Should you delay implementation of overtime eligibility?

Many employers have spent this holiday week rolling out communication plans and making final preparations for salary or exemption changes in response to the U.S. Department of Labor's overtime rule, set to go into effect on December 1, 2016. However, in a surprise November 22, 2016, ruling, the Eastern District of Texas issued a nationwide injunction, blocking the DOL's new rule from taking effect. (Link to the Opinion and Order) In light of this sudden change in the landscape, employers are wondering how to handle changes they have already made or were preparing to make in the coming days.

The DOL's final rule, which was set to go into effect next week, would have severely restricted the application of the three most common "white collar" exemptions from the FLSA's overtime requirement by more than doubling the minimum salary required for an employee to meet the executive, administrative or professional exemptions. As the Eastern District of Texas set forth, the exemption tests required that employees covered by the "white collar" exemptions satisfy three tests:

  • A salary basis test
  • A salary level test
  • A duties test

The DOL’s final rule impacted the salary level test, increasing the required salary level from $455/week ($23,660/year) to $913/week ($47,476/year).

In its order enjoining implementation of the final rule, the Eastern District of Texas pointed to the significant increase in the salary level test, and the nearly 40% of salaried employees who would no longer meet the "white collar" exemption due to this increased salary level. The federal court also found that the same significant increase in the salary level, plus the large increase in non-exempt employees, threatened irreparable harm to the state agencies that brought the challenge, due to the requirement that they either significantly increase their personnel budgets or cut hours and critical services.

Prior to Tuesday's order, private employers faced the same quandary: increase wages to meet the heightened salary level, face potentially significant overtime costs or require previously exempt employees to work within a 40 hour workweek. By delaying implementation of the final rule, and holding that the rule exceeds the scope of the DOL's authority, laying the groundwork for it to be invalidated on a permanent basis, the Texas federal court has provided some breathing room for employers who have been facing difficult decisions about how to manage within the new rule.

However, this last-minute order also brings challenges for employers who have already communicated or implemented compensation or scheduling changes. These employers must decide whether to stick to previously announced plans or delay (or even reverse) implementation. In making these decisions, employers should review the audits and determinations made in preparation for the new rules.

Some employers may decide to continue with previously announced or planned changes:

  • Many employers have used the new final rule as an opportunity to address risk related to the duties tests: these tests are unchanged by the injunction. These employers may want to push forward with reclassification of some or all positions, depending on the risk identified.
  • Employers who have announced salary increases to employees to clear the final rule's salary level hurdle may be hard-pressed to "take back" the pay increases. These employers may do better to stay the course on the increase, but hold off on future raises. Employers should consider clearly communicating any such salary freezes soon in order to set expectations and avoid allegations of improperly denying raises down the road.
  • Employers who have identified areas where job duties can be performed in a 40-hour week may want to continue with implementation of these changes, reversal of which may impact employee morale.
  • Employers who have linked employee benefits eligibility to exempt or non-exempt status may already have employees who have enrolled in benefits based on their anticipated post-December 1, 2016, exemption status. Making changes to exemption status at this point may lead to unanticipated changes in benefits.

Other factors may suggest that a delay in implementation is warranted:

  • Employers who were waiting to announce salary increases to maintain white collar exemptions until December 1, 2016 may be able to delay or stop implementation of such increases. Such salary increases that will be hard to reverse later, if the final rule is invalidated.
  • Employers who have not yet fully completed position audits may wish to delay any implementation, in order to make all changes at the same time.

In some situations, employers may decide that a reversal of previously communicated changes is the best decision for their business. Employers should think carefully about how any such reversal would be communicated. Before returning any newly non-exempt employees to their prior exempt status, employers should confirm that they are confident the employees at issue satisfy the duties test.