Attacks on Overtime Rule’s Salary Levels Carry Business Downside

Business groups challenging the US Labor Department’s new overtime rule may get more than they wished for if courts broadly gut a key provision on worker earnings, creating the potential for more litigation against employers over who should be eligible for time-and-a-half-pay.

Four pending lawsuits argue the DOL went beyond its authority when revising exemptions to overtime requirements for certain “white collar” workers, in part because it makes a huge swath of employees eligible when Congress meant for them to fall within a carve out.

Another legal strategy endorsed by all four cases takes aim specifically at the salary cutoff under which workers would qualify for overtime, arguing that the text of the Fair Labor Standards Act makes no mention of a worker’s earnings when determining exemptions. Several courts—and notably a trio of US Supreme Court justices—have raised similar questions, they say.

But eliminating that threshold will likely create a more complicated and ambiguous approach to determining who is legally exempt from overtime pay, attorneys say.

“If the Supreme Court strikes down the DOL’s ability to have a salary threshold at all, I’m not sure that that ultimately favors business,” said Brett Coburn, a partner at the management-side firm Alston & Bird LLP.

When determining which workers should be subject to the FLSA’s exemption for “executive, administrative, and professional” employees, the DOL uses a three-part test that considers whether the worker is salaried, how much they make each year, and their job duties. Historically, the salary piece of the test was used to screen out workers who earned so little they were obviously not exempt from overtime pay.

The Biden administration’s final rule, announced in April, would raise the salary threshold to $43,888 on July 1 and then to $58,656 on Jan. 1, a move that would make an estimated 4 million workers newly eligible for overtime.

Exemption Test

The law leaves it up to the Secretary of Labor to “define and delimit” the terms of the “white collar” exemption. Since the 1940s, the agency has typically considered salary level and job duties to determine who should be eligible, the DOL noted in its latest rulemaking.

If courts blocked the DOL from considering salary as part of the overtime eligibility calculation, the agency and employers would then only be able to review a worker’s duties to decide whether they should be exempt from overtime pay, a much longer and complicated process, attorneys say.

Still, it would likely mean that more workers would be deemed exempt from overtime pay by their employers.

A 2023 National Bureau of Economic Research report found “widespread evidence” of a practice where companies use “deceptive” manager titles like “guest experience leader” or “carpet shampoo manager” to avoid paying overtime premiums.

But the wrong call could be costly.

“I think employers appreciate those bright lines,” added Catherine Ruckelshaus, general counsel and legal director at the National Employment Law Project. “Because if you don’t have it, then you’re in a long test for what duties a worker is engaged in, which is a litigation nightmare for the employers, but also for the Department of Labor, because then they have to get mired in the specific facts of each job.”

Such a change would also increase the potential for litigation, said Jim Paretti a shareholder at Littler Mendelson PC.

“I think it increases the burden on employers because you really then are held to a close examination of what each individual employee does,” he added. “And that’s not an easy thing to do if you look at a very large workforce.”

Others say the elimination of a salary threshold as part of the overtime exemption could be a windfall for businesses.

“I think it would be a bonanza for employers,” said Myrna Maysonet, a partner at Greenspoon Marder. It would make it easier to deem workers exempt from overtime pay requirements based on their job duties alone, she said.

Past Litigation

The Trump administration was the last to update the salary level of the exemption test in 2019 to make it so that workers making less than $35,568 would be automatically owed overtime pay when they worked more than 40 hours a week, a policy that didn’t immediately draw concern from the business community.

Business groups representing numerous industries have argued that employers will be unable to absorb the new payroll costs under the Biden DOL’s rule, and that its update to the salary threshold is an excessive increase from the current level.

So far, a software company, national business groups, and the state of Texas have sued over the new policy, contending that the rule is arbitrary and capricious and that the DOL lacked the authority to issue the change.

Pending in the background is a separate challenge brought by a fast-food operator in 2022 against the Trump rule. The case, currently before the US Court of Appeals for the Fifth Circuit, argues that the DOL didn’t have the authority to consider a worker’s earnings at all when determining who is exempt from overtime pay.

“The only way to avoid this constitutional problem is to construe the EAP Exemption under its ordinary meaning, which denies the Secretary discretion to impose salary level rules,” attorneys for business owner Robert Mayfield argued in a brief to the appeals court.

Complicating matters even further is the fact that the DOL is already navigating around a 2017 ruling that struck down an Obama-era overtime rule that similarly sought a large update to the earnings threshold.

When Judge Amos L. Mazzant of the US District Court for the Eastern District of Texas initially blocked that rule, he found that Congress only intended the exemption to consider a workers’ job duties, not their earnings.

However, Mazzant later backtracked in his 2017 decision invalidating the rule, stating that while the plain meaning of the FLSA “does not provide for a salary requirement, the Department has used a permissible minimum salary level as a test for identifying categories of employees Congress intended to exempt.”

Mazzant ultimately concluded that the Obama-era salary level was set to such a high level that it “makes overtime status depend predominately on a minimum salary level, thereby supplanting an analysis of an employee’s job duties,” which Congress required when writing the law.

High Court Critique

Supreme Court Justice Brett Kavanaugh, joined by Justice Samuel Alito, made a similar point in a dissent in a 2023 case involving overtime compensation for an offshore rig worker.

“It is questionable whether the Department’s regulations—which look not only at an employee’s duties but also at how much an employee is paid and how an employee is paid—will survive if and when the regulations are challenged as inconsistent with the Act,” Kavanaugh wrote in Helix Energy Solutions Group Inc. v Hewitt.

And a separate dissent in that case from Justice Neil Gorsuch raised similar questions, but said that “larger statutory” analysis should be left “to another day.”

All three lawsuits challenging the Biden rule say that if the Fifth Circuit were to uphold the DOL’s ability to use a salary test in the case against the Trump rule, the latest regulation should still be set aside for the same reasons the Texas federal court used to toss the Obama rule.