In yet another setback for the Obama administration’s regulatory agenda, the US District Court for the Eastern District of Texas entered a nationwide injunction on Tuesday blocking the Department of Labor’s rule expanding the overtime protections of the Fair Labor Standards Act from taking effect on December 1. The injunction follows several recent decisions blocking other controversial DOL rulemakings such as the Persuader Advice Exemption rule and portions of the rule implementing President Obama’s Fair Pay and Safe Workplaces Executive Order.
According to the DOL, the revised overtime rule was intended to update the FLSA’s overtime regulations to “put more money in the pockets of middle class workers – or give them more free time.” As such, the final overtime rule would have almost doubled the salary threshold for executive, administrative, and professional employees—the so-called “white collar” exemptions—from $455 per week ($23,660 annually) to $921 per week ($47,892 annually), and included an automatic updating mechanism that would have increased the minimum salary level every three years. The rule did not make any changes to the duties tests that must also be satisfied in order for an employee to be classified as exempt.
Twenty-one states, led by Texas and Nevada, along with a coalition of business groups, challenged the rule on the basis that it was incompatible with clear congressional intent regarding the scope of the white collar exemptions. Specifically, the challengers argued that the FLSA defines the executive, administrative, and professional exemptions primarily by reference to job duties and functions, not salary. Because they believed that the revised salary requirement would create a de facto “salary-only test” that would supplant the duties test that Congress intended, the challengers argued that the DOL lacked the authority to make that change on its own.
The Court agreed, stating that the significant increase to the minimum salary threshold was not “based on a permissible construction of the [FLSA]” because “Congress did not intend salary to categorically exclude an employee with [exempt] duties from the exemption.” Accordingly, the Court found that the final rule was arbitrary and capricious, and issued an immediate injunction in light of the rule’s fast-approaching December 1 implementation date and the substantial costs to private and public sector employers if it were to go into effect.
Although the DOL defended the legality of the rule in response to the Court’s ruling and stated that it was evaluating all of its legal options, the forthcoming change of administrations makes it unlikely that the overtime rule will ever be revived.
Employers who had planned to increase salaries to maintain the overtime exemption now have a difficult decision to make. They can delay salary increases pending the final outcome of the injunction and whatever the incoming administration might do, which could anger employees who were expecting an increase in salary. Or, they could move forward with the salary increases, knowing that they are not currently necessary to maintain the overtime exemption. Conversely, employers who reclassified employees as non-exempt without increasing their salary rate can maintain their non-exempt status, or they can reclassify them back to exempt status.
However, notwithstanding the injunction at the federal level, employers should remain aware of changes to salary-level requirements at the state and local levels. Some states, such as New York, had planned to introduce new salary requirements in response to the federal changes, and some jurisdictions may maintain these increases regardless of the fate of the federal rule. Employers should consult with counsel to determine whether their employees’ exempt status will be affected by state-level laws and regulations.