United States: Federal Court Blocks New Overtime Rule

Last Updated: November 28 2016
Article by Sean M. McCrory, Maury Baskin, Robert F. Friedman and Tammy McCutchen

On November 22, 2016, at the request of 22 states and 55 business groups that brought suit as plaintiffs,1 the United States District Court for the Eastern District of Texas issued a preliminary injunction blocking the U.S. Department of Labor's new rule re-defining which employees are exempt from the minimum wage and overtime requirements of the Fair Labor Standards Act (FLSA).2  The new rule—which was set to take effect on December 1, 2016—would have more than doubled the minimum salary level for exempt employees from $455 per week ($23,660 annually) to $913 per week ($47,476 annually).  As a practical matter, the impact of this decision by the Texas federal court means that employers do not need to go forward with plans to implement the new rule's requirements in their workplaces.

Due to the hardship the new rule would bring, Nevada and 21 other states sued the DOL to challenge the new rule and request injunctive relief.  The Chamber of Commerce and a diverse coalition of business associations also sued in the Eastern District of Texas to contest the validity of the rule and prevent the harm the new rule threatened to bring to their members. The court consolidated the actions of the states and the business associations. 

The court held a three-and-a-half-hour hearing on the states' request for a preliminary injunction on November 16, 2016, and granted the injunction less than a week later.  The court held that there was a likelihood of success on the merits that the new rule was invalid. 

The states and business associations' arguments focused on the new rule's extreme deviation from Congress's unambiguous intent to exempt executive, administrative and professional (EAP) employees from the FLSA by adopting a minimum salary level that would exclude millions of employees performing exempt EAP job duties based solely on their salary level. The court agreed, noting that although there is no mention of a salary threshold in the statute, the new rule made the salary threshold a center-point.  Although there has been a salary requirement by regulation since 1940, since that time, the DOL has also set a low minimum salary level so that only "obviously" non-exempt employees are excluded from the exemption.  At the preliminary injunction hearing, the court characterized the salary level increase as a "drastic" change that would exclude 4.2 million employees from the exemption even though they perform exempt job duties.  Thus, the court concluded that the plaintiffs demonstrated a likelihood of success on the merits of their claim that the DOL had exceeded its rule-making authority because Congress intended to exempt EAP employees based on the duties they perform.  The court held the DOL exceeded congressional authority by raising the salary threshold to such a high level it supplanted the duties test for exempt status.

Not only did the states show a likelihood of success on the merits, they also bolstered their request for injunctive relief by demonstrating they would suffer irreparable harm should the new rule go into effect.  The states presented evidence that the new rule would deplete state budgets, cause layoffs, and hamper government services.  Because the states faced irreparable harm, injunctive relief was appropriate.  Further, the DOL presented no evidence of hardship should the new rule be enjoined.  The court also held the public interest would be best served by enjoining the new rule.  An injunction would preserve the status quo and prevent harm to state budgets, layoffs and the disruption of government services.

With the importance of preserving the status quo in mind, the court determined a nationwide injunction was appropriate.  The new rule will not go into effect on December 1, 2016, without further action from the court.  The court may also grant the business associations' motion for summary judgment, which asks the court to vacate the new rule and put an end to the DOL's unprecedented changes.

This decision presents practical considerations for employers going forward, which include the following:

  1. Because the court has enjoined the DOL from implementing and enforcing its new regulations, employers are not required to comply with the rule by December 1st.  Thus, employers can table plans to raise currently exempt employees' salaries to $913 per week ($47,476 annualized) or to convert employees with lower salaries to non-exempt status.
  2. This is a temporary injunction.  But the district court is already considering a motion for summary judgment filed by the business plaintiffs that would make the injunction permanent.  In addition, under its current leadership, the DOL may appeal the decision to the United States Court of Appeals for the Fifth Circuit, which could reverse the decision.  On the other hand, the incoming Trump administration may decide not to pursue an appeal.  Bottom line: while there is no need to implement changes to comply with the new rule by December 1st, employers should remain ready to comply quickly if the decision is reversed.   
  3. Some employers may have already announced or implemented plans to comply with the new rule.  Be cautious when unraveling these changes. Remember this injunction is temporary and not a final decision. Before moving employees back to exempt status, employers should ensure they meet the job duties requirements for exemption under both the FLSA and state laws, and comply with state law requirements regarding notices to changes in pay.  Because taking away proposed salary increases may lead to employee relations issues, employers may prefer to adjust by slowing future increases or reversing the changes over a set period of time.  For employees recently converted to non-exempt status, employers may want to ask the employees whether they prefer to be converted back to exempt, with a guaranteed salary and no requirement to punch a time clock, or continue to be eligible for overtime pay as a non-exempt employee.  The bottom line is that there are issues employers need to consider with respect to unraveling this issue, even though the unraveling has been caused by a court injunction.

Littler Mendelson will keep employers apprised of all future developments with respect to the court's decision to enjoin the new rule and the DOL's reaction to that decision.

Footnotes

1. The Business Associations are represented by Littler Mendelson, P.C. (Maury Baskin, Rob Friedman, Tammy McCutchen, and Sean McCrory) in the consolidated case of Plano Chamber of Commerce et. al. v. Thomas E. Perezet. al. No. 4:16-cv-732-ALM.  

2. 29 U.S.C. § 213(a)(1); 29 C.F.R. Part 541.

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Sean M. McCrory
Tammy McCutchen
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