Christmas came early for many employers yesterday when, in a stunning turn of events, Judge Amos L. Mazzant III of the Eastern District of Texas issued a nationwide injunction halting the implementation of the Department of Labor’s Overtime Final Rule. This Overtime Final Rule would have doubled the requisite minimum salary threshold for employees to qualify as exempt from the FLSA’s overtime regulations and extended overtime eligibility to an estimated 4.2 million workers. But, in a blow to the Obama administration’s economic legacy, a federal judge in Texas granted a preliminary injunction Tuesday delaying the implementation of the Overtime Final Rule and indicating a likelihood that a ruling permanently striking down the regulations is on the forefront.
The Overtime Final Rule
On March 13, 2014, President Barack Obama signed a Presidential Memorandum directing the Department of Labor to “modernize and streamline the existing overtime regulations for executive, administrative, and professional employees,” opining that the regulations “had not kept up with our modern economy.” On May 23, 2016, after receiving nearly 300,000 comments on the proposed rule, the Department of Labor published its “Overtime Final Rule.”
Set to take effect December 1, 2016, the Overtime Final Rule doubled the minimum salary level threshold required to qualify for the FLSA’s white collar exemption from $455 per week ($23,660 annually) to $913 per week ($47,476 annually). The Final Rule also established an automatic updating mechanism that would adjust the minimum salary level every three years, with the first automatic increase to occur on January 1, 2020.
Twenty One States and More Than 50 Business Groups Challenged the Final Rule and Moved for Preliminary Injunctive Relief.
In September, a group of 21 states, led by Texas and Nevada, filed a lawsuit in the United States District Court for the Eastern District of Texas challenging the Overtime Final Rule, arguing that the Department of Labor did not have the authority to require that employers offer overtime to workers who earn below a certain amount. That suit was then consolidated with another suit brought by the U.S. Chamber of Commerce and more than 50 other national and Texas business groups also challenging the Overtime Final Rule.
On October 12, 2016, the State Plaintiffs filed an Emergency Motion for Preliminary Injunction and Request for Oral Argument and Expedited Consideration. The Plaintiffs argued that the DOL’s rule would force many state and local governments, as well as private businesses, to increase their employment costs substantially. The Plaintiffs also took issue with the policy behind the rule change, arguing that the imposition of a salary threshold disregards the text of the FLSA that predicates an employee’s exempt status on whether the employee is actually performing bona fide executive, administrative or professional duties, instead of on the salary the employee is paid.
Judge Mazzant heard oral arguments on November 16, 2016 and indicated that he would quickly rule on the issue by November 22, 2016 in light of the impending December 1, 2016 date of implementation.
The Application of the Executive, Administrative, and Professional Exemption Must be Determined by the Employee’s Duties Actually Performed, not by Salary.
In his opinion, Judge Mazzant, an Obama administration appointee, stated that the Department of Labor had “exceed[ed] its delegated authority” and had “ignore[d] Congress’s intent by raising the minimum salary threshold such that it supplants the duties test.”
Applying the “traditional tools of statutory construction” set forth in Chevron U.S.A., Inc. v. Nat. Res. Def. Counsel, Inc., 467 U.S. 837 (1984), the court found the plain meaning of the terms in Section 213(a)(1) established Congress’ intent that the exemption depend on the employee’s duties actually being performed – not the employee’s salary. Judge Mazzant went on to explain that “if Congress intended the salary requirement to supplant the duties test, then Congress and not the Department should make that change.”
Pointing to the approximately 4.2 million employees who, under the Final Rule, would have become eligible for overtime under the Overtime Final Rule without any change in their duties, the court described the Overtime Final Rule’s significant increase in the salary level as “essentially a de facto salary-only test.”
Judge Mazzant also agreed that the State Plaintiffs would suffer irreparable harm due to the costs of complying with the rule if the injunction was not granted. In addition to the costs associated with compliance, the court also noted that several state agencies had limited resources and strict budget constraints, leaving them with relatively few options to comply with the regulations – all of which would have a detrimental effect on the services provided to the public.
“Due to the approaching effective date of the final rule, the court’s ability to render a meaningful decision on the merits is in jeopardy,” the judge said. “A preliminary injunction preserves the status quo while the court determines the department’s authority to make the final rule as well as the final rule’s validity.”
Implications of the Decision
The long-term legal ramifications of yesterday’s ruling will be hashed out in the courts, with the incoming Trump administration’s Department of Labor and potentially in Congress. Although the injunction is only temporary, the injunction does buy the court more time to come to a final decision on the overtime rule. Nevertheless, Judge Mazzant’s decision signaled a strong likelihood that he’ll eventually side with 21 state attorneys general and a coalition of business groups that sued to block implementation of the Overtime Final Rule.
In response to the ruling, the Department of Labor stated that it was considering all of its legal options, explaining “The department’s overtime rule is the result of a comprehensive, inclusive rulemaking process, and we remain confident in the legality of all aspects of the rule.” It is anticipated that the Department of Labor will appeal the ruling to the Fifth Circuit Court of Appeals. It is expected that the appeals will ensue to the United States Supreme Court regardless of Judge Mazzant’s final decision and the final decision of the Fifth Circuit.
Due to the impending December 1 implementation of the Overtime Final Rule, many employers’ focus had been turned away from the usual holiday parties and end-of-year financials and instead was focused on the impending December 1, 2016 implementation Overtime Final Rule. The drastic increase in salary level has caused many employers to increase employee compensation or implement new changes to their employee timekeeping, classification and payroll systems.
Those employers that have not yet announced and made changes to their employees’ compensation or classifications should consider postponing the effective date of those changes.
There are many employers, however, that have not yet implemented the new changes in employee compensation but have already communicated these upcoming changes to their employees. In these instances, the employer might carefully consider whether to postpone the changes, but at the very least should provide a communication to its employees explaining that the new rules for overtime pay exemptions will not be going into effect as expected due to a court-ordered injunction.
Employers that have already implemented changes to their employee compensation and classification plans, need to proceed with caution before rescinding those changes moving back to their original compensation and classification schemes, as such an abrupt change could cause employees to seek legal counsel.
For now, only one thing is certain – the Overtime Final Rule will not be taking effect on December 1. It remains to be seen, however, whether the Overtime Final Rule will be upheld or become a rule of the past.