New Overtime Requirements Put on Hold by Nationwide Injunction
On November 21, 2016, a federal district judge issued a nationwide injunction blocking the implementation of the new overtime regulation issued by the U.S. Department of Labor that was set to take effect on December 1, 2016. The regulation would have expanded the obligations for employers to pay overtime compensation to their employees by, among other things, doubling the minimum salary threshold required to qualify for the “white collar” exemption under the Fair Labor Standards Act (FLSA). For now, employers can breathe a sigh of relief as their impending obligations to comply with the regulation have been put on hold, at least temporarily.
Background of the Overtime Rule
The FLSA requires that certain employees receive time and one-half of their regular pay when working more than 40 hours in a given week. In 1954, the U.S. Department of Labor (DOL) issued regulations that set forth the criteria employees must meet in order to be considered “exempt” from the FLSA overtime requirements. Generally, employees must pass three tests in order to be exempt: (1) the compensation test, which requires that an employee earn at least $23,660 per year ($455 per week); (2) the salary basis test, which requires that an employee be paid on a salary basis only, defined as a pre-determined amount of compensation paid to an employee each pay period which cannot be reduced based on quality or quantity of work performed; and (3) the job duties test. As it pertains to the “job duties” test, there are three categories of “white collar” classifications that are exempt from the overtime requirements: Executive, Administrative, and Professional. Whether an employee fits within one of these classifications under the “white collar” exemption is based upon an examination of the specific job duties of the employee.
The Proposed New Regulation
In May 2016, the DOL issued a regulation that would expand the number of employees entitled to receive overtime pay. Under the new regulation, the salary threshold to qualify for an exemption would increase by more than 100%, to $47,476 per year ($913 per week). That means that to be exempt from overtime pay (and presuming the job duties and salary basis tests are met), an employee must receive a salary of at least $47,476 per year. If implemented, the economic impact on employers of the regulation would be enormous. It was expected that over 4 million currently exempt employees would become non-exempt, and thus, entitled to overtime. That would translate into an estimated $12 billion in new wages to be paid by employers nationwide to newly non-exempt employees.
The Injunction and What it Means for Employers
After the DOL passed the regulation, 21 states and a coalition of business associations brought lawsuits seeking to block its implementation. These cases were consolidated into one case in the U.S. District Court for the Eastern District of Texas. On November 22, 2016, the judge presiding over the suit issued a preliminary injunction against the DOL from implementing the regulation. Prior to the injunction, many employers were bracing themselves for the impact of the new regulation. Some employers increased the pay of their currently exempt employees in order to meet the increased minimum salary threshold. Now, these same employers will face the tough dilemma of whether to rescind the salary increases that have been given or promised to their employees – a decision that will surely affect employee morale.
Conclusion
While the preliminary injunction does not end the litigation, it does mean that until further action by the Court is taken, the new regulation will not take effect. The DOL indicated that it will appeal the Court’s injunction. With the new Trump administration in tow, observers will be watching closely to see how the litigation will play out under a Trump-appointed Labor Secretary. If the injunction is lifted, employers will need to evaluate their positions and make decisions about whether to reclassify exempt employees as nonexempt, pay additional overtime, reduce hours, bring on more workers, or simply absorb the increased costs. For the time being, however, employers should continue to comply with the existing regulations.
