Yesterday, to the surprise of many, a federal judge in Texas issued a preliminary injunction blocking implementation of the U.S. Department of Labor's new overtime rule that otherwise would have substantially increased the minimum salary level for the so-called white collar exemptions on December 1. The new rule, which effectively doubled the minimum salary level for the executive, administrative, and professional exemptions under the Fair Labor Standards Act (FLSA), would have made millions of workers across the country eligible for overtime. As a result of the court's ruling, employers will no longer need to raise these employees' salaries on December 1 to maintain their exempt status. It seems likely that the new rule may not take effect for some time, if at all.

Background on the Overtime Rule

Under federal law, employees who perform executive, administrative, or professional duties are exempt from the FLSA's overtime provisions if the employees satisfy three essential requirements: (1) the "duties test" (i.e., have and perform certain white collar job duties); (2) the "salary basis" test (i.e., be paid on a salary or fee basis as opposed to an hourly basis); and (3) the "salary level" test (i.e., be paid at least US$455 per week / US$23,660 per year). If an employee is "highly compensated," meaning that he or she earns at least US$100,000 in total annual compensation, the employee may also be considered exempt under a relaxed version of the duties test.

On May 18, 2016, the Department of Labor issued a controversial new overtime rule that was to take effect on December 1, 2016, The rule would have doubled the minimum salary level necessary to be exempt by increasing it from US$455 per week (or US$23,660 per year) to US$913 per week (or US$47,476 per year). It would have also increased the total annual compensation required for an employee to qualify as a "highly compensated employee" from US$100,000 per year to US$134,004 per year. The rule also would have caused the above dollar levels to automatically update (i.e., increase) beginning on January 1, 2020 and every three years thereafter. This rule was expected to make millions of workers eligible for overtime, which would have required that employers track hours worked by such individuals. For more details on the rule, please see our client alert.

Preliminary Injunction Granted

In the fall of 2016, twenty-one states (the State Plaintiffs) filed a lawsuit in the U.S. District Court for the Eastern District of Texas, challenging the validity of the overtime rule. On October 12, 2016, the State Plaintiffs moved for a preliminary injunction barring the Department of Labor from implementing the overtime rule until the court could issue a final decision in the case. On November 22, 2016, the court granted the State Plaintiffs' motion for a preliminary injunction. The court reasoned that the Department of Labor exceeded its authority under the FLSA by raising the salary threshold so high that it effectively "supplant[ed] the duties test" and created a "de facto salary-only test." Because the court determined that implementation of the rule would cause irreparable harm to the State Plaintiffs, whereas a delay in implementation would not cause significant harm to the Department of Labor or the public, the court felt that a preliminary injunction was warranted. The court prohibited the Department of Labor from implementing or enforcing the final rule until further order of the court. This injunction applies nationwide and applies to both public and private employers.

Impact on Employers

The new overtime rule will not take effect unless and until either the federal district court or an appellate court orders otherwise. The federal government is expected to appeal the court's ruling to the U.S. Court of Appeals for the Fifth Circuit. However, even if the government is able to obtain a favorable ruling on appeal, a decision may not be issued for many months (though it is possible that it could be issued sooner). Additionally, if the appeal is pending when President-elect Donald Trump takes office, the government could decide to withdraw its defense of the rule and drop any challenge to the injunction.

Given the court's ruling, at this time, employers do not need to raise the salaries of white collar exempt employees to maintain their exempt status (or reclassify such employees as nonexempt in lieu of raising their salaries) to comply with the DOL's new overtime rule. Employers should, however, watch this litigation closely to see whether the court's decision is reversed on appeal, or whether the court otherwise orders that the injunction be lifted. Additionally, some employers have already made changes to employee classifications and salary levels to comply with the new rule. Such employers should consider whether they wish to maintain these changes going forward, or whether they desire to revert to their prior salary and classification levels. If employers desire to reverse changes, they should carefully consider how to communicate such changes to employees, the impacts the changes may have on employee morale, and whether the manner in which such changes are implemented could give rise to new claims, potentially including discrimination claims. Employers must also consider the impacts of state law. Certain states have implemented their own version of the minimum salary level test, and employers generally must comply with the minimum salary rules for employees working in the applicable states.