[Washington DC] - The Department of Labor's (DOL) Final Overtime Rule has been put on hold with a temporary injunction issued by a Federal District Court Judge on November 22, 2016. The rule was scheduled to go into effect on December 1. The court will next consider the underlying merits of the two cases brought against the Final Rule. In the meantime, there is also the possibility that Congress will address this issue during the injunction period. With a new Administration, the Department may choose to not vigorously defend the Final Rule. Employers who have already raised the pay for certain employees in order to retain their exempt status will likely find it difficult to reverse that decision; however, employers may find it possible to put on hold or reconsider reclassification of employees from exempt to non-exempt.

What Happened

A U.S. District Judge from the Eastern District of Texas has issued a preliminary injunction requested by twenty-one states ("State Plaintiffs") preventing the implementation of the DOL's Final Rule increasing the salary level requirements for the overtime regulation's "white collar" exemption. The court did not specifically address the change made to Highly Compensated Employees; however, the entire Final Rule is put on hold with this temporary injunction.

DOL issued its Final Rule updating the overtime regulations for exempt "white collar" executive, administrative, and professional employees on May 23, 2016. Effective December 1, 2016, the Final Rule increased the minimum salary level for "white collar" workers from $455 per week ($23,660 annually) to $913 per week ($47,476 annually). The Final Rule would have updated the new minimum salary level every three years, with the first scheduled on January 1, 2020.

Two plaintiff groups whose cases were consolidated are challenging the Final Rule: the State Plaintiffs consisting of 21 states (with 20 of those states led by Republican governors); and separately, a group of over fifty business organizations ("Business Plaintiffs") led by the U.S. Chamber of Commerce. On October 12, 2016 the State Plaintiffs moved for emergency preliminary injunctive relief. On October 14, the Business Plaintiffs moved for an expedited ruling. On October 17, the Business Plaintiffs moved for expedited summary judgment (which the Department opposed) and the court consolidated the State Plaintiffs' action with the Business Plaintiffs' action. The Department filed its response to the request for an injunction on October 31, the plaintiffs replied on November 10, and the Department filed its additional reply on November 15. On November 16, the court held a preliminary injunction hearing to consider the State Plaintiffs' motion.

The injunction, while temporary, is a strong signal that the court considers the plaintiffs' case a strong one. In order to issue the injunction, the court had to find that the plaintiffs' was likely to succeed on its merits and that without the relief of a temporary injunction the plaintiffs were likely to suffer irreparable harm. The court found that the plaintiffs had made a prima facie case that the Department exceeded its authority in changing the minimum salary level for the "white collar" exemption and establishing the automatic updates. The court disagreed with the plaintiffs' argument that the Fair Labor Standards Act does not apply to states. The court also found that in addition to the costs associated with the increased minimum salary level, compliance costs would also impact state governmental programs and services. On the other hand, the court found that the Department had not identified any harm it would suffer from delaying the implementation of the Final Rule. In considering the public interest, the court found that the public interest is best served by an injunction.

What Happens Next

By issuing the injunction, the court signaled that the plaintiffs case is likely to succeed on its merits. At stake is whether DOL has the statutory authority to change the minimum salary requirements for the "white collar" exemption. That also puts at risk the automatic adjustments scheduled every three years under the Final Rule.

The Labor Department last changed the overtime rule in 2004 when it created the current three-pronged test: 1) work must be executive, administrative, or professional in nature; 2) the worker must be paid on a salary basis not dependent on work performed; and 3) the worker must be paid at least $455 per week ($23,660 annually). President Obama issued a March 2014 Executive Order directing the Department to update the overtime rule, representing what many commenters said was an attempt to go around congressional authority. The court seems to agree with this position saying, "If Congress intended the salary requirement to supplant the duties test, then Congress, and not the Department, should make that change."

An incoming Republican Congress will attempt to permanently halt the rule, possibly by using the Congressional Review Act once convening in January. Politico reports that President-elect Trump would like to exempt small businesses from the regulation. The Hill noted some political risk associated with completely undermining the Final Rule and suggested a compromise level for a new salary threshold is a possibility.

In the current Congress, several bills to address the rule are pending. The House of Representatives has passed H.R. 6094, which would delay the rule for six months. Additionally, the House has also introduced H.R. 5813, which would phase-in the implementation of the rule. Both House bills address the December 1 implementation date. For its part, the Senate has introduced S. 3464 to delay implementation of the rule. Moreover, this spring, the House and Senate introduced legislation (H.R. 4773 and S. 2707) to block enforcement of the rule. There has also been consideration of including language in the Fiscal Year 2017 Labor, Health and Human Services, Education and Related Agencies Appropriations to prevent the implementation of the Final Rule. And while Congress or the Trump Administration may intervene, the outcome of the case may make any congressional action unnecessary.

What Must Employers Do

For now, employers need not make any changes to the status of employees before December 1 as contemplated by the Final Rule. Although not permanent, the temporary injunction preserves the existing overtime rule employers are currently subject to. Until the court considers the case on its merits, the Final Rule is not effective and the 2004 salary level is in place.

The Society for Human Resource Management (SHRM) observes that many employers will have already implemented strategies to meet the Final Rule's requirements: "Employers will likely want to leave decisions in place if they have already provided salary increases to employees in order to maintain their exempt status." The Wall Street Journal (WSJ) reported that Wal-Mart recently increased the salaries of its assistant managers from $45,000 to $48,500 to avoid having to pay time-and-a-half.

While it would be difficult to walk back a salary increase, it may be possible to reconsider other strategies - those whose triggers have been pulled and those whose triggers were due to be pulled on December 1. For example, employers who planned to reclassify certain employees from exempt to non-exempt (or have already done so), from salaried to hourly, or some combination of the various options, may choose to wait (or return to the status quo ante) and let the litigation play out. The WSJ reported that one restaurant chain had planned to make its 125 assistant general managers hourly, creating a bonus pool to reward them for keeping overtime costs in check. The company has put that plan on hold.

"Wait and see" is the operative term for employers who have not put into place any changes or who can reverse any previous changes made in anticipation of the Final Rule becoming effective. SHRM warns, "Employers shouldn't assume however that the overtime rule will be permanently barred. They should still have a plan to move forward if necessary in the future."

Additional resources may be found at www.shrm.org. 

Questions? Please contact Frank Moore, NLBMDA's Regulatory Counsel at [email protected].