As the Office of Information and Regulatory Affairs (OIRA) of the Office of Management and Budget concludes its review of the proposed final overtime regulations, the issuance of new regulations defining and delimiting the executive, administrative, professional, outside sales, and computer employee exemptions by the U.S. Department of Labor’s (DOL) Wage and Hour Division (WHD) are imminent. As of Thursday, May 12, 2016, OIRA had conducted some 51 meetings with interested stakeholders including businesses, business and employer associations, employee advocates, institutions of higher learning, and a variety of nonprofit interests. The general consensus continues to be that the final Part 541 rules will dramatically increase the salary level required for exemption by at least doubling the current salary of $455 per week or $23,660 per year. The most recent suggestion is that the new salary threshold for exemption may be around $47,000 per year. 

While this significant salary increase will create immediate compliance challenges for employers of all sizes—especially nonprofit entities and state and local governments—a more troubling prospect will arise if the department includes a provision in the final regulations that will index the salary level to provide for automatic annual increases. In its proposed rules, the WHD requested comments on a choice of provisions to index the salary amount either to the 40th percentile of earnings for all full-time salaried workers in the United States, which was the draft’s proposed salary level, or to the rate of increase in the Consumer Price Index for All Urban Consumers (CPI-U).

Characterized by Solicitor of Labor M. Patricia Smith as an “antidote for obsolescence,” such an indexing provision in the final rule can be viewed as inconsistent with the philosophy of the current administration and its supporters, and would serve as litigation fodder to those who oppose the provision. The Fair Labor Standards Act (FLSA) provides for the executive, administrative, professional, outside sales, and computer employee exemptions and charges the Secretary of Labor with the responsibility to “define[d] and delimit[ed] from time to time by regulations” these exemptions. Such a provision may be considered an abdication of the department’s statutory duty and a tacit admission that an even bigger, more powerful government cannot fulfill its obligations.

Instead of advocating that the DOL discharge its statutory responsibility to define these exemptions from time to time by revising the salary level, proponents of this indexing measure have advocated for automated government intervention into employer-employee relations. Yet, by advocating for automatic salary increases, these same proponents are admitting that the federal government is either incapable of performing the job assigned to one of its agencies (of establishing a new salary from time to time) or that the government is not sufficiently industrious to fulfill its statutory obligations. Instead, the administration would take the easier road and tether future increases in the salary amount test to a data set that either includes the salary data of salaried, nonexempt employees or that is an index to measure price inflation. Further, a proposal to use the CPI-U, an inflation index, as the source to increase a salary level amount could be viewed as economically incongruous and disingenuous—a change to a salary level test should not be based on price changes for a basket of goods and services as a group that measures inflation.

In its 2004 rulemaking, the WHD also addressed whether it would include a provision to automatically increase the salary level in response to several comments urging it to adopt such a mechanism. It concluded that neither the FLSA’s legislative history nor regulatory developments or studies supported the inclusion of a provision to automatically update the salary level. Rather, it stated its intent “in the future to update the salary levels on a more regular basis, as it did prior to 1975,” and a belief “that a 29-year delay is unlikely to reoccur.” Thus, as required by the statute and as the WHD acknowledged in 2004, “[t]he salary levels should be adjusted when wage survey data and other policy concerns support such a change.” 

Most, if not all, observers would agree that the salary level should be adjusted, and many would support a salary level of approximately $561 per week or $29,178 per year, $577 per week or $30,000 per year, or possibly even as much as $657 per week or $34,176 a year. In fact, these are three alternatives that the WHD considered in its rulemaking as discussed in its proposed rule. The WHD rejected these salary level amounts in favor of its recommended amount that is much closer to the highest option—a salary of $1,083 per week or $56,291 per year—that it considered. Aside from the proposal’s proponents, the dramatic increase that more than doubles the current $455 per week or $23,660 per year salary amount or a provision to automatically increase the salary level in the future without reference to actual wage survey data does not have widespread support.

Finally, including a provision to automatically increase the salary level in future years creates a potential legal controversy involving whether the WHD has exceeded its statutory authority and issued an “arbitrary and capricious” standard in contravention of the Administrative Procedure Act, among other legal theories. Litigation over such a provision not only could impact the effective date of the provision, but also could possibly tie up more aspects of the rulemaking. Obviously, whether the Part 541 final rule will be challenged through litigation will depend, in great measure, on its content, such as whether it includes any possible changes to the duties tests. It is now up to OIRA to keep the WHD from potentially overreaching by including a mechanism to increase automatically the salary level in the future if it truly wants to effectuate the FLSA and possibly to avoid potential litigation involving its overtime final regulations.

In anticipation of the final rule, Ogletree Deakins’ Wage and Hour Practice Group has launched the Overtime Solutions Center, an up-to-the-minute educational resource containing breaking news and information as they occur. In addition to our Overtime Solutions Center, the firm’s Wage and Hour blog is frequently updated with significant new developments in the law. Stay tuned.

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