Lawsuits Target New Federal Overtime Rule's Automatic Salary Threshold Increase Provision

Payroll on Bloomberg Tax is built to get you to the right answer faster and more efficiently. Get all the payroll intelligence you need with Bloomberg Tax expert analysis, perspectives and...

By Chris Opfer and Ben Penn

A group of 21 states sued the Labor Department on Sept. 20 in an attempt to block implementation of the new federal overtime rule that is to take effect Dec. 1.

The states' lawsuit largely focuses on a component of the new rule ( RIN:1235-AA11) that would automatically adjust the salary threshold for exempting workers from federal overtime requirements. Business groups also are to challenge the automatic adjustment component in upcoming lawsuits.

A Fair Labor Standards Act provision exempting some workers from overtime pay requirements “does not reference automatic updating, a salary level, or the salary level test,” the states said in the lawsuit. “While simultaneously claiming authority to enact these regulations, DOL bluntly states these regulations ‘were all made without specific congressional authorization.'”

The states that sued the Labor Department are Alabama, Arizona, Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Michigan, Mississippi, Nebraska, Nevada, New Mexico, Ohio, Oklahoma, South Carolina, Texas, Utah and Wisconsin.

Effects of Labor Department's Overtime Requirements

The U.S. Chamber of Commerce, which also filed a lawsuit Sept. 20, and other opponents of the new rule said many businesses cannot afford to cover increased payroll costs and would likely trim jobs in response to implementation of the rule, which is to make 4 million workers newly eligible for overtime premiums.

Under the rule, the standard annual salary threshold for the executive, administrative and professional exemptions from the FLSA's overtime requirements is to increase to $47,476 from $23,660, and the annual salary threshold for highly compensated employees is to increase to $134,004 from $100,000.

The automatic indexing provision would adjust the salary thresholds for overtime exemption every three years starting Jan. 1, 2020. Adjustments to the standard salary threshold are to set it at the 40th percentile of salaries for full-time salaried workers in the lowest-wage U.S. Census Bureau region, while adjustments to the threshold for highly compensated employees are to set it at the 90th percentile of salaries for full-time salaried workers in the U.S.

The challenge to the automatic adjustment provision evokes a long-standing legal question: What happens when Congress tells a federal agency to do something, but does not specify how to do it?

“This is a classic kind of argument,” Fordham University law professor Aaron Saiger told Bloomberg BNA. “The question is not whether the Fair Labor Standards Act gives the Labor Department some authority. The question is whether the department has gone outside of that authority.”

The FLSA delegates to the Labor Department the power to determine which workers should be removed from overtime requirements. Critics of the new rule say automatic indexing is not what Congress had in mind when it empowered the department to update the exemption “from time to time.”

Question of Adjustments

The indexing provision of the new overtime rule is intended to prevent inflation-related erosion regarding coverage for workers so that regulators do not have to go back to the drawing board every few years.

For opponents of the rule, however, Congress’s “time to time” delegation meant lawmakers expected the Labor Department to go through notice and comment rulemaking processes each time the department wants to update details for overtime exemptions, including the applicable salary thresholds.

“The reason why the FLSA does not authorize automatic indexing of the salary threshold is because those changes to the standards for these exemptions are substantive changes,” said Paul DeCamp, who ran the Labor Department’s Wage and Hour Division under President George W. Bush. “That means that while the Department of Labor has the power under the FLSA to change the salary levels, it does not have the power because of the Administrative Procedure Act to do a one-time set-it-and-forget-it indexing.”

Critics of the rule say other statutes, such as the Social Security Act, specifically instruct agencies to use indexing in regulations interpreting the laws. Since Congress did not specifically ask agencies to use indexing for FLSA regulations, critics of the rule contend that lawmakers did not intend to give the Labor Department indexing authority.

DeCamp now is a shareholder at management firm Jackson Lewis P.C. in Washington. He said he is not currently involved in any lawsuits challenging the overtime rule.

If a judge decides to temporarily block the indexing provision, that likely would not stop the rest of the rule from being implemented, DeCamp told Bloomberg BNA.

The U.S. Chamber of Commerce and other groups, together or in separate lawsuits, are to also challenge the rule as a whole, arguing that the department violated the Administrative Procedure Act because the regulation is arbitrary and capricious. That is a tougher argument to make, but also could stand a better chance of completely halting the rule, DeCamp said.

The Labor Department already is expecting the challenges. “We are confident in the legality of all aspects of the rule,” department spokesman Jason Surbey told Bloomberg BNA.

Degree of Authority

The Labor Department tried to diffuse some of the indexing challenges when it responded to public comments as part of the final rule.

The department acknowledged that Congress did not mention automatic updates or indexing when it delegated to it the authority to implement rules regarding exemptions from FLSA overtime provisions. The department also said the FLSA does not reference a salary threshold or refer to the duties tests established by the department to determine whether workers who are paid more than the threshold should be exempt from overtime requirements.

“The department concludes that just as we have authority … to establish the salary level test, we likewise have authority to adopt a methodology through notice and comment rulemaking for automatically updating the salary level to ensure that the test remains effective,” the department said.

The department disputed the claim that Congress’s silence on indexing means lawmakers did not want it to automatically update the exemption. The department's interpretation is protected by substantial judicial deference to agency moves to “fill any gaps” Congress leaves in a statute, the department said.

The department likely is to invoke decades of precedent giving relatively wide berth to agencies in issuing regulations. That includes the Supreme Court’s decision in Chevron U.S.A. Inc. v. Natural Resources Defense Council, (467 U.S. 837, 1984), in which the justices held that judges must defer to agency interpretations of ambiguities in the laws they administer, unless those rulemakings are unreasonable.

Consequences of Updates

The original version of the rule proposed in 2015 called for annual updates to the salary thresholds, more frequent updates than the final rule's schedule of adjusting the thresholds every three years.

The legal argument is as strong today as it was when the proposal rule was released in 2015, DeCamp said.

“The biggest problem as a factual matter with what the department is doing is it ignores the fact that the distribution of workers who will be in the salary pool will change as a result of each of these updates,” DeCamp said.

The Labor Department estimates that the new salary level of $47,476 will rise to more than $51,000, based on wage growth, with the first scheduled update Jan. 1, 2020.

To DeCamp, this qualifies as a substantive change, which requires new notice and comment rulemaking processes under the Administrative Procedure Act.

Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.

Request Payroll