Employment Law Alert: New Overtime Rules Won’t Take Effect on December 1

Authors: C. Michael DeCamps, Faith A. Alejandro and Brian G. Muse

Yesterday, a Texas federal judge put a halt on the new overtime rules spearheaded by President Obama’s administration that were to take effect on December 1.  Businesses everywhere have gone into overtime to prepare for the new Fair Labor Standards Act (“FLSA”) wage & hour rules by auditing their workforce and adjusting pay scales and duties to comply. All of that is now delayed.  And it is possible they will never go into effect or will be modified by the new administration.

The Eastern District of Texas has stopped (at least for the time being) the Department of Labor from implementing new regulations under the FLSA that more than double the minimum salary level at which hourly workers must be paid overtime at the premium rate of 1.5 times their normal rate of pay.  The new rules raise the annual salary threshold from $23,660 to $47,476 for executive, administrative, or professional employees exempt from overtime pay (the “EAP exemption”).  In addition, the new rules include an automatic increase to this salary threshold to maintain it at the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census region—this feature in particular gave anxiety to many small businesses.

For now, employers everywhere can pause their efforts to comply with the new rules—at least until Judge Amos L. Mazzant, III (an Obama appointee) renders a final decision on the merits of these new overtime rules.   At the moment, the plaintiffs (including Texas and 20 other states) have established a substantial likelihood of success on the merits of their argument that the Department of Labor lacked authority under the FLSA to use a salary test and include an automatic increase mechanism in the new overtime rules.  In the meantime, the injunction Judge Mazzant granted has a nationwide effect.

In its 20-page opinion, the Texas court traced the legislative history behind the EAP exemption and the Department of Labor’s administrative history attempting to define the duties that signify whether a worker is an “executive, administrative, or professional” employee (i.e., the “duties test”).  Ultimately, the court determined that the salary increase found in the new overtime rules “creates essentially a de facto salary-only test” which is expected to make nearly 4.2 million workers eligible for overtime overnight without any changes to their duties.  The increased salary level—along with the automatic increase mechanism—runs contrary to Congress’s legislative intent under the FLSA, the court said.

Both public and private employers will need to carefully consider how best to respond to this ruling.  On the one hand, it provides short-term flexibility to employers struggling to respond to what would have been a significant increase in the salary threshold for white collar workers on December 1.  On the other hand, employers should proceed with caution before taking any steps backward or scrapping their plans to adjust to the new rules if they become new law.  Doing so, especially going into the holiday season, may negatively impact workplace morale and disrupt business, particularly if employers have previously announced or even implemented pay adjustments.  The ruling also invites scrutiny from employees whose duties arguably still fall short of the existing duties test for EAP exempt employees and who take issue with the salary level, which falls below the 2015 poverty threshold for a family of four according to the Department of Labor.  Further, the ultimate outcome of these new rules remains uncertain, particularly against the backdrop of the incoming Trump administration and as Congressional Republicans pledge, just in the last few days, to roll back these new overtime rules.

Only one thing is clear: this ruling is welcome news for employers.

For employment law practitioners, Judge Mazzant’s opinion forecasts some interesting questions to ponder and follow in the remaining litigation.  The new overtime rules did nothing to alter the duties test, and the court explained that Congress clearly intended the EAP exemption to apply to employees doing “actual” duties that are bona fide executive, administrative, and professional as defined by the dictionary, without regard to a minimum salary level.  Still, the court recognized that Congress established a minimum salary threshold—currently $23,660—which must be met before an employee can be treated as exempt from overtime.  The court then pointed out that the intent behind this minimum was to “screen[] out the obviously nonexempt employees” and avoid making employers perform the duties test unnecessarily.  Importantly, however, the court declined to rule on the legality of the Department’s use of a salary test under the FLSA in general, limiting its ruling only to the salary test in the context of the new overtime rules. Since the FLSA was enacted in 1983, the salary threshold has increased seven times (including the last increase in 2004)—but not at a pace sufficient to keep up with inflation and the elimination of the former “long” duties test that ensured employers could not avoid paying overtime by assigning lower-paid employees a minimal amount of exempt work, according to the Department of Labor.  For now, it remains to be seen whether or not the Department of Labor can legally consider salary levels when rulemaking in a manner consistent with Congress’s intent to exempt only “bona fide” executive, administrative, and professional workers.

If you find yourself in need of legal advice while your business waits and sees what happens next to the new overtime rules, the employment law attorneys at Sands Anderson are available to counsel on this subject and other wage and hour laws under the FLSA.