United States: Federal Court Blocks New Overtime Rule - How Should Your Business Respond?

Late yesterday, a federal court issued a nationwide preliminary injunction against the U.S. Department of Labor (DOL) that temporarily blocks the implementation of the DOL's new overtime rule, which was scheduled to take effect on December 1, 2016.  This eleventh-hour injunction allows employers to maintain the status quo and operate under the current salary basis of $455 per week ($23,660 annually) for determining employee exemptions from overtime under the Fair Labor Standards Act (FLSA).  The new rule, which was estimated to make 4.2 million additional workers eligible to receive overtime pay, is now in jeopardy of being permanently struck down by the court.

How Did We Get Here?

As we previously reported, the DOL announced the new final rule in May, which substantially increased the minimum pay threshold necessary for certain "white-collar" administrative, professional, and executive employees to be classified as "exempt" salaried employees and therefore ineligible to receive overtime pay.  The rule did not, however, alter the "duties tests" necessary for an employee to meet any of the white-collar exemptions.  Therefore, under the new rule, in order to properly classify an employee as an exempt salaried employee, an employer would be required to ensure that (i) the employee is paid no less than the new salary threshold of $913 per week ($47,476 annually) and (ii) the employee's primary duties meet all of the requirements of at least one of the white-collar exemptions.

Following the DOL's announcement of the new rule, many employers scrambled to audit the classifications of their workforce and, in many cases, decided to increase the salaries of their affected exempt salaried employees in order to meet the new threshold or to reclassify their exempt salaried employees to non-exempt hourly employees, who would thereafter be eligible to receive overtime pay under the FLSA. 

However, in September, several states (Florida did not join in) and a coalition of business groups, including the U.S. Chamber of Commerce, filed a lawsuit against the DOL in the U.S. District Court for the Eastern District of Texas, arguing that the DOL exceeded its authority in promulgating the rule.  In October, the challengers requested an injunction to block the rule from taking effect.

Yesterday, U.S. District Court Judge Amos L. Mazzant, an appointee of President Obama, agreed with the challengers and entered a nationwide preliminary injunction that temporarily halts the rule from taking effect until a full trial on the merits can be conducted.  In so doing, the court determined that the challengers stood a significant chance of succeeding on the merits with respect to the case and would suffer serious financial harm if the rule took effect as scheduled on December 1st.

The court held that the new salary threshold served to supplant the "duties tests" for the white-collar exemptions, which contravened the intent of Congress when it included the white-collar exemptions as part of the FLSA.  According to the court, the "significant increase to the salary level creates essentially a de facto salary-only test," which was not Congress' intent.  Therefore, based on the challengers' likelihood of success on the merits, the court issued the preliminary injunction, which serves to maintain the status quo of the law on a nationwide basis (i.e., the new rule will not go into effect on December 1st) until a full trial on the merits can be conducted.

What Happens Now?

The DOL has the right to appeal the district court's decision to the U.S. Court of Appeals for the Fifth Circuit.  However, that appellate court is generally viewed as conservative and has recently struck down other executive actions of the Obama Administration.  Even if the rule survives the current legal challenge, the new Congress may pass a law that nullifies the rule.  It is also possible that under the new Trump Administration, the DOL will take actions to repeal or change the rule.

What Does the Injunction Mean for Employers?

For now, employers are not required to comply with the DOL's rule until the issue of the rule's effectiveness is resolved by the courts.  In this regard:

  • employers who have not yet made compensation or classification decisions under the new rule may continue to operate under the status quo until further notice;
  • employers who have already decided to grant pay raises to meet the increased salary threshold or reclassify employees as overtime eligible in light of the increased salary threshold but have not announced that decision to affected employees may postpone any announcement and continue to operate under the status quo until further notice;
  • employers who have already announced compensation or classification changes to comply with the increased salary threshold will now have to make difficult decisions regarding whether to continue to implement those changes or roll them back. 

The future of the DOL's rule is uncertain.  Employers should still be ready to implement compensation or classification changes if the injunction is lifted.  For now, company management should work closely with its human resources team and employment counsel to reexamine any decisions made in light of the district court's injunction and, if necessary, to effectively communicate the company's plan of action to its workforce in a way that is positive for both employee morale and the company's bottom line.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Rachel D. Gebaide
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