Ten days before their December 1 effective date, a federal district court in Texas enjoined enforcement of the regulations increasing the salary level for white collar employees to qualify for the overtime exemption under the Fair Labor Standards Act (FLSA). Late on November 22, 2016, federal Judge Amos Mazzant (a President Obama appointee) issued a preliminary injunction preventing the U.S. Department of Labor (DOL) from enforcing these regulations on a nationwide basis.
The ruling stemmed from two consolidated lawsuits brought a few months ago by 21 states and multiple business groups challenging the regulations announced by the DOL in May 2016. The regulations would have more than doubled (to $913 per week) on December 1, 2016 the current salary level to qualify for the most common white collar exemptions and contemplated future increases every three years. The federal court held that these regulations are contrary to the FLSA insomuch as they disqualify from the statutory exemption—based solely on salary level—substantial groups of employees who perform executive, administrative and professional duties, which, the court stated, is the governing statutory requirement for exempt status.
How should employers respond?
Most employers have been engaged for months on planning for the December 1, 2016 effective date. Their plans have included audits of current exempt positions to ensure compliance with the duties test; budgeting for compensation increases designed to meet the new salary levels; reclassification from exempt to nonexempt of employees whose compensation will not meet the new salary level; and communications to employees announcing changes in compensation, timekeeping practices and status.
The big question is what should employers do now in light of this decision? Here are the key issues to consider.
- The district court's decision is a preliminary injunction and the court could change its ruling after further proceedings. However, that is unlikely given the rationale for yesterday's decision.
- Much more likely is that the DOL will appeal the district court's ruling to the federal court of appeals. A court of appeals ruling for either party then could be appealed to the U.S. Supreme Court. There is a risk that if the district court ruling is eventually overturned, the regulations could be enforced retroactive to December 1, 2016. This creates some exposure for employers who do not comply with the new regulations as of December 1, 2016.
- The Trump Administration may decide to withdraw the regulations or drop any pending court appeals filed by the Obama Administration.
- Employers must continue to comply with state requirements for exempt status.
- Employers who have conducted position audits and concluded that certain positions do not meet the duties test for exempt status may be out of compliance now and should consider moving forward (carefully) with the reclassification of those positions.
- Employers who intended to change compensation levels and reclassify employees on December 1, 2016 may want to hold off implementation after taking into account the legal risk, employee relations and other operational impact of a last-minute change of plan. Complying with the proposed December 1 regulations is not unlawful, and those employees whose compensation is increased and who currently meet the duties test will continue to be exempt. However, increases will not be necessary for those employees who meet the current compensation level if the district court ruling is sustained.
- Employers who already have made compensation adjustments and reclassifications may want to revisit these decisions after taking into account the above considerations.
- Most employers already have communicated their intentions to employees. Any change in plans will require new communications designed to take into account employee relations considerations and legal requirements. Many state laws require that employees be given advance notice of changes to compensation. If notice of an increase (or decrease) already has been made, new notifications should be sent in compliance with state law, internal policy and any contractual requirements with individual employees.
This is a fluid and complex situation. It is possible that the DOL may issue some type of guidance to employers concerning compliance pending final disposition of the litigation. However, we cannot count on it. Employers should carefully consider their course of action in consultation with legal counsel. Please contact Heather M. Sager at +1 (415) 749 9510, Bruce R. Alper at +1 (312) 609 7890, Joseph K. Mulherin at +1 (312) 609 7725, or your Vedder Price attorney with whom you have worked to discuss your particular situation.