NOTE FROM ROBIN: This is a client bulletin by Jim Coleman and Ellen Kearns, co-chairs of our Wage and Hour Practice Group, that went out this afternoon. Because the blog subscription and bulletin subscription lists are not identical, I’m reproducing the bulletin here for our blog readers.

UPDATE (9/5/17): As we expected, today the U.S. Department of Labor filed an unopposed motion to dismiss as moot its appeal of Judge Mazzant’s preliminary injunction order.

UPDATE (9/7/17): It’s ovah! (Well, all over but the new rulemaking.) The Fifth Circuit has dismissed the DOL’s appeal.

The Obama overtime rule may be really dead.

Yesterday, U.S. District Court Judge Amos Mazzant followed up on his preliminary injunction ruling, issued last November, by rendering final judgment in favor of the business groups and state governments who had challenged the rule as invalid.

Here is a copy of the Opinion and Order, and here is a copy of the Final Judgment.

Background

The overtime rule was published by the U.S. Department of Labor in May 2016 and was to take effect on December 1, 2016. The Final Rule would have increased the minimum salary necessary for employees to qualify for exemption from the overtime requirements of the Fair Labor Standards Act under the executive, administrative, and (some) professional exemptions, from $455 a week to $913 a week. The Final Rule also created a new automatic updating mechanism that would have adjusted the minimum salary level every three years. The first automatic increase was scheduled to occur on January 1, 2020. A number of state governments and business groups, led by the Plano, Texas, Chamber of Commerce, filed suit in federal court in Texas seeking to block the rule from taking effect. (They initially filed separate lawsuits, but the cases were consolidated.)  The state governments sought a preliminary injunction to halt the rule’s implementation; the business groups sought to decide the matter by way of a motion for summary judgment.

On November 22, 2016, Judge Mazzant issued a preliminary injunction barring the DOL from enforcing the rule. The DOL, still under the Obama Administration, appealed to the U.S. Court of Appeals for the Fifth Circuit. All briefing in that appeal has been completed, and oral argument is scheduled for early October. The state plaintiffs also joined in the business plaintiffs’ motion for summary judgment in the District Court.

In yesterday’s decision, the court granted the combined motion for summary judgment, finding that the rule was invalid.

Judge Mazzant’s decision

After finding that the plaintiffs had standing to sue and that the issue was ripe for review, Judge Mazzant rejected the state government plaintiffs’ argument that the rule violated states’ rights under the U.S. Constitution. However, the court went on to find that the rule was not a permissible interpretation of Section 213(a)(1) of the FLSA, which exempts from overtime  “any employee employed in a bona fide executive, administrative, or professional capacity.”

When a court determines whether a government agency’s interpretation of a statute is valid, the  court applies the Supreme Court’s two-step analysis in Chevron U.S.A., Inc. v. National Research Defense Council. Under Chevron, if a court finds that the statutory language is unambiguous regarding an issue, then the government agency must follow that language. However, if the court finds that the statutory language is ambiguous (or if the statute is silent), then the agency may issue regulations that “interpret” the statute, and courts will defer to those regulatory interpretations as long as they are “reasonable” and based on a permissible construction of the statute.

Under Step 1 of this analysis, Judge Mazzant found that the plain language of the statute “defined the EAP exemption with regard to duties. In other words, Congress unambiguously intended the exemption to apply to employees who perform ‘bona fide executive, administrative, or professional capacity’ duties.” (Emphasis added.)

Judge Mazzant then noted that courts have recognized the EAP exemption gives the Department “broad latitude to define and delimit the meaning of the term bona fide executive…capacity,” but emphasized that the Department’s authority was limited by the plain meaning of the words in the statute and Congressional intent:

Specifically, the Department’s authority is limited to determining the essential qualities of, precise signification of, or marking the limits of those “bona fide executive, administrative, or professional capacity” employees who perform exempt duties and should be exempt from overtime pay. With this said, the Department does not have the authority to use a salary level test that will effectively eliminate the duties test as prescribed by Section 213(a)(1)…Nor does the Department have the authority to categorically exclude those who perform ‘bona fide executive, administrative, or professional capacity’ duties based on salary level alone.

(Emphasis added.)

Judge Mazzant found that because the Final Rule more than doubled the DOL’s previous minimum salary level, “this significant increase would essentially make an employee’s duties, functions or tasks irrelevant if the employee’s salary fell below the new minimum salary level”:

This is not what Congress intended with the EAP exemption. Congress unambiguously directed the Department to exempt from overtime pay employees who perform “’bona fide executive, administrative, or professional capacity’ duties.” However, the Department creates a Final Rule that makes overtime status depend predominantly on a minimum salary level, thereby supplanting an analysis of an employee’s job duties . . thus the Final Rule does not meet Chevron step one and is unlawful.

Although Judge Mazzant found that the overtime rule was invalid under Step 1 of Chevron, he also found that it was invalid even if Step 2 applied. That is, he found that even if the language of Section 213(a)(1) was ambiguous, the Final Rule did not pass muster under Chevron Step 2 because it was not based on a permissible construction of the statute. By raising the salary level in the manner that it did, the Judge said, the DOL effectively eliminated a consideration of whether an employee performs “bona fide executive, administrative, or professional capacity duties.”

Judge Mazzant concluded that the DOL “has exceeded its authority and gone too far with the Final Rule. Nothing in Section 213(a)(1) allows the Department to make salary rather than an employee’s duties determinative of whether a ‘bona fide executive, administrative, or professional capacity’ employee should be exempt from overtime pay.” On this basis, as well, Judge Mazzant found that the rule was not a reasonable interpretation of Section 213(a)(1) and thus not entitled to Chevron deference. For the same reasons, the Court determined that the automatic updating mechanism was also unlawful.

What does this mean for employers?

In a nutshell, yesterday’s ruling is expected to moot the DOL’s appeal of Judge Mazzant’s November preliminary injunction. This is because in its brief filed June 30, the DOL asked that the Fifth Circuit “reaffirm the Department’s authority to establish a salary level test… but not address the validity of the specific salary level set by the 2016 final rule ($913 per week), which the Department intends to revisit through new rulemaking.” Although Judge Mazzant has declared the Final Rule invalid, he has at the same time clarified that the DOL does indeed have the statutory authority to use salary level as part of the criteria for defining the EAP exemptions – just not the $913/week salary level set by the rule.

Accordingly, Judge Mazzant’s ruling yesterday should give the DOL time to do what it says it wants to do in terms of opening new rulemaking and setting a salary level somewhere between the current $455/week and the $913/week that was set in the Obama Administration rule. Many believe, based on comments from Secretary of Labor Alexander Acosta, that the Trump DOL is likely to set a minimum salary level in the $650-$700/week range, which would be roughly between $34,000 and $36,000, annualized.

We will continue to keep you up to date as this critical issue evolves going forward.