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It took a few months, but in a ruling that should surprise no one, a federal judge in Texas has blocked the U.S. Department of Labor’s new overtime exemption rule that increased the minimum salaries for workers to be considered exempt from overtime pay under the executive, administrative, and professional exemptions. The ruling by Judge Sean D. Jordan of the U.S. District Court for the Eastern District of Texas applies nationwide. Judge Jordan issued a similar ruling in June, blocking the rule from taking effect for employees of the State of Texas. While the Department of Labor can appeal the ruling, the appeal will not be resolved before the new administration takes office in January 2025, meaning that the new rule may be dead at least for the foreseeable future.

So where does this leave employers? The first phase of the new rule went into effect on July 1, 2024, increasing the salary threshold for exempt employees from about $35,568 per year to $43,888 per year. That number was set to increase again on January 1, 2025 to $58,656 per year. By striking the new rule down, this ruling means that the minimum salary threshold reverts to $35,568 ($684 per week).

Few employers who increased minimum salary levels in July 2024 are likely to announce immediate pay cuts. However, employers who planned to increase salaries to meet the $58,656 salary level taking effect in January 2025 may wish to put those plans on hold.

Back in April 2024, the Federal Trade Commission (FTC) issued a final rule that would have banned non-compete agreements nationwide as of September 4, 2024. (You can read our alert on the FTC’s final rule here.) However, on August 20, 2024, in the case Ryan LLC v. FTC, a federal district court in Texas issued a permanent injunction blocking the FTC’s final rule from going into effect on September 4. This followed the same court’s preliminary ruling in July that offered limited, temporary relief from the rule for plaintiffs only. In its August 20 ruling, the federal court made it clear that the injunction would be permanent and apply nationwide. However, litigation over the rule is pending in other jurisdictions, and the FTC has said that it is considering an appeal of the Texas district court decision. Thus, employers should proceed with non-competes with caution.

FTC Non-Compete Final Rule

Under the FTC’s Final Non-Compete Clause Rule, employers would have been banned from entering into or attempting to enforce any new non-compete agreements against workers after September 4. Additionally, existing non-competes for the vast majority of workers, except for senior executives, would no longer have been enforceable, and employers would have been required to provide notice to these workers that they would no longer be enforcing any noncompete covenants against them. The FTC asserted that it had authority to issue the final rule pursuant to powers granted to the agency under the FTC Act, including the power to prevent unfair methods of competition.

Texas District Court Ruling

In the August 20 ruling, U.S. District Judge Ada Brown set aside the FTC’s final rule, declaring that it would “not be enforced or otherwise take effect on September 4, 2024, or thereafter.” With frequent references to Loper Bright, the recent U.S. Supreme Court decision overturning the longstanding Chevron doctrine of judicial deference to federal agencies (you can read our alert on Loper here), Judge Brown asserted that the FTC was incorrect in interpreting the FTC Act as expressly granting the agency authority to promulgate substantive rules to regulate unfair methods of competition. Judge Brown concluded that the FTC’s final rule was an “unlawful agency action” because the FTC “lacks statutory authority to promulgate the Non-Compete Rule,” and the rule itself is “arbitrary and capricious.”

Takeaways

As a result of the latest court ruling, employers may cautiously continue lawful practices with respect to non-compete agreements, subject to any state restrictions that may apply. However, employers should be aware that the FTC intends to appeal the Texas federal court’s decision, and conflicting decisions in other federal courts may lead to a circuit split, with either pathway potentially leading to U.S. Supreme Court review. The FTC has expressed that it would also continue to address non-compete issues through “case-by-case” enforcement actions. Thus, the debate over non-competes is far from over. We will continue to monitor and provide updates on ongoing litigation regarding the FTC non-compete rule. Please contact a Franczek attorney with any

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Kenny Eliason, Unsplash

On August 23, 2024, the Fifth Circuit Court of Appeals struck down a 2021 regulation by the U.S. Department of Labor restricting employers’ use of the tip credit for tipped employees under the Fair Labor Standards Act. The ruling effectively does away with the DOL’s longstanding “80-20” rule.

The case is Restaurant Law Center, v. U.S. Dept. of Labor, 5th Cir., No. 23-50562, August 23, 2024.

Background

The Fair Labor Standards Act requires employers to pay employees a specified minimum wage, currently $7.25 per hour for most employees. However, under FLSA Section 3(m), employers are allowed to count up to $5.12 per hour of a “tipped employee’s” tips against their total minimum wage obligation. (State and local laws vary.) In 1967, the year after Congress added the tip credit to the FLSA, the DOL issued a regulation addressing situations where an employee engages in distinct jobs for the same employer. Under that regulation, for example, a maintenance worker in a hotel who also works as a waiter in the hotel would be considered a “tipped employee” only when working as a waiter. The regulation contrasted this with the example of a waitress who spends part of her day “cleaning and setting tables, toasting bread, making coffee and occasionally washing dishes or glasses.” The waitress in that case was considered a “tipped employee” when performing these related duties even though the duties themselves were not directed toward producing tips.

In 1988, the DOL published its so-called “80/20” rule in its Field Operations Handbook. Under that rule, if an employee spends more than 20% of their time during a workweek performing non-tipped activities like setting tables or making coffee, the employer must pay the employee the full minimum wage for the excess time spent on those supporting duties.

The 80/20 rule remained in place until 2009, when the DOL briefly rescinded the guidance in an opinion letter. That opinion letter was rescinded shortly thereafter by the Obama administration, but then re-issued in 2018 under the Trump administration. In 2020, the DOL under President Trump issued a final rule set to take effect in March 2021 that would have permitted employers to claim the tip credit for all non-tipped duties so long as they were related to the employee’s tipped occupation and performed reasonably contemporaneously with the employee’s tipped duties. The Biden administration withdrew that rule before it could take effect.

In December 2021, the DOL issued a different final rule that codified the longstanding 80/20 guidance. The 2021 rule identified three categories of work: (1) directly tip-producing work (e.g., providing table service); (2) directly supporting work (e.g., setting and bussing tables), and (3) work not part of the tipped occupation (e.g., preparing food). The rule specified that an employer can take the tip credit for tip-producing work, but that if more than 20 percent of an employee’s workweek is spent on “directly supporting” work, the employer cannot claim the tip credit for that excess. The rule also added a new wrinkle, providing that an employee must be paid the full minimum wage if they spend more than 30 minutes on “directly supporting” work at any given time.

The Court’s Decision

The Restaurant Law Center and Texas Restaurant Association filed a lawsuit in federal district court seeking to block the 2021 rule. While the district court initially upheld the rule, the Fifth Circuit Court of Appeals has now reversed that ruling. Until recently, federal courts were required by the so-called Chevron doctrine to defer to administrative agencies’ interpretations of ambiguous laws, so long as their interpretation was reasonable. However, in the wake of the Supreme Court’s recent decision in Loper Bright Enterprises, the Fifth Circuit found that it was no longer required to defer to the DOL’s interpretation of the FLSA. The Fifth Circuit found that while the FLSA tip credit provision applies to “tipped employees,” the 2021 rule impermissibly focused on whether given tasks performed by tipped employees fall within the DOL’s view of a “tipped occupation.” In so doing, the rule “is attempting to answer a question that DOL itself, not the FLSA, has posed,” the court found.

Because the 2021 rule was not a permissible interpretation of the FLSA, the Fifth Circuit vacated the rule as a whole. The ruling also effectively rejects the 80/20 rule embodied in the DOL’s pre-2009 guidance. As a result, the FLSA regulations effectively revert to the 1967 rule that distinguished between employees holding dual jobs, but did not impose a time limitation on activities performed by a tipped employee within the scope of their regular job.

Implications for Employers

The 2021 rule was one of those regulations destined to create confusion and inadvertent violations that inevitably expose employers to legal risk. In a restaurant environment, few managers are going to stand over employees with a stopwatch, recording the amount of time spent on “supplemental duties” versus core “tip producing” work to ensure that employees don’t cross into the forbidden 20% / 30 minute territory. Reasonable minds may differ on whether the tipped minimum wage is a good idea. Some states and local governments are considering or have already moved to phase out the tip credit. Chicago, for example, will fully phase out the tip credit by July 1, 2028. However, the tip credit remains part of federal law for the time being. The Fifth Circuit’s ruling will make it easier for employers to apply the tip credit without risking liability for failure to carefully track each tipped employee’s activities over the course of the work day.

Many employers make the mistake of assuming that employees can be treated as exempt so long as they have certain job titles or are paid a salary rather than an hourly wage. That error is especially common in small businesses like restaurants. It can be an expensive mistake, as one D.C. restaurant recently learned after a federal court ruled that its former chef was entitled to approximately $450,000 in unpaid overtime wages and liquidated damages, plus attorneys’ fees.

Adan Sanchez Sanchez was employed at Malbec restaurant, an Argentinian steakhouse located in Washington, D.C., from December 2015 to August 2019. Throughout this time, Sanchez held the title of “chef” or “kitchen manager.” The restaurant also employed another individual as its general manager.

In October 2019, Sanchez sued Malbec and its owner, alleging that they failed to pay him overtime pay as required by federal and D.C. law. The restaurant responded that Sanchez was not entitled to overtime pay because, as chef, he was an exempt executive.

Federal regulations define an exempt executive employee as one:

(1) [Who is] [c]ompensated on a salary basis . . . at a rate of not less than $684* per week exclusive of board, lodging and other facilities;

(2) Whose primary duty is management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof;

(3) Who customarily and regularly directs the work of two or more other employees; and

(4) Who has the authority to hire or fire other employees or whose suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees are given particular weight.

29 C.F.R. § 541.100(a)

(*The minimum salary level has since been increased.)

After a trial, the court determined that while Sanchez was paid a salary of at least $684 per week, he could not be classified as exempt because his primary duty was not management. Although he was “in charge of the kitchen,” prepared the menu, and sometimes oversaw other employees working in the kitchen, he was neither “in charge of, nor had significant (if any) input in, hiring and firing decisions.” The court noted that “sometimes performing managerial duties is not enough to prove that management is a ‘primary duty.'”

Because Sanchez was not exempt, the court found that he was entitled to overtime pay for any workweek in which he worked more than 40 hours. Unfortunately for the restaurant, because Sanchez was treated as an exempt employee, there were no records of his work hours. Instead, at trial, witnesses for both sides had to testify about Sanchez’s hours. The court ultimately accepted Sanchez’s estimate that he typically worked 10.5 to 11 hours per day, for a total of 2,770 overtime hours, equating to overtime wages of $112,102.50. The court also found that Sanchez was entitled to treble damages under D.C. law in addition to the wages due to him under the FLSA, as well as his attorneys’ fees and costs of suit.

Lessons for Employers

Employers should assume – as the law does – that employees are by default entitled to overtime pay whenever they work more than 40 hours in a workweek. Simply paying an employee a salary or giving an employee a job title like “chef” or “manager” does not make the employee exempt if the employee’s actual job duties do not meet all of the requirements for one or more of the exemptions available under state and federal law.

It is also vital for employers to maintain records of employee work hours. In some states, like Illinois, employers are obligated to maintain records of employees’ work hours even for overtime exempt employees. Failure to maintain such records puts an employer at a severe disadvantage, as courts and administrative agencies will presume that an employee’s estimate of their work hours is accurate absent persuasive evidence to the contrary.

Finally, employers should not hesitate to check with their employment lawyers to make sure that their practices comply with the law for their jurisdiction. As this case illustrates, a quick phone call could easily save an employer years of legal headaches and tens or even hundreds of thousands of dollars in legal fees and liability.

After a federal judge in the Eastern District of Texas blocked the DOL’s new overtime exemption rule as it pertains to Texas state employees, another judge in the Northern District of Texas declined to issue a similar injunction in a challenge brought by tech company Flint Avenue, LLC. Without addressing the merits of the company’s challenge to the new rule, the court found that a preliminary inunction was not needed because the company did not have any exempt employees who would immediately be rendered nonexempt under the new rule on July 1, 2024. The company conceded that the one employee who it had previously identified was not exempt under the existing rule from 2019. The court determined that a preliminary injunction was not necessary as to four other employees because they would not be affected until after January 1, 2025, when the minimum exempt salary increases again to $1,128. The court stated that it would be able to rule on the merits of the company’s claims before then, making a preliminary injunction unnecessary.

While the DOL’s new overtime rule remains in effect for employers other than the State of Texas, the legal challenges will continue. We will report on further developments as they occur.

On Friday, a federal district court granted a preliminary injunction sought by the State of Texas to block implementation of the U.S. Department of Labor’s new rule increasing minimum salaries for overtime exempt employee. However, the court limited the effect of its injunction to the State of Texas as an employer.

The court concluded that the DOL exceeded its authority by making salary level, rather than job duties, the deciding factor in determining whether many employees fall within the executive, administrative, and professional exemptions under the Fair Labor Standards Act. Although Texas asked for a nationwide injunction, the court declined to extend its ruling beyond Texas state employees, reasoning that the state was the only party to the litigation and had failed to present evidence showing that other employers would be harmed if the rule were to go into effect.

While the present order is limited to Texas state employees, the court also entered a procedural order combining the state’s lawsuit with a parallel suit filed by the Plano Chamber of Commerce and other employer groups. The business groups have yet to file a motion for a preliminary injunction or temporary restraining order, but may now do so in light of the court’s ruling on the State of Texas’s motion.

A third lawsuit challenging the new rule, filed by software developer Flint Avenue, LLC, is pending in the U.S. District Court for the Northern District of Texas. The plaintiff in that case did seek a preliminary injunction. The court has yet to rule on that motion.

The DOL has given no indication that it intends to postpone implementation of its new rule for employers other than the State of Texas. While a broader injunction may follow in the wake of this order, employers should assume for the time being that the new salary rules are in effect.

With the DOL’s new overtime exemption rule set to go into effect on July 1 and no ruling yet on the state of Texas’s motion to put the rule on hold, employers will need to decide what to do with exempt employees whose minimum salary falls below the new threshold.

For some employees, the best path may be to convert an exempt employee’s salary to an hourly rate so that employees’ take home pay remains steady once overtime is factored in. In principle, this is relatively simple: just calculate how many hours the employee is expected to work, then do the math to back in to the correct hourly rate. In practice, things can be a bit more complicated.

Step 1: Estimate weekly overtime

For most employers, this will be the hard part. Any accurate projection of compensation for an employee who is entitled to overtime pay has to include an accurate estimate of how many overtime hours an employee is likely to work. This might be simple for employees who work a fixed schedule in an office setting. But remember, when an employee is non-exempt, they have to be paid for all hours worked. This may include work that would usually be done at home or after hours, time spent dealing with work matters during a lunch break, travel and training time, etc. Don’t assume that someone works 35 or 40 hours per week just because that is the nominal schedule.

Some states, including Illinois, already require employers to maintain accurate records of daily work hours for all employees, including exempt employees. However, most employers do not regularly track exempt employees’ working hours. In the absence of accurate time records, employers are left to estimate. This might entail speaking with supervisors, who hopefully have at least a general idea of when people come in, whether they respond to calls or email after hours, and whether they stick around after “quitting time.” Employers can also look at records such as network access and keycard logs to see when people are present and working.

Of course, once an employee is classified as non-exempt, it is vital to maintain an accurate record of their hours. If the recorded hours do not match up with prior estimates, employers can either adjust employees’ hours or adjust pay rates to ensure that employees are fairly compensated. Of course, such adjustments may create employee relations issues. People may not appreciate having their hours changed, and while they don’t typically mind pay increases, pay reductions will be less popular.

Step 2: Calculate the Hourly Wage

Once you have a decent estimate of how many hours an employee works, converting a salary to an equivalent hourly rate is relatively simple. If the employee works fewer than 40 hours, just divide the salary by the number of hours worked. If the employee does work overtime, the math is only slightly more complicated.

Here’s the formula:

Hourly Rate = Salary ÷ (40 + (OT hours x 1.5))

For those who don’t like to do math, here is an Excel file that will calculate the amount for you: Calculator – Salary to Hourly Rate

Caveats

Remember, garbage in, garbage out – if your estimates of work hours are off, this formula will not necessarily result in hourly earnings that are the same as a reclassified employee’s former salary. One way to address this might be to set the rate conservatively, but tell employees that the company will gross up their pay after some period if it turns out to be less than their former earnings. Just be aware that if you do that, the “gross up” bonus may itself have to be factored into overtime.

Also note that this method may not work very well for employees whose hours fluctuate significantly from week to week. For those employees, consider whether the fluctuating workweek method of calculating overtime based on a fixed weekly salary may be a better fit than an hourly wage.

UPDATE June 27, 2024: As of this morning, the court has yet to rule on the pending motion to block implementation of the DOL’s new overtime rule. Yesterday, the DOL filed a “notice of supplemental authority,” suggesting that the district court should follow the Supreme Court’s decision yesterday in Murthy v. Missouri by holding that any relief in the case is limited to the state of Texas as an employer, rather than blocking the rule nationwide for all employers. If the district court follows that suggestion, the new rule may still take effect on July 1 even if the court finds that the DOL exceeded its authority in adopting the rule. Employers should remain prepared to implement the new rule on July 1 by increasing salaries to meet the new minimum salary thresholds or reclassifying employees as non-exempt.

ORIGINAL POST:

The clock is quickly ticking down to July 1, when the U.S. Department of Labor’s new rule increasing the minimum salary for many employees to be considered exempt from overtime under the Fair Labor Standards Act is supposed to take effect. When a similar rule was supposed to take effect back in 2016, the clock was paused at the last moment by a federal judge in Texas, who found that the DOL exceeded its authority under the FLSA by making salary rather than job duties the controlling factor for whether an employee is an exempt executive, administrative, or professional employee. The 2016 rule never took effect, although the DOL approved a smaller increase to the minimum salary level in 2019, to the current $684 per week.

This past Monday, June 24, 2024, another federal judge heard arguments on a motion to block implementation of the DOL’s new rule in State of Texas v. United States Department of Labor, et al. In comments during the hearing, Judge Sean D. Jordan reportedly expressed skepticism about the new rule, suggesting that a repeat of 2016 may well be in the works. Judge Jordan has yet to issue a ruling but could do so at any time.

So what should employers do in the meantime? As in life, nothing is certain in litigation. Until we know for certain that the rule will be enjoined, employers should assume that it will take effect on July 1. If it does, employees with salary levels below the new minimum of $844 per week (increasing again to $1,128 per week effective January 1, 2025) either need to be paid more or reclassified as non-exempt.

Stay tuned for further updates.

A common question for schools assessing how to comply with the new overtime exemption rule published by the U.S. DOL is what to do about coaches and athletic trainers in light of the new minimum salary requirement for the executive, administrative and professional exemptions.

For coaches, two exemptions may still apply even if the coach’s salary falls below the new thresholds of $884 per week (starting July 1, 2024) or $1,128 per week (starting January 1, 2025). A coach whose primary job duties are instructing student athletes on topics such as athletic performance, physical health, team concepts, and safety, or designing instructional programs for student athletes or the team as a whole, may qualify for the teaching exemption. Employees who fall under the teaching exemption do not have to be paid on a salary basis or meet the minimum salary level under the regulations.

Continue Reading Coaches and Athletic Trainers Under the New FLSA Exemption Rules

The U.S. Department of Labor recently published new final regulations that increase the minimum salary level for most employees to be considered exempt under the executive, administrative, and professional exemptions to the Fair Labor Standards Act. While these new rules could affect some 4 million workers, not all exempt employees are subject to the minimum salary requirement.

Continue Reading Not All Exempt Employees Are Affected by the New Minimum Salary Rule