 31, 2016 |
$727.50 |
$825.00 |
$787.50 |
$750.00 |
|
December 31, 2017 |
$780.00 |
$975.00 |
$900.00 |
$825.00 |
|
December 31, 2018 |
$832.00 |
$1,125.00 |
$1,012.50 |
$900.00 |
|
December 31, 2019 |
$885.00 |
|
$1,125.00 |
$975.00 |
|
December 31, 2020 |
$937.50 |
|
|
$1,050.00 |
|
December 31, 2021 |
|
|
|
$1,125.00 |
Similar to forthcoming changes to the minimum hourly wage, which are also scheduled to take effect on December 31, 2016 (see prior update here), the minimum salary threshold will vary based on an employer’s geographic location and size. The minimum salary threshold will also increase annually to match corresponding planned increases to the minimum hourly wage. The NYSDOL is accepting public comments on the proposed changes through December 3, 2016. The proposed changes do not apply to the professional exemption, for which there is no salary requirement under New York law.
We will continue to keep you updated as this situation continues to develop. In the meantime, please reach out to any member of our labor and employment team should you have questions or wish to discuss how these developments impact your organization. If you would like our assistance, or if you have any questions about this LEGALcurrents®, please contact a member of our Labor and Employment practice group at (585) 232-6500.