November 29, 2016

Employers and employees nationwide received a surprise on Tuesday afternoon as many prepare to take a few days off for the Thanksgiving holiday: Judge Amos Mazzant of the United States District Court for the Eastern District of Texas ordered the Department of Labor ("DOL") not to enforce the new overtime Final Rules under the Fair Labor Standards Act ("FLSA") set to go into effect on December 1, 2016.

The Order. The Order was issued in a lawsuit filed by several state governments, including Iowa, to enjoin enforcement of the DOL's new final rules on overtime - which raised the "salary threshold" for the "executive, administrative, and professional" (or "EAP") exemption from $455 per week to $913 per week. This widely publicized rule change was estimated to result in 4.2 million more workers becoming "non-exempt" under the FLSA, and entitled to overtime for hours worked above 40 hours per workweek.

While technically a preliminary ruling, the Court held the increased "salary threshold" in the Final Rules is an unlawful means of delineating EAP exempt employees, rather than applying a duties test. Specifically, the Court noted Congress did not define the terms "bona fide executive, administrative, or professional capacity" in the language of the FLSA, and the "plain meaning" dictionary definitions relate to a person's performance, conduct, or function - not salary. Overall, the Court held that, because the Final Rules impose a salary threshold that could render an employee non-exempt regardless of the employee's actual EAP duties, it is contrary to clear Congressional intent.

Additionally, the Court held that because the Final Rules are unlawful, the DOL did not have the authority to implement the automatic updating mechanism in the Final Rules. This would have allowed the DOL to automatically update the salary threshold every three years without going through a new rulemaking process.
As a result, the Court issued an injunction that applies nationwide, and enjoins enforcement of the new Final Rules without limitation.

What Happens Next. This ruling clearly leaves employers and employees in a lurch regarding implementation of the new Final Rules, particularly because many employers have likely been making arrangements, reclassifying employees, and raising salaries for months. What might happen next?

The DOL has the option to appeal the Order to the Fifth Circuit Court of Appeals, which may affirm or overturn the ruling. While it is pending, employers can view the Court's Order as a "pause" on the requirement to comply with the Final Rules issued by the DOL by December 1, 2016. In addition, analysts predict that if the preliminary injunction and/or appeal pushes the implementation date past January 20, 2017, the new Presidential administration would be more likely to reopen the rulemaking and revise the Final Rules. Other analysts also point out that a pending appeal could be dropped once the next U.S. Presidential administration takes control, because it has been speculated these regulations were already on the chopping block. It is not easy to predict what might happen next, but the conventional wisdom appears to be that the longer enforcement is delayed, the less likely the rules will ever go into effect.

Where does that leave employers who have initiated and/or completed preparations to come into compliance with the rules? The short answer has less to do with the law and more to do with the realities of your situation. Practically, options might include, but are not limited to:

  •  Staying transition efforts until the legal issues are resolved, explaining to employees that the status quo prior to transition efforts will remain in effect until further notice;
  • Rescind salary increases that have not gone into effect (knowing that the increases may need to be paid if the injunction is lifted). Employers should avoid, without discussing with counsel, attempting to recoup increased compensation paid in anticipation of the rule change or making any such salary reductions retroactive;
  • Continue as planned with all changes in classification and salary increases; or
  • Middle of the road approaches: For example, put announced raises into effect, but keep individuals who were being transitioned to hourly as salaried until further notice.

Any option, or combination of options you choose, should be based on considerations of employee morale, contractual obligations, and a potential "see-saw" effect if the regulations are in fact implemented.

If you have further questions, please contact any member of the Ahlers & Cooney Employment Law Group.


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Overberg, Nathan


Reif, Rebecca


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