The Department of Labor’s Overtime Rule 2.0
Written by Elizabeth M. Young LaBerge, Senior Regulatory Compliance Counsel, NAFCU
Normally, employment law and activity by the Department of Labor is not something your NAFCU Regulatory Compliance Team spends much time writing about. Credit union and consumer financial regulation is more our jam. Because the 2016 amendments to the Fiduciary Duty Rule and the Overtime Rule had significance for credit unions, these specific issues did fall on our radar. And because both rule amendments were embattled and zombified after being issued, they never really fell off our radar.
Like phoenix from the ashes, the Department of Labor’s Overtime Rule is back. It is not yet clear whether this version will fare better in court than its predecessor.
In 2016, the Department of Labor under the Obama administration issued a final Overtime Rule, with an effective date of December 1st of that year. Multiple lawsuits seeking to overturn the rule were filed and consolidated into a case in the U.S. District Court for the Eastern District of Texas. A preliminary injunction against the rule was issued by the Texas court in November 2016, preventing it from going into effect. On December 1, 2016, the Department of Labor appealed that injunction to the Fifth Circuit Court of Appeals.
In January 2017, the Trump administration took office. The Department of Labor under the new administration asked the Court to hold the appeal while it pursued a new rulemaking process. In July 2017, the Department issued a Request for Information asking the public for additional information regarding the regulation, with the goal of issuing a new proposed rulemaking.
In August 2017, that Texas district court issued a summary judgment against the Department striking down the rule. It found that the Overtime Rule exceeded the Department’s authority. To understand why the 2016 Overtime Rule was struck down and how the proposed Overtime Rule is different, it helps to understand how the current rule, which has been on the books since 2004, operates. As of 2004, the Department of Labor assessed whether an employee was exempt from overtime pay as an executive, administrative or professional employee by looking at whether the employee was:
- being paid a salary (the “salary-basis test”),
- being paid at or above the minimum salary levels (the “salary-level test”) which are established by regulation ($23,660 annually), and
- whether the duties being performed were standard duties of that type established by the regulation (the “duties test”).
The 2004 salary levels were pegged to the 20th percentile of earnings for full-time salaried workers in the lowest-wage census region and in the retail sector. The 2016 rule sought to update the salary-level test by basing it on the 40th percentile of weekly earnings for full-time salaried workers in the same region. The change more than doubled the amount of the minimum salary levels to $47,476 annually, with an automatically updating mechanism that would adjust the minimum salary level every three years.
An estimated 4.2 million employees whose duties would have otherwise qualified them for the exemption would have been excluded based solely on their salary. The Court found that using a minimum salary pegged to the low end of the range of prevailing salaries for executive, administrative or professional employees is a valid way to screen out employees whose duties would likely not qualify them for the exemption. However, it also found that the minimum salary level cannot be used to exclude employees whose duties would generally qualify them for the exemption, but for their salary. In other words, the Department of Labor exceeded their authority by setting the salary-level test so high that it stops serving as a useful screen in identifying employees whose duties do not meet the test.
In the Department of Labor’s new proposed rule, the Department proposed to formally rescind the 2016 rule. In its place, the Department proposes to use the same methodology to set the salary level from the 2004 rule, but with data from 2017. This would raise the minimum salary for executive, administrative and professional employees from $23,660 annually to $33,332 annually. The Department decided that an automatically updating mechanism for future increases may not be sufficiently flexible, so instead it projected updates through 2020 based on existing growth and inflation rates, and committed to manually evaluating the threshold on a more frequent basis in the future. The Department estimated that this change may affect approximately 1.1 million workers who would otherwise be exempt under the currently enforced salary level.
The proposal also contains some additional changes regarding the calculation of salary for purposes of the test and updates to the compensation levels for other types of employees. Comments to the proposal will be due 60 days after it is published in the Federal Register. Ultimately, the effect of the proposed rule on a credit union’s operations is not something we can assist with. Credit unions may wish to speak with their HR professionals or counsel experienced in employment law to get a full understanding of what this means for them. NAFCU will be issuing a Regulatory Alert on the proposal and seeking feedback from credit unions, so we hope to hear from you. If you have not signed up for Regulatory Alerts, you can do so here.