Two major policies from the US Labor Department are likely to undergo a potent examination to determine whether the latest revisions to the department’s regulations can overcome the legal shortcomings which resulted in the failure of their Obama-era counterparts.
The Biden administration unveiled final regulations this Tuesday to extend overtime pay protections to cover millions more US workers and to widen strict fiduciary standards of conduct to include more retirement plan advisers. Both regulations swiftly drew criticism from business groups and Wall Street.
Marc Cadin, CEO of the financial security professionals group, voiced his concern about the regulations, stating his intent to recommend litigation to the Finseca board.
Both regulations, while implementing different federal laws – the Fair Labor Standards Act and the Employee Retirement Income Security Act of 1974 – share the potential to ignite some legal déjà vu if the DOL is forced to defend these new policies in court. Their Obama-era predecessors were struck down on allegations of overstepping the bounds of the underlying laws, a flaw that some management-side lawyers argue is present in the new rules.
The argument was made by James Paretti, a management-side attorney at Littler Mendelson PC, who pointed out that the Biden administration is following a similar strategy to one the court dismissed in 2016. Carol McClarnon, a partner in Eversheds Sutherland’s employee benefits and executive compensation department, also raised concerns about the new rule, predicting it may face legal challenges.
For the Fair Labor Standards Act, several exemptions to overtime pay requirements exist for certain industries. The DOL uses a three-part test for determining exemptions for “executive, administrative, professional and outside sales” employees. This test requires the employee to be salaried, earn more than a specified amount per year, and hold certain job duties.
Action has already been taken to challenge the Obama administration’s attempt to raise the salary threshold for overtime exemption. In 2016, their rule was invalidated by a federal judge in Texas, who argued that the DOL set the salary threshold so high that it essentially negated the job duties part of the test. This new rule from the Biden administration, which seeks to raise the salary threshold to approximately $59,000, is predicted to face a similar fate.
There is, however, a significant difference between the 2016 and the new 2024 rules: the method used to calculate the salary threshold. The Biden rule sets its triannual updates by using the 35th percentile of earnings in the lowest wage region in the country. The question remains whether this change will be enough to ensure this rule’s survival against a legal challenge.
The DOL also attempted to address any flaws in the new fiduciary rule that contributed to the failure of its Obama-era version. This came to a head when the US Court of Appeals for the Fifth Circuit vacated the Obama regulation in 2018, ruling against the DOL’s attempt to replace a 1975 five-part test defining an investment advice fiduciary.
Only time will tell if these new rules can withstand the legal challenges ahead and be successfully implemented without repeating the failures of their predecessors.