Monthly Archives:' November 2016

Texas Court Enjoins Salary Test For Exempt Employees

On November 22, 2016, Judge Mazzant from the Eastern District of Texas, issued a preliminary injunction, stopping the December 1 application of a huge increase in the salary test for FLSA exemptions for executive, administrative, and professional employees.  Here is the rest of the story.

Background. Both business interests (through Plano Chamber of Commerce and others) as well as a number of state AGs (including Texas) sued the Department of Labor (DOL) to enjoin the revised rules relating to executive, administrative, and professional (EAP) exemptions in the Fair Labor Standards Act (FLSA). The cases were combined by Judge Mazzant, who has issued a preliminary nationwide injunction, stopping the December 1 implementation of the significantly increased salary test. The next step will be a determination as to whether or not the FLSA supports the use of a salary test at all. A change in leadership at the DOL and US Attorney General could result in a decision to not defend the regulation.

The Memorandum Opinion and Order by Mazzant notes that the FLSA delegates to DOL the authority to define the terms “bona fide executive, administrative, or professional capacity.” However, he has concluded that this exemption can and should be defined by referencing duties without also imposing a minimum salary level. The ultimate result may be that the rule will be amended as a result of the judicial determination that only a duties test is authorized under FLSA with no minimum salary requirement to be imposed.

By the way, a minimum salary test has been in the rules since 1949! By bumping up the minimum salary so significantly (almost doubling) without a phase-in, DOL virtually guaranteed push back.

So, this still leaves you with the question of what do in response to this order. My hunch is that in January with a new administration, the salary test issue could be resolved with a decision to NOT DEFEND the rule. But that is only a hunch.  Here is a possible response:

Restore prior treatment of EAP.  For many employers, the major issue is keeping these individuals on a salary basis rather than hourly. Also, the record keeping rules do not apply to exempt employees. Many previously exempt employees are unhappy with this perceived “demotion” as well as the need to punch a clock (figuratively) and keep time records. Employers may wish to indefinitely defer changes with the understanding that these may need to be made in the future. However, if you have already increased salaries, you may not be able to put that genii back in the bottle.

No change to MLOs. But please note that this case is about the salary part of the EAP rule. That would not affect the prior rules relating to the duties test for mortgage loan officers (MLOs). According to DOL, MLOs don’t meet either the administrative or the outside sales exemptions in the FLSA based on an analysis of their duties.

Consequences of Election

The trade associations and the trade journals have all made their prognostications as to the consequences of a Trump administration with a Republican majority in both the House (solid) and Senate (slim). The following is a review of the potential actions that could result from this new regime.
CFPB. While we would all like to put that genie back into the bottle, unwinding the agency appears unlikely to me. To create it, the Fed, FTC, and HUD all dismantled their consumer compliance rulemaking and interpreting sections. Some experts retired while some moved over to the CFPB. All of the rule-making functions were shifted to the CFPB. I suspect that it is unlikely that this function will be de-centralized with all of those divisions re-created. Also, I am skeptical that the Fed would get back its consumer regulation writing authority given some of the animosity that Trump has expressed toward the Fed! However, there are several other possible scenarios that seem very likely.
First, President Trump could take the DC Court of Appeals at its word and dismiss Director Cordray, with or without cause. The PHH decision “cured” the constitutional defects in the organization by concluding that the president should be able to remove him without cause. Alternatively, perhaps the extremely high-handed approach taken by this director could support a finding of “cause” to remove. The refusal to acknowledge the statutes of limitation applicable to various laws and the punitive use of penalties as well as retroactive changes in the game rules all are highly offensive and might support a “cause” finding.
Second, a Republican majority Congress could finally enact meaningful change to the agency by replacing the single director with a multi-party commission, more accountable to Congress.  In addition, the open pocket book should be slammed shut!
Executive Orders. Trump has promised to rescind Obama’s Executive Orders on “day one.” There are several relating to federal contractors that have been troubling to banks. These include rules relating to minimum wage and diversity rules. Not all applied to banks, however.
Employment Issues. The Obama DOL reversed the Bush DOL on the rules for exemption of mortgage loan officers. I could envision this interpretation swinging back around. In addition, DOL significantly increased the salary test for the exempt categories. I could see those getting cut back at least somewhat. The banking regulators have been asking banks with more than 100 employees for their diversity plans. That was part of the Dodd Frank Act but is not well articulated.  I would like to see that de-emphasized as well.
Arbitration. The CFPB clearly does not like arbitration. Its rule-making would eviscerate this remedy, arguably in contravention of the Federal Arbitration Act. The Dodd Frank Act only prohibits mandatory pre-dispute arbitration in residential mortgages and authorizes a study of other scenarios. This is another area that should be reined in.
Overdraft Programs. The CFPB has this on its agenda but has done very little work on it as of this writing. In a meeting I participated in this spring in Washington, it was painfully clear that Cordray doesn’t understand the difference between an ad hoc program and an automated one. It is also clear that the CFPB wonks don’t grasp the fact that their rules (like the small dollar loan proposal) would actually reduce credit availability and make it more costly. Similarly, strict limits on overdraft privilege would eliminate a cheap source of credit for many.
Residential Mortgage Rules. This area is extremely complex. The CFPB actually put into place rules with more flexibility than the statute. They could do this under their authority to create flexibility where appropriate. And integrating Truth in Lending and RESPA disclosures instead of having two sets of inconsistent documents is not a bad thing. Industry has invested millions of dollars and untold time into making TRID work. Unraveling it at this point would be hugely expensive.
By contrast, implementing more flexibility in the ability to repay rules would make sense. Both the statute and the rules make it hard for self-employed and high net worth customers to qualify for credit!
Basel III. It appears that European banks may thumb their collective noses at the changed and increased capital requirements. Thus, it doesn’t make sense for American banks to be hamstrung by these rules. While many of the pending Fed rules would primarily apply to the largest banks, the existing HVCRE requirements are having a negative impact on interim construction financing, hurting both lenders and the economy.
Taxes. This appears to be the area of greatest potential for meaningful reform. The changes in brackets and rates would be straight-forward, real relief. And, this has the potential to stimulate meaningful economic activity.
Fair Lending. Although the US Supreme Court held that the Fair Housing Act enforcement can use statistical analysis to find “disparate impact,” it has not applied this to the Equal Credit Opportunity Act-which has different statutory language. I believe that there is an opportunity here to rein in arbitrary actions by the banking regulators and the Department of Justice. Again, these have had the perverse effect of restricting credit availability in the pursuit of “cookie cutter” lending standards and terms.
Recent redlining rulings-which have been agreed to without trial-have forced banks to put branches in locations identified by the regulators or DOJ. This is antithetical to the concept that banks must also answer to their shareholders. It effectively converts banking into a kind of utility. All of this is the result of prosecutorial privilege rather than clear rules. This could be dialed back with appropriate appointments, I think.
ADA. Banks are being threatened with lawsuits over accessibility of their websites by the blind and visually impaired. Yet DOJ has stated that it will not provide rules for such websites until sometime in 2018. Right now industry doesn’t know which standards will be imposed, but they are liable for failing to meet them! DOJ has supported these lawsuits with amicus briefs but has not supported business by providing answers. Again, the right appointments could clarify this murky source of liability.
Conclusion. With judicious appointments and repeal of certain executive orders, Trump can significantly reduce some of the regulatory burden that is a headwind, slowing economic growth. For more information contact: Karen Neeley.

Kennedy Sutherland Named a 2017 'Best Law Firm' by U.S. News-Best Lawyers

Kennedy Sutherland LLP is pleased to announce that it has been named a “Best Law Firm” by U.S. News – Best Lawyers for 2017, achieving national Tier 1 rankings in the practice area of Financial Services Regulation Law.

“Kennedy Sutherland LLP has taken great pride in advising financial institutions on regulatory compliance and enforcement, complex transactions and other expansion activities and banking laws for over 30 years. It’s an honor to have our clients and peers include us in this distinguished group for the work we’ve done” said Patrick J. Kennedy, Jr.

Firms included on the “Best Law Firms” list are recognized for professional excellence with persistently impressive ratings from clients and peers. Inclusion in the rankings signals a quality law practice and breadth of legal experience and knowledge.

About “Best Law Firms”: The U.S. News – Best Lawyers® “Best Law Firms” rankings are based on a rigorous evaluation process that includes the collection of client and lawyer evaluations, peer review from leading attorneys in their field, and review of additional information provided by law firms as part of the formal submission process. To be eligible for a ranking, a law firm must have at least one lawyer listed in 23rd Edition of The Best Lawyers in America© list for that particular location and specialty.

About U.S News & Best Lawyers: U.S. News Media Group publishes the monthly U.S. News & World Report magazine and its signature franchises include its “America’s Best” series of consumer guides that include rankings of colleges, graduate schools, hospitals, health plans and more. Best Lawyers is the oldest peer-review publication in the legal profession. For over a quarter century, the company has helped lawyers and clients find legal counsel in distant jurisdictions or unfamiliar specialties.