Federal Court Blocks Implementation of New Overtime Regulations

An unexpected decision was issued by a federal judge in Texas yesterday, which prevents the Department of Labor’s (DOL’s) new federal overtime regulations from taking effect as scheduled on December 1, 2016. As we explained in a Calfee First Alert this past spring, the DOL’s new overtime rule would have raised the minimum salary level required to qualify for the “white collar” exemptions under the Fair Labor Standards Act (the FLSA) to $47,476 per year, more than double what it was under the previous regulations.

As a quick refresher, under the FLSA, employers must pay time-and-a-half for all hours worked over forty in one week, unless the employee is “exempt” from the rule. Under both the previous rule (which will now remain in place) and the new rule (which was just blocked), the general framework for qualifying as exempt is the same. Under both rules, an employee would be exempt if he or she meets three tests: (1) the salary basis test, which provides that the employee must be paid a predetermined salary that is not subject to any reductions from week to week based upon the quality or quantity of work performed; (2) the salary level test, which sets forth the minimum specified amount of salary paid in order to qualify for an exemption; and (3) the duties test, which requires that the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations.

The Court Found that the New Minimum Salary Level Would Have Supplanted the Duties Test

In October of 2016, twenty-one states sued to prevent the rule from going into effect, seeking emergency injunctive relief. The federal court in Texas granted their request yesterday, and issued a nationwide preliminary injunction which will preserve the status quo until the court can determine whether the DOL had authority to promulgate the rule and whether the rule itself is legal. The states’ argument -- which won the day yesterday -- was that, by drastically increasing the salary threshold, the new rule would have automatically re-classified millions of workers from exempt to overtime-eligible without any analysis of their duties. The states argued that this was contrary to Congress’s intent when passing the FLSA, which was to exempt employees from overtime provisions based primarily on the duties they perform, not their salary level.

The court stated that Congress gave the DOL the power to define the types of duties that would qualify as executive, administrative or professional, but that nothing in the statutory language gave the DOL authority to require a minimum salary level. In short, the court found that by raising the salary level to such an extent that it supersedes the duties test, the DOL exceeded its authority. The states attacked several aspects of the new rule, and few commentators predicted success for the states’ challenge to the salary level increase. After all, a salary level test of some sort has been a part of the DOL’s FLSA regulations since 1949, and, as discussed above, an analysis of employees’ duties still would be needed to determine whether the employee qualifies as exempt under the new rule.

Meaning for Employers

While many employers may add the Texas court’s ruling to their list of things for which to give thanks at their Thanksgiving tables, the only sure thing about this ruling is that employers may put on hold, for now, whatever changes in salary or employee status they had planned for December 1.  The District Court’s decision, of course, can and likely will be appealed, sending the case to the Fifth Circuit Court of Appeals.  Looming over all of this is what action, if any, the incoming Trump Administration might take on this issue on or after January 20, 2017. 

If the appeal remains pending on Inauguration Day, the new Administration might (or might not) order the DOL to drop the appeal. Separately from this litigation, Congress might enter the fray with legislation to repeal the new rule or perhaps modifying the rule and its implementation.  Moreover, the new Administration could opt to rescind the rule, although that process is governed by the Administrative Procedure Act, and could be as lengthy as the process by which the rule was promulgated. The simple act of placing a hold on salary and status changes, however, may not be all that simple. 

If employers have already communicated to employees a salary increase or a change to non-exempt status, informing them of a reversal or temporary hold on those changes can be a delicate matter.  Further complicating matters, if the injunction is lifted on appeal, newly non-exempt employees may claim unpaid overtime going back to December 1, 2016 -- and some court decisions on unrelated DOL regulations support employer liability during the period the injunction was in place.

Thus, at this point, the best an employer can do is keep a watchful eye on this case and on whatever action Congress or the Trump Administration might take on the FLSA’s white collar exemptions.  For the time being nothing need be done. Please contact any of the Labor & Employment lawyers at Calfee, or your regular Calfee contact, if you have questions about this decision or strategies for managing the uncertainty about the rule.

For additional information and discussion on this topic, please get in touch with your regular Calfee contact or one of the attorneys listed below: John R. Cernelich 216.622.8251 jcernelich@calfee.com Todd F. Palmer 216.622.8354 tpalmer@calfee.com Abbey Kinson Brown 216.622.8358 abrown@calfee.com

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