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Federal Court Enjoins DOL’s New Overtime Rule: What’s Next For Employers?

Last Wednesday, just days before the December 1, 2016, effective date of the Department of Labor’s (“DOL”) new overtime rule (the “Final Rule”), a federal district court judge in Texas issued a nationwide preliminary injunction blocking it from taking effect.

The Final Rule would have made millions of additional American workers potentially eligible for time-and-a-half overtime pay. At least for now, the ruling preserves the status quo, meaning that the minimum weekly salary required for most employees to qualify for one of the “white collar” exemptions from the overtime requirements remains at $455.

Though this development is welcome news for many employers, it also creates some potentially dicey practical issues. In particular, employers that have already adjusted employees’ salaries or payroll classifications in anticipation of the expected December 1 implementation deadline must now decide whether to revert to the status quo ante – thereby potentially revoking pay increases that have been announced or even implemented – or to absorb the costs of compensation changes prompted by the now-blocked Final Rule.

The FLSA Regulations And Final Rule

The federal Fair Labor Standards Act (“FLSA”) governs which employees must be paid overtime for work exceeding 40 hours in a workweek. Employers are not required to pay overtime to employees who are considered “exempt.” DOL regulations interpreting the FLSA mandate that, in order to qualify for a “white collar” exemption – the most common of the exemptions – an employee must (1) be paid on a salary basis (i.e., a fixed, minimum weekly salary irrespective of variations in hours worked), at no less than the minimum weekly level set by the regulations; and (2) perform a job whose primary duty involves an executive, administrative, or professional function.

Since 2004, the minimum salary level for most exempt employees has remained at $455 per week. In May 2014, President Obama issued an executive order instructing the DOL to look for ways to “modernize” and “simplify” the overtime regulations while ensuring that the FLSA’s intended overtime protections are fully implemented. The ultimate result of the rulemaking commenced by this executive order was the Final Rule, which, among other things, provided for a substantial increase – to $913 per week – in the minimum weekly salary for the white-collar exemptions, with further increases to be implemented automatically based on future prevailing salary levels.

The Final Rule was the crown jewel of one of the Obama administration’s signature goals, that of improving compensation for middle-class workers. However, the Final Rule augured difficult changes for many employers, who were left with the choice of either increasing weekly salaries for, or beginning to pay overtime to, previously exempt employees. For some employers, the new salary threshold meant trimming their workforces in order to accommodate such higher labor costs.

The Court Injunction

Two separate lawsuits, one filed by a group of 21 states, led by Texas and Nevada, and another filed by over 50 business organizations, challenged the Final Rule. These cases were recently consolidated before Judge Amos Mazzant in the U.S. District Court for the Eastern District of Texas.

In seeking a preliminary injunction, the plaintiffs argued, in part, that the Final Rule exceeded the authority that Congress granted to the DOL under the FLSA, and that a preliminary injunction delaying implementation of the Final Rule was necessary in order to protect the plaintiffs from suffering irreparable harm. Having promised to rule on the injunction request before the December 1, 2016, effective date of the Final Rule, Judge Mazzant issued a decision on November 22.

In his decision, Judge Mazzant held that, in enacting the FLSA, Congress meant to exempt certain employees from overtime protections based on their job duties, rather than their salary level. On this basis, the court ruled that the DOL exceeded its legal authority by setting a high new threshold for the salary test. Specifically, Judge Mazzant concluded that the plaintiffs were likely to succeed on the merits of their claims because, by more than doubling the salary threshold for the white-collar exemptions, the DOL “ignore[d] Congress’s intent by raising the minimum salary level such that it supplants the duties test.” According to the court, “Congress defined the [white collar exemptions] with regard to duties, which does not include a minimum salary level.” Judge Mazzant characterized the salary test, first established by the DOL in 1949, as a way to “screen[] out the obviously nonexempt employees, making an analysis of duties in such cases unnecessary.”

The court further held that a preliminary injunction should issue, because the Final Rule, if implemented, was likely to cause irreparable harm, particularly as applied to public-sector entities. Judge Mazzant stated that forcing state agencies operating on fixed budgets to comply with the new regulations would “have a detrimental effect on government services that benefit the public” because such agencies would be forced to reduce staffing levels.

A Preliminary Injunction With Permanent Impact?

Though, strictly speaking, a preliminary injunction is a temporary measure, subject to revision or revocation as the litigation continues, it seems likely that Judge Mazzant’s preliminary injunction means the death of the Final Rule, at least in its current form.

In particular, the wording of the decision strongly suggests that Judge Mazzant would permanently invalidate the Final Rule as part of any final judgment in the litigation. Further, it remains unclear whether the DOL intends to appeal from the decision (perhaps due to the impending new presidential administration), and even if an appeal were taken, the conservative-leaning Fifth Circuit Court of Appeals seems unlikely to overturn the ruling.

What Employers Should Do Now

As a result of the injunction, the Final Rule will not go into effect on December 1, so employers’ current overtime obligations will not change. Thus, there is no longer an immediate need to raise certain employees’ salaries to preserve their exempt status, or to convert them to non-exempt, overtime-eligible status.

However, employers that have already raised salaries or announced salary increases should tread lightly. Employers may still have to comply with state laws regarding notifying employees of pay changes. Insofar as unionized employees have seen compensation changes, employers may not be permitted to rescind those changes without first bargaining with their unions. In addition, employers need to consider the impact upon employee morale that would result from salary rollbacks.

Similarly, for employees who have already been converted from exempt to non-exempt, employers should carefully weigh the financial and practical impact of returning them to exempt status.

Finally, barring a reversal of Judge Mazzant’s ruling, employers should stay tuned for potential overtime changes in the legislative realm. Although President-elect Trump expressed some criticism of the Final Rule while on the campaign trail, suggesting that the increased salary threshold was excessive and should include some carve-out for small businesses, there appears to be growing support for some type of increase in the minimum salary level for the white-collar FLSA exemptions. Thus, a legislative measure enacting a more modest increase, or phasing in increases over time, may be a possibility in the coming months.

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This is an evolving issue that has immediate practical implications for many employers. If you have questions about how the Texas court decision impacts your organization, please don’t hesitate to contact one of our experienced employment attorneys.