As of yesterday, employers who have not yet fully implemented changes in preparation for the new salary basis increase should put those plans on hold because a Texas federal court issued a nationwide preliminary injunction against the rule while it evaluates the legality of the rule. The salary required for exempt status for executive, administrative, and professional employees (EAP or white collar employees) will remain at $23,660 or $455 per week. (Employees, of course, must meet the respective duties tests.) Any employers who had planned to raise exempt employees’ salaries to $47,476 or convert them to non-exempt status can place those plans on indefinite hold. We recognize, however, that it may be difficult and bad for employee relations to roll back already announced or implemented salary increases. Each employer should evaluate the financial and good will costs of rolling back salary increases made to comply with the new rule or keeping them in place.

It remains to be seen what will happen if the federal court lifts the preliminary injunction after further proceedings or if the federal government successfully appeals. It is unlikely that the incoming Trump administration will continue to fight to enforce the rule.

What was the Court’s rationale?

The final rules were published on May 23, 2016 and set to take effect Dec. 1, 2016. The salary basis was set to increase to $47,476 or $913 per week. Starting in 2020, minimum salary levels were expected to adjust every 3 years based on the 40th percentile of workers for the lowest wage region (currently, the South).

In Nevada v. DOL, twenty-one states sued the Department of Labor (DOL) alleging that the rule was illegal. They sought a preliminary injunction to block the rule from going into effect on December 1st. In addition more than 50 business organizations sued seeking similar relief. That case was consolidated with the state-plaintiffs’ case. The Court held that the salary test essentially supplanted the duties test and resulted in employees who qualified for the EAP exemptions based on their job duties being classified as non-exempt because of their salaries.

In holding that the DOL exceeded its authority in adopting the new rule, the Court followed a two-step process set forth by the U.S. Supreme Court to determine if the agency properly construed the Fair Labor Standards Act (FLSA). First, the court looked at “whether Congress has directly spoken to the precise question at issue.” “If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.” Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 842-43 (1984). If Congress has not directly addressed the issue, courts defer to federal agencies (including the DOL) in interpreting and making rules for areas within their authority unless “arbitrary, capricious, or manifestly contrary to the statute.”

The Court held that, while Congress did not specifically define “executive,” “administrative,” or “professional” in the statute, it intended that the terms meant their usual meaning by referring to them as “bona fide executive, administrative, or professional capacity.” The Court looked to the dictionary definitions, noting that the dictionary defines these terms without regard to salary level. The Court held that Congress intended that individuals with EAP duties should be exempt from overtime without regard to salary. The Court rejected the federal government’s argument that the terms also include an element of societal status (or income level) in their definition. The Court held that the DOL has no authority to define and set the salary level required for the exemptions. The DOL is only empowered to set and define the required duties.

Second, moving on to step 2 even though step 1 resulted in the rule’s illegality, the Court held that the rule did not deserve deference at step 2 because it is not a reasonable construction of the FLSA because it is at odds with Congressional intent to exempt executive, administrative, and professional employees from overtime.

The Court also invalidated the automatic updating provision as a part of the illegal rule.

While a preliminary injunction is subject only to a “likelihood of success on the merits” standard, this decision is probative of the Court’s eventual decision on the merits. In addition, the next administration likely will not continue the fight in favor of the rule.