Yesterday, the United States District Court for the Eastern District of Texas dealt employers yet another surprise in this season of upsets with its decision in State of Nevada v. U.S. Department of Labor, halting the implementation of the DOL’s new FLSA overtime exemption rules, which were set to take effect December 1, 2016. The rules would have increased the minimum salary for exempt executive, administrative and professional employees from $455 per week to $913 per week, or about $47,476 per year. The court issued a nationwide injunction prohibiting the enforcement of the new salary threshold for exempt employees. As a result of the court’s ruling, the new rules will not take effect on December 1, the prior rules will remain in effect, and the timing of a change in the rules, if any, is completely up in the air.
While the new rules already faced an uncertain future under the Trump administration and the Republican-controlled congress, most legal observers gave this lawsuit a low probability of success. The complaint, filed on September 19, 2016 by a coalition of 21 states, claims that the DOL exceeded its authority under the FLSA and unlawfully infringed upon states’ budgets by enacting the new rules. A coalition of business groups led by the U.S. Chamber of Commerce also filed a parallel lawsuit, which was later consolidated with the states’ case. The states asked the court to grant a preliminary injunction blocking the rules from taking effect until a final ruling in the case. For their part the business groups asked the court to skip the preliminaries and expedite its final ruling on the merits.
Although the court declined to issue a final decision for the time being, it granted the states’ motion for a temporary nationwide injunction blocking the new rules from taking effect and prohibiting the DOL from expending any resources to enforce them. The court found that Congress intended for the executive, administrative, and professional exemptions to be based on an employee’s actual duties and responsibilities, rather than the employee’s salary. By issuing a rule that “categorically excluded” employees who performed exempt job duties from exemption based on a “de facto salary-only test,” the court determined that the DOL exceeded its authority and violated the unambiguous intent of Congress to exempt employees based upon the type of work they perform. While the Court’s ruling seems to suggest that the low $455 per week salary threshold in the existing rules might be permissible because it screens out only “obviously non-exempt employees,” the court did not address whether a smaller increase in the current minimum might have been permissible. It also did not rule on whether that lower minimum salary threshold could be subject to automatic increases as the DOL had proposed, finding instead that “because the Final Rule is unlawful, the Court concludes the Department also lacks the authority to implement the automatic updating mechanism.”
Importantly, this ruling is not limited to the States that filed the lawsuit. The Court’s ruling is nationwide in scope and applies to all employers covered by the FLSA. However, much uncertainty remains. Rulings on preliminary injunctions are subject to immediate appeal. While it is rare for the Fifth Circuit Court of Appeals to overturn a preliminary injunction, this is an unusual and unexpected decision, and the Obama Administration may well try its luck in a bid to preserve the new rules. While its ruling on the preliminary injunction likely forecasts the district court’s final ruling on the merits of the case, it is also possible that the court may reach a different result upon final review and lift the injunction.
We also do not know at this time exactly what President-elect Trump will do on this issue when he takes office in January. He may well simply order a halt to further government efforts to defend the Obama administration rules, in which case the current injunction will likely remain in effect and the rules will be dead. But the President-elect is nothing if not unpredictable, and it is at least possible (if unlikely) that his populist side may win out over business interests and lead him to defend the new rules. It is also possible that Congress may step into the fray, either by voting to block the new rules under the Congressional Review Act, or by enacting legislation that either does away with the salary increase or phases it in over several years.
This leaves employers with a difficult question: What now? Unfortunately we are still waiting for a definitive answer.
Employers who are contemplating changes to comply with the new rules but have not yet announced them should consider waiting to see what happens before they act. Employers that have already announced or implemented adjustments will need to decide whether to roll them back, and if so whether to do that now or wait for the dust to clear. Employers who do announce further changes based on this ruling should be clear with employees that further changes might follow depending on the final resolution of the lawsuit and the response of Congress and the new administration. Obviously those communications will need to be handled carefully, particularly if they mean rescinding pay increases or other changes that employees may have seen as favorable.
Finally, as employers plan to respond to these issues, they should watch not only the courthouse in Texas and politicians in Washington D.C., but their state legislatures and city councils. New York already has a higher minimum salary for exempt white collar employees ($675 per week), and has recently proposed increases even greater than those in the now blocked federal rules. If the federal rules are declared dead, other state and local governments may be inspired to take similar action.