2016 Final Rule on Overtime Exemptions

By Wayne Young

The status of the proposed changes to the white-collar exemptions (“2016 Final Rule”) continues to be a hot topic in the HR legal community, specifically the dramatic proposed increase in the salary threshold for those exemptions. Many are still asking about the status of those changes or what employers can expect in the future.

On November 22, 2016, a federal judge in Texas halted the effective date of the 2016 Final Rule via a preliminary injunction that applied nationwide. The reasoning for the injunction reached beyond the amount of the salary threshold, however, and suggested that the Department of Labor had no authority to set any minimum salary threshold at all in defining and delimiting the exemptions. The court reasoned the white-collar exemptions as crafted by Congress contemplated only a particular set of duties for the exemptions and not any particular minimum salary. The DOL appealed that decision to the Fifth Circuit Court of Appeals and the case is still pending.

As we all know, earlier in November 2016 there as a change voted on with respect to the presidential administration. The conventional wisdom was that President Trump’s DOL would likely take action that would abandon the effort to raise the salary threshold for the white-collar exemptions so dramatically. President Trump’s eventual pick for Secretary of Labor, Alex Acosta, suggested the threshold salary for the white collar exemptions should be raised to a range around $33,000 per year. This is of course significantly less than the threshold proposed in the 2016 rule of $47,476 per year.

There was no development of note in the first half of 2017 with respect to the 2016 Final Rule. Then in a reply filed with the Fifth Circuit in July 2017, the Department of Justice arguing the appeal from the temporary injunction on behalf of the DOL abandoned the government’s argument defending the increased amount of the salary threshold in the 2016 Final Rule. In the brief the government also previewed that it intended to undertake further rule-making to determine what the salary level should be. The DOJ, however, shrewdly maintained that the DOL did have the authority to decide a minimum salary threshold for the exemptions.

Another development that impacted the status of the 2016 Final Rule occurred very early on in the Trump Administration. On February 27, 2017, President Trump signed Executive Order 13777 entitled Enforcing the Regulatory Reform Agenda. This order tasks federal agencies with identifying regulations for repeal, replacement or modification that, among other things, inhibit job creation, are outdated, or impose costs that exceed benefits.

With that backdrop on July 26, 2017, the DOL published a request for information (RFI) seeking public comment on a series of questions concerning the white-collar exemption rules. The questions themselves shed some light on the thought process within the DOL as it relates to a potential new rule. Below is a summary, with a few comments, on the eleven specific questions in the RFI.

1. What data should be used to update the salary threshold, e.g. measure of inflation, the methodology used in 2004, etc.? Would setting the salary level using any of these methods require changes to the duties test?

The DOL is in search of a way to update the salary threshold that makes sense in light of how the current threshold was set in 2004. The method used in 2004 was to set the salary at the rate of the bottom 20 percent of salaried employees in the lowest wage earning census region. The 2016 Final Rule used similar methodology but set the threshold of 40 percent of salaried employees in that region.

2. Should the regulations contain multiple salary levels? If so, how should the levels be set?

A criticism often heard among employers is that a uniform salary threshold does not make sense in light of the broad range of income levels and costs of living across the country. The DOL is acknowledging that comment and appears to be contemplating setting the salary by geographic area. While that would more appropriately reflect the economics of different regions of the country and different costs of living, it would be an administrative challenge for those employers with operations in multiple areas. Also another reality of the modern economy is the location where an employee works can be a nebulous concept. The question also asked about a different salary threshold depending on the size of the employer, presumably with larger employers required to pay a higher salary.

3. Should the regulations set a different salary threshold for different exemptions, specifically should the salary threshold for executives and administrators be lower than that of professionals?

This is another potential idea borrowed from prior versions of the rules. The “one-size-fits-all” method of setting the salary threshold is obviously coming under intense scrutiny. The challenge with this change would be that employers would have to specifically identify ahead of time the applicable white-collar exemption in order to make sure the appropriate salary was set.

4. Should the salary threshold relate at all to the former long and short tests?

The prevailing theme of the questions is the search for some methodology to set the salary thresholds. They are not ruling out borrowing the old methodology from prior versions of the rules.

5. Did the 2016 Final Rule salary threshold effectively eclipse the role of the duties test? If so, at what level does the duties test no longer fulfill its historical role in determining exempt status?

This is a nod to the business community that the DOL hears them with respect to the arguments against the proposed salary threshold in the 2016 Final Rule. This question begs the follow up question posed from the federal judge’s order: is any salary threshold consistent with the duties test?

6. What changes did employers make (e.g. payroll, time keeping, changing status, changing hourly rates, etc.) in light of the proposed 2016 Final Rule and what was the impact of those changes?

This is an interesting question designed to peek into the crystal ball to get an idea of what would have happened had the 2016 Final Rule gone into effect. The DOL could be searching for data to support a drastic lowering of the proposed salary threshold in the 2016 Final Rule.

7. Would a strictly duties test be preferable? And if so, what should such a duties test look like?

This gets at the heart of whether the DOL should line up with the federal judge’s reasoning and abandon any effort to set a minimum salary altogether. If this method is adopted, it would be a significant change in wage and hour law of course. A pro of such a solution would be it would eliminate the salary threshold barrier to correctly classifying individuals who should be exempt. A con would be employers could expect the duties test to get much stricter should the DOL adopt this approach. The DOL may prefer this solution in part because it would allow them to get in front of a potential adverse ruling from the Fifth Circuit.

8. Does the salary threshold in the 2016 Final Rule exclude from exemption some historically exempt positions?

This question gets at what the impact would have been with the drastic change proposed in the 2016 Final Rule.

9. Were the provisions related to inclusion of certain bonuses and commission in the minimum salary appropriate?

A unique feature to the 2016 Final Rule that arguably broadened the exemption was the allowance of certain bonuses and commissions in the computation of the minimum salary. The amount of such bonuses and commissions that could be credited toward the salary threshold was capped at 10 percent, however. Hopefully if the DOL intends to keep the salary threshold, they will consider broadening the definition of “salary basis” to include more types of compensation and allow employers and employees more flexibility with respect to types of compensation.

10. Should there be multiple compensation levels for the highly compensated employee exemption?

The increase to the highly compensated employee threshold was another sticking point with a lot of employers from the 2016 Final Rule. Much like with the salary threshold for the white-collar exemptions, it appears the DOL is considering adopting a multi-tiered approach to the threshold for highly compensated employees that could vary based on geographic area or a host of other factors similar to the ones suggested for the salary threshold for the white-collar exemptions.

11. Should the salary threshold(s) be automatically updated on a periodic basis, and if so, how?

The icing on the cake so to speak for many employers from the 2016 Final Rule was that the aggressively high salary threshold would actually increase even more beginning on January 1, 2020 and again every three years based on updated salary data. The DOL hopefully seems to be reconsidering the wisdom of this methodology and looking for a better alternative if automatic updates should be implemented.

The DOL’s questions squarely address the concerns the employment law community had with the 2016 Final Rule. Considering all of the DOL’s activity in recent months, the ultimate takeaway is to expect a much more workable rule with respect to the white-collar exemptions. Many had feared the chaos that would ensue if the Texas federal court’s order was reversed at the Fifth Circuit. Given the government’s position on the rule, that seems to have been avoided. Although if the DOL publishes a new rule while the lawsuit is still pending, it is unclear what impact that would have. The DOL has instructions for how to provide comments in various forms in response to the questions on their website at https://www.federalregister.gov/documents/2017/07/26/2017-15666/request-for-information-defining-and-delimiting-the-exemptions-for-executive-administrative. The comment period is open until September 25, 2017.

Wayne Young is a partner with the firm and a member of the Labor and Employment Law Practice Group. He was named the 2017 Russell Gunter Legislative Advocacy Award Recipient by the Arkansas SHRM. The award recognizes outstanding contributions of time and effort in local, state or federal legislative advocacy on behalf of the Human Resources profession.