Last week, two lawsuits were filed in federal court in Texas seeking to block the Final Rule on white-collar exemptions to the overtime provisions of the Fair Labor Standards Act, which was issued in May. Meanwhile, legislation that would delay the effective date of the rule until June 2017 just passed the U.S. House of Representatives, and there is other legislation pending in Congress that would “nullify the rule.” The overtime rule is still set to take effect on December 1, but with all of this “blockage action” going on, can employers breathe easier now?

I am delighted that Jim Coleman and Ellen Kearns, co-chairs of Constangy’s Wage and Hour Practice Group, agreed to be interviewed about the efforts to block the rule and whether those efforts will buy employers a little more time to get ready for the rule to take effect.

(Quick answer on that last: NO, but read on!)

ROBIN SHEA: Jim and Ellen, last week two lawsuits were filed — on the same day, and in the same federal court in Texas — challenging the U.S. Department of Labor’s final rule on white-collar exemptions to the overtime provisions of the Fair Labor Standards Act. One was filed by 21 states, and the other was filed by the U.S. Chamber of Commerce, a number of trade associations including the National Retail Federation and the National Association of Manufacturers, and a number of local Chamber of Commerce chapters.

Do you have any thoughts on why the federal court in Sherman, Texas, was chosen for these lawsuits? I assume this was a coordinated effort. Do you agree?

JIM COLEMAN: It is a fair bet that counsel for both sets of plaintiffs independently concluded that the Eastern District of Texas was a favorable forum for presenting their legal challenges. Only a few months ago another federal court in Texas, this one in the Northern District (Lubbock), enjoined the Secretary of Labor from enforcing the “Persuader Rule,” and that success may well have been a factor in the forum selection in the two lawsuits filed last week. While I am not involved in either lawsuit, I suspect there was coordination between the respective plaintiffs’ counsel.

ELLEN KEARNS:  The Eastern District of Texas has a reputation of moving cases quickly, earning the nickname “rocket docket.”  This means that plaintiffs could get a quick hearing on their request for injunctive relief, giving them time to appeal to the [U.S. Court of Appeals for the] Fifth Circuit if needed.

Second, as Jim has noted, federal judges in Texas have recently been willing to halt Obama Administration initiatives — the persuader rule, and a federal judge in the Southern District of Texas (Brownsville) recently granted an injunction freezing a program to expand deportation procedures for certain undocumented workers, and the injunction was affirmed on appeal.

But I don’t think that it was a totally coordinated effort. The two lawsuits involve different plaintiffs, and were filed by different law firms. The states’ lawsuit originated in the Nevada office of the Nevada attorney general, and then other states were asked to sign on. The Chamber of Commerce lawsuit was coordinated by the U. S. Chamber of Commerce and was filed by a private law firm and a number of industry legal groups. That having been said, some coordination no doubt took place because the two suits were filed on the same day, in the same courtroom, hours apart.

ROBIN SHEA: If this was a coordinated effort, either in whole or in part, then why didn’t all of the plaintiffs join together in a single lawsuit?

JIM COLEMAN: Each lawsuit presents different legal claims and theories, although there is significant overlap and a common goal. For example, the lawsuit filed on behalf of 21 states asserts, among other things, that the DOL’s final rule violates the Tenth Amendment to the U.S. Constitution by unlawfully mandating how state governments must pay their employees.  This is a “States’ Rights” argument that is unique to the plaintiffs in the state lawsuit, but not to the private plaintiffs in the other.

ELLEN KEARNS: I agree, and I’d like to elaborate on that Tenth Amendment issue. The states’ lawsuit argues that the new overtime rule will increase state governments’ employment costs significantly based in part upon the number of Executive, Administrative, or Professional employees who will no longer be exempt from overtime. According to the lawsuit, “Because the Plaintiff states cannot reasonably rely upon a corresponding increase in revenue, they will have to reduce or eliminate some essential government services and functions. . . . These changes will have a substantial impact on the lives and well-being of the Citizens of the plaintiff states.” The states say that the rule improperly mandates the way that states “structure the pay of State employees and, thus, [dictates] how States allocate a substantial portion of their budgets,” which could force the states to reduce or eliminate programs. They argue that these are “indisputable attributes of State sovereignty” and that there is no federal interest that justifies interference. As Jim has noted, this constitutional argument could not be made by the private sector plaintiffs in the Chamber of Commerce lawsuit.

ROBIN SHEA: Let’s focus on that one — the Chamber of Commerce lawsuit. The plaintiffs claim, among other things, that the DOL’s position is “arbitrary and capricious.” The Obama Administration says that the threshold of $23,660 under the current rule has not kept pace with the economy. In fact, the poverty line this year for a family of four is $24,300. However, the plaintiffs say that by raising the salary threshold to $47,676 a year, the DOL is effectively (and without justification) taking away the “exempt” status of large numbers of workers whose job duties should make them exempt. Do you think this claim has legal merit?

JIM COLEMAN: Well, I don’t want to prejudge the argument, but I think the analysis will be whether the DOL satisfied the notice and comment rulemaking requirements of the Administrative Procedure Act, which governs the process for promulgating federal executive branch regulations. While few could disagree that the current salary threshold, last adjusted in 2004, was in need of updating, the employer community as a whole was rocked with the more than doubling of the current requirement. The enormous size of the one-step increase is what has caused the employer community to push back.

ELLEN KEARNS: In addition, the DOL argues that the current threshold was set too low in 2004, and that it is increasing the threshold to account for the alleged mistake that was made in 2004.

Will the DOL’s rationale for the rule trump the plaintiffs’ claim that the DOL is effectively removing the exemption from large numbers of workers who should be exempt based on their job duties? Although it is a close question, I do not think the DOL’s rationale will be found to be arbitrary and capricious. Therefore, even though workers may meet the applicable duties test for exempt status, I think the salary level, as determined by the DOL, will be found to be an integral and indispensable part of the definition of an exempt white-collar employee.

ROBIN SHEA: As you’ve both pointed out many times in the past, the final rule provides for automatic increases of the salary threshold, and the compensation threshold for “highly compensated employees.” The plaintiffs in both lawsuits say that this indexing is improper because it allows the DOL to increase the thresholds in the future without going through the notice and comment requirements of the Administrative Procedure Act. What do you think about the legal merit of this claim?

JIM COLEMAN: In my view, this is one of the more compelling arguments being presented in both lawsuits. The automatic adjustments, or indexing, scheduled at three-year intervals starting January 1, 2020, will probably result in increases in the salary and compensation thresholds without the benefit of notice and comment rulemaking, without the establishment of an administrative record, and without the input of affected parties. This legal challenge may well prove to be a winner in both lawsuits. However, it is possible that a court could invalidate the automatic indexing provisions without invalidating the rest of the final rule.

ELLEN KEARNS: I agree that that may be a valid claim. Both lawsuits address the fact that there is no specific congressional authorization in 29 U.S.C. Section 213(a)(1) (the part of the FLSA addressing the white-collar exemptions) or the FLSA generally for the new indexing mechanism. As one of the lawsuits noted, “Indexing not only evades the statutory command to delimit the exception from ‘time to time’ as well as the notice and comment requirements of the APA, it also ignores the DOL’s prior admissions [during the George W. Bush Administration] that ‘nothing in the legislative or regulatory history . . . would support indexing or automatic increases.’”

ROBIN SHEA: The new overtime rule is scheduled to take effect December 1, but the plaintiffs in both of these lawsuits are seeking court orders to block the rule. And at the same time, in Congress, Sens. Tim Scott (R-SC) and Lamar Alexander (R-TN), and Reps. Tim Walberg (R-MI) and John Kline (R-MN) have introduced the Protecting Workplace Advancement and Opportunity Act — legislation which, according to Sen. Scott, would “nullify the rule.” Legislation passed the House just this week that would delay the effective date of the overtime rule until June 2017. And on top of this, we have the impact of the Presidential election. Should employers hold off on trying to comply with the final rule until they see what the court will do with these two lawsuits, or what happens in Congress, or who is elected President in November?

JIM COLEMAN: While tempting to take a “wait and see” approach, we are only two months away from the December 1 effective date, and I think employers need to have contingency plans in place so that they can be in compliance if the judicial or legislative fixes do not come to pass. The legislative fix generally requires either the support of the White House, or super-majorities in the House and Senate to override an almost certain presidential veto. Most would agree that neither is very likely to happen. The judicial fix, likely in the form of a court-ordered injunction or declaratory judgment that the final rule is invalid and unenforceable, is much more difficult to predict, as is the timing of any such ruling.  For most large employers, making the changes necessary to ensure compliance with the final rule will be no small task, and will require significant advance planning. Thus, with only two months to go, the “wait and see” approach will quickly become a high-stakes game of “chicken.”

ELLEN KEARNS: Moreover, both lawsuits were assigned to Judge Amos Mazzant, who was nominated by President Obama in 2014 and is the only one of the three Sherman judges to have been nominated by a Democratic president. According to an anonymous former Labor Department official from the Bush administration, “If both suits are in front of an Obama appointee, then it is essentially game over, at least in the district court. They may fare better in the Fifth Circuit, but that takes time.”  As Jim noted, December 1 is only two months away.  It is certainly a risk to wait for the outcome of these two lawsuits before planning for the final rule’s implementation. Even if the DOL decides to forgo enforcement pending the outcome of the lawsuits, private plaintiffs may be able to sue after December 1 in reliance on the rule.

The states and the Chambers are likely to appeal immediately to the Fifth Circuit if Judge Mazzant denies their request for an injunction blocking the rule. And, as happened in the deportation case I talked about earlier, the Fifth Circuit may rule in their favor. But all of those “ifs” make it risky for employers to delay.


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