NOTE: The following blog originally appeared on November 23, 2016.
For the most recent developments since that time, see the December 2016 Update at the end of the blog.
Stunning news coming out of Texas yesterday! A federal Judge, who was appointed by President Obama, issued a nationwide preliminary injunction blocking the federal Department of Labor’s (DOL) new overtime rule that was scheduled to take effect on December 1, 2016. Under the new rule, the minimum salary for executive, administrative and professional employees to be exempt from overtime pay requirements under the federal Fair Labor Standards Act (FLSA) would have increased to $913/week ($47,476/year) – more than double the current level. Further information about the new rule – which has now been blocked – can be found here. You can read the Court’s opinion here.
The development is a big blow to President Obama, who directed the DOL in 2014 to update the regulations defining which white collar employees are exempt from overtime pay.
Background
Before addressing why the court issued the injunction, let me start with a little background:
The FLSA requires, among other things, that employers who are covered by the FLSA pay overtime pay to employees who work more than 40 hours in a week. The FLSA, however, includes various exemptions to the overtime pay requirements, including an exemption for employees who are “employed in a bona fide executive, administrative or professional capacity.” 29 U.S.C. §213(a)(1). The FLSA itself does not define this so-called EAP exemption. Instead, Congress delegated to the Secretary of Labor the power to define the EAP exemption, and the Secretary of Labor authorized the DOL to issue regulations interpreting the EAP exemption.
Under the existing regulations, an employee generally must meet three requirements to qualify for the EAP exemption: (1) He/she must be paid on a salary basis (“salary basis test”); (2) He/she must be paid at least the minimum salary set by the applicable DOL regulations (“salary level test”); and (3) He/she must perform EAP duties (“the duties test”).
The new rule addressed the salary level test and, in the absence of the injunction that was issued yesterday, would have raised the minimum salary from $455/week ($23,660/year) to $913/week ($47,476/year), effective December 1, 2016. Thereafter, the minimum salary would have increased every three years starting on January 1, 2020.
Why Did The Court Issue The Injunction?
The Texas Court, in blocking implementation of the new rule, concluded that Congress “intended the EAP exemption to apply to employees doing actual executive, administrative, and professional duties. In other words, Congress defined the EAP exemption with regard to duties, which does not include a minimum salary level.” (Emphasis added). Thus, while the DOL had significant leeway to establish the types of duties that would qualify for the EAP exemption, Congress did not intend for the DOL to define the EAP exemption based on a minimum salary.
The proposed overtime rule specifically provides that employees earning less than $913 per week will not qualify for the EAP exemption, notwithstanding their actual job duties. According to the Court, this is in direct conflict with Congress’s intent and the DOL effectively exceeded its authority by raising the minimum salary level to such a point that it supplants the duties test. Therefore, the Court found the proposed rule to be unlawful.
In addition, the Court stated that the current salary level of $455/week was purposefully set low to screen out employees who are obviously not exempt. By increasing the salary level so significantly in the proposed new rule ($913/week), the DOL essentially created “a de facto salary-only test” which could wrongly exclude employees who are performing executive, administrative or professional duties from the exemption.
Employer Recommendations
Many employers expended significant time and effort preparing for the new rule, analyzing their workforce, and deciding whether to issue pay raises to some employees so that they would remain exempt or deciding to reclassify employees as non-exempt and to pay them overtime pay. For employees in the latter category, their pay may have changed from a base salary to an hourly wage, they may have been told that they now need to track hours, their benefits may have changed, and there may have been many other ramifications.
For employers who already have implemented changes or, at least, communicated changes to employees, what do they do now? That question needs to be addressed on a case-by-case basis.
For some employers, it may be very difficult to reverse course or, even if possible, it may simply make sense to continue with previously announced changes. For example:
- Some employers, in anticipation of the new rule, analyzed the duties for employees who were classified as exempt and determined that they were misclassified under the duties test. For such employees, unless their job duties have changed, they would still be misclassified and should be reclassified as non-exempt employees.
- Some employers will not be able to reverse previously announced salary raises because of the impact on employee morale or because of the manner in which raises were communicated. For such employers, this may be an opportunity to show employees how good they are by explaining that despite the injunction, the company is going to maintain the new salaries that it offered to employees.
For other employers, it may make sense to inform employees that previously communicated changes will be reversed. Obviously, such employers should carefully plan how to communicate that message to employees, should review whether there may be other effects of such a change (such as benefit plan eligibility), and should ensure that doing so will not be in violation of any contractual agreement or other applicable law.
Department of Labor’s Response
Obviously, the issuance of a preliminary injunction was not welcome news to the DOL. In response to the Court’s decision, the DOL released the following statement: “We strongly disagree with the decision by the court, which has the effect of delaying a fair day’s pay for a long day’s work for millions of hardworking Americans. The department’s overtime rule is the result of a comprehensive, inclusive rulemaking process, and we remain confident in the legality of all aspects of the rule. We are currently considering all of our legal options.”
What Happens Next?
For employers that procrastinated and had not taken steps to prepare for the new rule, they owe a debt of gratitude to the Texas Judge! He bailed them out, at least temporarily. But, at least for now, the reprieve is only temporary. The Texas Court issued a preliminary injunction. It is possible that when the Judge makes a final determination, he reaches a different conclusion. Based on the language contained in yesterday’s opinion, that does not seem likely, but it is not out of the question.
Beyond that, the DOL likely will appeal to the United States Court of Appeals for the Fifth Circuit. If so, and if the decision is reversed, it is possible that employers will be responsible for compliance with the new rule as of December 1 and, if they were not in compliance, it is possible they could be held liable for damages for the period from December 1, 2016, through the date the Court of Appeals issues its decision.
Of course, all of this legal maneuvering is taking place with President-Elect Donald Trump set to take office on January 20, 2017. Will he and the new leadership at the DOL view this issue the same as the Obama administration? Not likely. So, if it is still pending, any appeal could be dropped by the DOL under the new administration.
Might Congress act? The crux of the Court’s decision yesterday was that the DOL overstepped its authority. Congress can step in and pass legislation providing for a new salary level, which even many employers agree is too low under the current regulations.
While it is understandable that both employers and employees would like clear answers, we are in uncharted waters and clear answers are not readily available. Over the next several weeks, hopefully more clarity will be brought to this situation so that everyone knows what is necessary to comply with the law.
DECEMBER 2016 UPDATE
On December 1, 2016, the Department of Labor appealed the preliminary injunction to the United States Court of Appeals for the 5th Circuit and, on December 8, 2016, the Court of Appeals granted the DOL’s request for an expedited briefing schedule. As a result, all briefs must be submitted to the Court by the end of January 2017. Thereafter, the Court will schedule oral arguments to allow the parties to further argue their positions.
Of course, between now and then a new administration will take office and it is possible that the new Trump administration may choose to drop the appeal. So, where this process ends remains uncertain and employers and employees should continue to monitor developments in this case.
