Overtime Lawsuit to Target Automatic Salary Threshold Increases

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By Chris Opfer and Ben Penn

Sept. 6 — Business groups challenging the Labor Department’s overtime rule in court are likely to focus on a piece of the regulation that would automatically adjust the salary under which workers are eligible for time-and-a-half pay.

The U.S. Chamber of Commerce and other opponents of the new rule (RIN:1235-AA11)—which is expected to make some 4 million workers newly eligible for overtime pay—say many businesses simply can’t afford to cover increased payroll costs and will instead trim jobs. They’re sharpening their legal arguments in the hope they can sway a judge to issue an injunction blocking the rule before it goes into effect Dec. 1.

The Chamber and its allies are likely to focus much of their fire on the automatic indexing provision, which adjusts for inflation the salary threshold for overtime eligibility every three years. That challenge raises a question that has dogged lawyers, judges and lawmakers for decades: What happens when Congress tells a federal agency to do something, but doesn’t say exactly 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 secretary the power to determine which workers should be removed from overtime requirements under the law’s exemption for white-collar employees. The new rule more than doubles the baseline salary under which workers don’t qualify for the exemption, and provides the automatic threshold adjustments.

Critics of the new rule say automatic indexing isn’t what Congress had in mind when it empowered the DOL to update the exemption “from time to time.”

How Often Is Too Often?

The indexing provision is intended to prevent the overtime rule from inflation-related erosion. The idea is to keep the threshold fresh, so that regulators don’t have to go back to the drawing board every few years.

For opponents, however, Congress’s “time to time” delegation meant lawmakers expected the Labor Department to go through notice and comment rulemaking each time it wants to update the exemption.

“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,” Paul DeCamp, who ran the DOL’s Wage and Hour Division during the George W. Bush administration, told Bloomberg BNA. “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 say other statutes—such as the Social Security Act—specifically instruct agencies to use indexing in regulations interpreting the laws. Since Congress didn’t do that in the FLSA, the argument is that lawmakers didn’t intend to give the Labor Department indexing authority.

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

If a judge decides to grant an injunction related to the indexing provision, that likely won’t stop the rest of the rule from going into effect, DeCamp said. Instead, the court would simply carve out and invalidate the automatic indexing provision.

The Chamber and other groups—together or in separate lawsuits—are expected to also challenge the rule as a whole, arguing that the DOL violated the Administrative Procedure Act (APA) because the regulation is arbitrary and capricious. That’s a tougher argument to make, but could also stand a better chance of completely halting the rule, DeCamp said.

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

Congress Left Much Unsaid

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

The DOL acknowledged that Congress didn’t mention automatic updates or indexing when it delegated to the department the authority to implement the white-collar exemption. The department also said the FLSA doesn’t reference a salary threshold at all or refer to the duties test established by the DOL to determine whether workers who make 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 DOL wrote.

The department also disputed the claim that Congress’s silence on indexing means lawmakers didn’t want the DOL to automatically update the exemption. It said its interpretation of the exemption is protected by the substantial judicial deference to agency moves to “fill any gaps” Congress leaves in a statute.

The DOL is likely to hang its hat on 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.

Judy Conti, a federal advocacy coordinator at the National Employment Law Project and overtime rule supporter, said employers should welcome the certainty that would come with regular updates. “If we want to make sure that employers have regular and predictable updates—instead of massive readjustments every 10 to 12 years—it makes perfect sense to index them,” Conti said.

Did DOL Understand Consequences?

The original version of the rule proposed in 2015 called for annual updates to the salary threshold based on national earnings. The final rule stretches the updates to every three years, and ties the threshold to the 40 percentile of full-time salaried workers in the South, the lowest-earning Census region.

A less-frequent boost to the salary level wasn’t enough to appease critics.

“I think the” legal “argument is as strong today as it was when the” proposal “came out,” 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. So this isn’t simply a matter of indexing numbers to inflation; this is a matter of not understanding the consequences of what the department is actually doing.”

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

To DeCamp, this qualifies as a substantive change, which requires new notice and comment rulemaking under the APA.

Shopping for Venues

Whether the Chamber can get a judge to pump the brakes on the rule may very well depend on which judge—or judges—hears the case.

“I would not say this is the kind of case in which one side has no argument,” Fordham’s Saiger said. “It’s fairly common for opinions on issues like this not to track partisan differences, but to be more idiosyncratic based on the way the judges read the U.S. Code.”

Groups challenging Obama administration initiatives have had some success of late in Texas.

A federal judge in the Northern District of Texas in June enjoined the DOL from implementing its “persuader” rule, which expands disclosure requirements for employers that use advisers to help fight unionization drives. A separate move to expand deportation protections for some undocumented workers also remains on hold, thanks to an injunction in the Southern District of Texas.

The U.S. Court of Appeals for the Fifth Circuit later affirmed the decision in the immigration case. Overtime challengers are expected to file their lawsuits somewhere within the Fifth Circuit in the hopes that they can get a similarly favorable ruling if and when any decision is appealed.

The exact venue to hear a potential overtime rule lawsuit will be selected based on several criteria.

First, the ideal court would be in an area where “the regulation is likely to have a very severe local impact—a jurisdiction where businesses are going to be potentially put out of business, where people may lose jobs over this regulation,” DeCamp said.

For instance, a judge in rural Alabama would be far preferable for the rule’s litigants than to one in higher cost-of-living cities such as New York or Washington.

Beyond region, the judge’s profile could sway the decision. “Frankly, you would want to bring the lawsuit in a jurisdiction where there was a very high likelihood that the case would be heard by a judge sympathetic to your views in the case,” the former WHD administrator said.

The strategy involves not just reviewing the judges’ views in that jurisdiction, but also considering that in some jurisdictions, there would only be one or two federal judges eligible to hear the case. “Knowing who those folks are can be an important part of where you choose to file your case,” DeCamp said.

The persuader rule litigation is an example of just how tough that decision can be, and may offer a preview of where the overtime lawsuits will wind up. The Texas judge granted an injunction to block the rule several days after a Minnesota court denied a similar request in a different case challenging the regulation.

To contact the reporters on this story: Chris Opfer in Washington at copfer@bna.com; Ben Penn in Washington at bpenn@bna.com

To contact the editor responsible for this story: Susan J. McGolrick at smcgolrick@bna.com

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

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