Current Rule

The current overtime exemption rule under the Federal Labor Standards Act (FLSA), Section 213(a)(1), exempts from both minimum wage and overtime requirements “any employee employed in a bona fide executive, administrative, or professional capacity” (the EAP exemption).1 To qualify for the EAP exemption, an employee must meet three criteria: (1) an employee must be paid on a salary basis; (2) an employee must be paid at least the minimum salary level established by the regulations (currently $455 per week/$23,600 annually) (the salary test); and (3) an employee must perform executive, administrative, or professional duties (the duties test.).

New Rule

As many employers are aware, the Department of Labor’s (DOL) new overtime rules were set to be effective on December 1, 2016 (the final rule). The final rule would have increased the minimum salary level for exempt employees from $455 per week ($23,600 annually) to $921 per week ($47,892 annually).

Injunction

The key words here are “would have” as, on November 22, 2016, a U.S. District Court Judge in Texas effectively prevented, at least for the time being, the implementation of the final rule. Yesterday, Judge Amos L. Mazzant, of the U.S. District Court for the Eastern District of Texas, Sherman Division, granted the request by 21 states for a preliminary injunction, temporarily blocking the implementation of the final rule nationwide.

By way of background, on September 20, 2016, the states of Nevada, Texas, Alabama, Arkansas, Georgia, Indiana, Kansas, Louisiana, Nebraska, Ohio, Oklahoma, South Carolina, Utah, Wisconsin, Kentucky, Iowa, Kentucky, Maine, New Mexico, Mississippi, and Michigan (the plaintiffs) filed suit against the Department of Labor, the Wage and Hour Division of the Department, and their agents (the defendants), challenging the final rule. On October 12, 2016, the plaintiffs moved for emergency, preliminary injunctive relief. Additionally, over 50 business entities filed suit in a separate action challenging the final rule, and this action was consolidated with the pending states’ action.

In rendering its decision, the court considered whether the plaintiffs satisfied the four elements necessary to seek a preliminary injunction: (1) substantial likelihood of success on the merits; (2) substantial threat that plaintiffs will suffer irreparable harm if the injunction is not granted; (3) the threatened injury outweighs any damage that the injunction might cause the defendant; and (4) the injunction will not disserve the public interest. The court determined the plaintiffs satisfied this four-part test.

Specifically, the court found the plaintiffs showed a likelihood of success on the merits because the final rule exceeded the DOL’s statutory authority, and thus is not entitled to deference. The court determined that Congress intended the EAP exemption to first and foremost apply to employees doing actual executive, administrative, and professional duties. Congress thus intended the EAP exemption to depend on an employee’s duties rather than an employee’s salary. Under Section 213(a)(1), the DOL can define and delimit these classifications because an employee’s duties can change over time; however, the court found that nothing in the EAP exemption indicates that Congress intended the DOL to define the EAP exemption based on a minimum salary level test alone.

In essence, the court found that, by implementing the final rule, and only changing the salary test, the DOL chose to supplant the duties test by disqualifying individuals under the exemption based on salary levels alone, regardless of the duties they are performing. Therefore, the court found the DOL exceeded its authority and ignored Congress’s intent by raising the minimum salary level such that it supplants the duties test, and creates a “de facto salary only test.” As the court noted: “Congress did not intend salary to categorically exclude an employee with EAP duties from the exemption.”

The court also found the plaintiffs showed they will suffer irreparable harm if the preliminary injunction was not granted because of: (1) the significant cost of compliance; and (2) the impact of the costs on governmental programs and services.

Further, the court determined the plaintiffs demonstrated that the balance of hardships weighed in favor of preliminary injunctive relief. For the same reasons noted above, the court determined that the impact on governmental services and benefits to the public far outweighed the delayed implementation of the final rule on December 1, 2016.

Lastly, the court found that due to the approaching effective date, the public interest is best served by an immediate injunction in order.

The court also found a nationwide injunction is proper in this case, despite the defendants’ arguments that a nationwide injunction should be limited only to the plaintiffs who showed irreparable injury. The court determined that because the final rule is applicable to all states, the scope of the alleged irreparable injury extends nationwide and it also prevents employees and employers from being subject to different EAP exemptions based on location.

Meaning for Employers

So, what does this injunction mean for employers? Several things. For one, if an employer has not taken actions to comply with the final rule, it can feel at ease that, as long as the injunction remains in effect, it will not be in violation of the final rule.

However, if an employer has already taken actions to comply, which most have, it will need to determine whether it should: (1) keep the employees who were affected by the compliance with the final rule at their current exempt or non-exempt status; or (2) reverse the actions taken to comply by changing the affected employees back to their pre-final rule status. Given the preliminary nature of the injunctive relief, however, the prudent (and more conservative) approach is to continue efforts to comply with the new regulations pending a final decision on the merits of the pending action.

It is too early to say whether the DOL will appeal, but it is entirely possible that the outgoing Obama administration will appeal to the 5th Circuit to reverse the court’s ruling. (It should be noted that the 5th Circuit has ruled against several of the Obama administration’s Executive Orders.) With the new Trump administration taking over the reins of the DOL in January, however, it may simply drop any pending appeal, given President-elect Trump’s prior statements that he is opposed to the final rule.

At that juncture, employers could safely reverse and otherwise cease efforts to comply with the final rule. Of course, that would also mean that some four million largely blue collar workers would lose the overtime benefits that they would have received under the final rule.