?An ongoing lawsuit in federal district court is challenging whether the U.S. Department of Labor (DOL) can apply a salary requirement for workers who are exempt from overtime. The DOL defended its use of the salary test in recent court filings.
The lawsuit “seeks to invalidate the minimum salary threshold requirement of the Fair Labor Standards Act (FLSA) white-collar exemption regulations,” said James Coleman, an attorney with Constangy, Brooks, Smith & Prophete in Fairfax, Va. “While there would no doubt be appeals, and likely requests to stay any ruling pending appellate review, the implications for employers are enormous. If the court were to invalidate the minimum salary requirement, it would mean that exempt status under the FLSA white-collar exemptions could be determined without regard to how and at what level the employee is paid.”
The case could be “far-reaching in its impact,” said Angella Myers, an attorney with Kaufman Dolowich Voluck in Dallas. “It will be a hotly contested issue.”
Background
For workers who are nonexempt, employers must pay 1.5 times the hourly rate for any hours worked above 40 hours in a week. Employees are exempt from overtime if they earn at least $35,568 per year on a salary basis (or at least $684 per week) and perform executive, administrative or professional work. The DOL is expected to release proposed changes to the overtime rule in May.
In August 2022, Robert Mayfield of Austin, Texas, sued the DOL, claiming it overstepped its authority when it raised the salary requirements for overtime exemptions to their current levels in 2019. Mayfield owns R.U.M. Enterprises, which has 350 workers and operates 13 Dairy Queen franchises, as well as Wally’s Burger Express, in the Austin area.
The lawsuit argues the DOL didn’t have the legal authority under the U.S. Constitution to set a minimum salary level for exempt employees.
The DOL’s “rigid salary level requirements impede R.U.M. from implementing its preferred compensation structure and therein reduces both company profits and management bonuses,” the lawsuit said. “R.U.M. was required to either pay higher starting salaries to all managers earning less than $684 per week or to convert them to a nonexempt status.”
Mayfield said he’s “worried about the federal government trying to run my business, instead of me. What I want is the freedom to run my own business. Sometimes we might like to promote somebody to management at $30,000, instead of $36,000.”
However, the DOL said Congress gave it the power to use a salary requirement in defining who works in an executive, administrative or professional capacity and is therefore—if they satisfy the duties tests—not entitled to overtime pay. “The 2019 rule also comfortably withstands scrutiny on its own terms” because the salary test is lawful according to legal precedent, the DOL argued in its request for summary judgment filed with the U.S. District Court for the Western District of Texas on Feb. 10.
The DOL said the salary test “prevents the misclassification by employers of obviously nonexempt employees.” It noted that salary level “is a helpful indicator of the capacity in which an employee is employed, especially among lower-paid employees.”
Part of the reason the department has periodically raised the salary threshold is general wage inflation across the U.S. over time, Myers said.
The district court hasn’t issued a decision yet on the request for summary judgment.
Requirements for a White-Collar Exemption
To qualify for a white-collar exemption, an employee must satisfy a job duties test, be paid at or above the minimum salary and be paid on a salary basis. There are separate duties tests for different white-collar exemptions:
- Executive exemption: The employee’s primary duty must be managing the business or a department or subdivision. The employee must regularly direct the work of at least two employees and have the authority to hire or fire workers—or the employee’s recommendations for hiring and firing must be given particular weight.
- Administrative exemption: The employee’s primary duty must be performing office or nonmanual work that is directly related to the employer’s business operations or customers. The employee’s primary duty must include exercising discretion and independent judgment with respect to matters of significance.
- Professional exemption: The employee’s primary duty must be performing work requiring advanced knowledge in a field of science or learning that is customarily acquired by prolonged, specialized, intellectual instruction.
On Feb. 22, the U.S. Supreme Court ruled 6-3 in Helix Energy Solutions Group v. Hewitt that highly compensated employees can be eligible for overtime pay if they are paid on a daily or hourly basis. Justice Brett Kavanaugh dissented, saying the FLSA “focuses on whether the employee performs executive duties, not how much an employee is paid or how an employee is paid.
Based on that dissent, “I think if [the Mayfield case] is presented to the Supreme Court, they’re going to want to pick it up,” Myers said.
Tips for Employers
For now, Myers recommended that employers continue to comply with the salary test. “We’ve had a salary test and a duties test for so long that if employers are already in compliance, they should maintain that compliance,” she said. “I don’t think they should put all their eggs in this basket and assume the salary test will be gone.”
Under the FLSA, employers that willfully and repeatedly misclassify workers as exempt may face up to $1,000 in civil penalties for each violation and may be criminally prosecuted for willful violations of the law. Employers may also have to pay all unpaid overtime owed to the affected employee(s) going back three years prior to the date of the claim, as well as liquidated damages.
“When considering exempt or nonexempt classification decisions, employers should equally consider the duties and salary tests. The DOL does not overlook the duties requirement simply because the salary threshold has been met or even far exceeded,” said Jeffrey Ruzal, an attorney with Epstein Becker Green in New York City.
Coleman explained that with overtime classifications, “the two most common employer errors usually relate to either not having an accurate picture of actual job duties, or allowing for improper deductions from salary, such that the salary basis requirements are not satisfied. Either can lead to invalidation of the exempt classification.”
In the end, even if the federal rule changes, “many states would still have some form of the salary tests, and employers would still have to comply with those,” said Patrick Dalin, an attorney with Fisher Phillips in Philadelphia.