401(k) Advice, Overtime Rules Poised to Reprise Obama-Era Fights

Two signature US Labor Department policies are almost certain to face a test of whether the latest updates to the agency’s regulations can survive legal deficiencies that led to the demise of their Obama-era predecessors.

The Biden administration released final rules Tuesday both to extend overtime pay protections to cover millions more US workers and to expand strict fiduciary standards of conduct to cover more retirement plan advisers. Both immediately drew pushback from business groups and Wall Street.

“Based on this deeply flawed process, I am going to recommend to the Finseca board that litigation makes sense,” said Marc Cadin, CEO of the financial security professionals group. “I don’t think we can just sit by and let them foist this on the American people.”

While the rules implement different federal statutes—the Fair Labor Standards Act and the Employee Retirement Income Security Act of 1974—both have the potential to induce some legal deja-vu if the DOL must defend the new policies in court.

The Obama administration’s overtime and fiduciary rules were struck down for going beyond the text of the underlying laws. Management-side attorneys say the new rules suffer the same flaws.

The Biden administration has the same flawed gameplan that the court struck down in 2016, James Paretti, a management-side attorney at Littler Mendelson PC, said of the overtime rule. “It could be a case of history repeating itself.”

Carol McClarnon, a partner in Eversheds Sutherland (US) LLP’s employee benefits and executive compensation department, said the new fiduciary rule has “provisions that I still think are problematic and subject to litigation.”

“I think it’s going to get attacked all over the place,” she said.

Three-Part Test

Under the Fair Labor Standards Act, there are several exemptions to overtime pay requirements for certain industries.

When it comes to “executive, administrative, professional and outside sales” employees, the DOL uses a three-part test that requires an employee to be salaried, make more than a certain amount per year, and have certain job duties in order to be exempt from time-and-a-half-pay-requirements.

In 2016, the Obama administration attempted to raise the salary threshold piece of that test to $47,476 and update it every three years. But the rule—which never went into effect—<-bsp-article-citation state="{"cms.site.owner":{"_ref":"00000166-e5a9-d785-a767-fffdcac50000","_type":"00000151-acf5-d1ce-a159-bff728d6001e"},"cms.content.publishDate":1713971292836,"cms.content.publishUser":{"_ref":"0000017d-957e-dd7d-a97d-9f7fb45f0000","_type":"00000151-acf5-d1ce-a159-bff728d8001b"},"cms.content.updateDate":1713971292836,"cms.content.updateUser":{"_ref":"0000017d-957e-dd7d-a97d-9f7fb45f0000","_type":"00000151-acf5-d1ce-a159-bff728d8001b"},"articleCitation":{"linkArticle":{"_ref":"0000015e-39ca-d666-a57e-bfda7dd60002","_type":"00000151-acf5-d1ce-a159-bff728d50010"},"_id":"0000018f-10a6-dda8-a78f-16f64f520000","_type":"00000160-bca2-df03-a1ef-bcef37330000"},"_id":"0000018f-10a6-dda8-a78f-16f64f4b0000","_type":"00000160-bca2-df03-a1ef-bcef37350000"}">was halted and later invalidated by a federal judge in Texas, who said the DOL set the salary threshold so high it “effectively eliminated” the duties portion of the test.

Judge Amos Mazzant of the US District Court for the Eastern District of Texas also found that the provision to automatically update the threshold went beyond the agency’s authority.

Management-side attorneys predict the new overtime rule—which would similarly raise the salary threshold to roughly $59,000 and update it triannually—will likely meet the same fate.

“I do think that the rule at least theoretically has the same sorts of vulnerabilities as the 2016 rule,” said Timothy Taylor, an employment and litigation attorney at Holland & Knight LLP who served as a deputy solicitor of labor during the Trump administration. He pointed to the rule’s significant initial increases in the salary threshold and the automatic updates.

Different Percentiles

But there is a big difference between the 2016 and the 2024 rules: the methodology used to calculate the salary threshold.

The existing overtime salary threshold calculation—set under former President George W. Bush and also used by the Trump administration—is based on the 20th percentile of weekly earnings of full-time salaried workers in the lowest wage region of the country, but it’s not automatically updated.

The Obama-era test would have tied its salary threshold automatic updates to what the bottom 40% of these workers were earning, which would have made far more employees eligible for overtime pay.

Similarly, the Biden rule sets its triannual updates based on the 35th percentile of earnings in the lowest wage region in the US, which is currently the South.

“That does directly implicate the 2016 challenge to the Obama rule,” said Andrew Spital, chair of Willkie Farr & Gallagher LLP’s employment litigation and counseling practice.

“If 20% to 40% is an overreach, well, then isn’t 20% to 35% also an overreach?” he said. “That’s going to be the argument.”

Separately, some attorneys have suggested that the DOL’s use of Trump-era methodology to calculate an intermediate salary threshold of $43,888, scheduled for July 1, may help that provision survive a legal challenge.

The agency explained in its final rule that its approach “will work effectively with the standard duties test to better define and delimit” the executive, administrative, and professional exemption and will ensure “overtime protection for some lower-salaried employees without excluding from exemption too many white-collar employees solely based on their salary level.”

In response to comments that the new rule runs afoul of the 2017 decision striking down the Obama regulation, the DOL said its policy won’t “create an impermissible ‘de facto’ salary-only test or make nonexempt too many employees who pass the duties test, and is compatible with the district court decision’s emphasis on the salary level test’s historic screening function.”

“Time will tell whether what they what they’ve done is sufficient to allay those sort of concerns,” Taylor said.

Fiduciary Definition

The DOL similarly attempted in its new fiduciary rule to overcome the defects that sank the Obama-era version.

“The preamble really reflects the ways in which this rule was crafted so as to not fall into the same traps, so it’s not just a rehash of that 2016 rule, it’s really intended to be a different and more resilient rule,” said Elizabeth Dyer, partner at Cleary Gottlieb. “The DOL is acutely aware of this, that the rule is likely to be challenged whether it’s by the insurance industry or some other contingent just because of the changes it’s going to usher in.”

The US Court of Appeals for the Fifth Circuit vacated the Obama regulation in 2018, ruling 2-1 against the DOL’s attempt to replace a 1975 five-part test defining an investment advice fiduciary.

The Obama rule was inconsistent with the plain text of ERISA and the Internal Revenue Code as well as the common law meaning of “fiduciary,” which is a “special relationship of trust and confidence” with a client, the court found.

Imposing fiduciary duties on IRA investments, annuities, and other insurance products thus unlawfully expanded the DOL’s purview under ERISA, the court said.

Removing the five-part test to determine who qualifies as a fiduciary—in particular an element focused on whether advice is provided on a “regular basis"—is one key way the new rule revamps past iterations and brings advisers who only provide a single instance of advice under the umbrella of its new definition.

The DOL said this specific change was meant to alleviate tension with the statutory text of ERISA, which the Fifth Circuit highlighted.

Stricter Exemption Conditions

But McClarnon said the DOL’s amendment to its PTE 2020-02 procedures and requirements and other prohibited transaction exemptions—which allow fiduciaries to receive compensation that would otherwise be banned—may be ripe for renewed litigation.

“Slapping a disclosure on a communication or saying it was a one-time interaction won’t be sufficient to allow you to avoid fiduciary responsibility” under the new rule, said Robert Sichel, partner at K&L Gates LLP. “The heart of this is that the DOL is turning more folks into fiduciaries, that’s their goal, so at the end of the day there’s going to be more fiduciaries and more fiduciary interactions and that will lead to more litigation.”

Stephen Hall, legal director and securities specialist at Better Markets—an industry group that supports the new fiduciary rule—noted there’s recently been “a real explosion in litigation challenging agency rules,” making challenges to the new DOL policies “inevitable.”

“Judges on the federal bench, especially in areas like the Fifth Circuit, are predisposed to accept industry attacks,” he said.