Federal Court Throws New Overtime Rules Into Limbo

(November 23, 2016) Businesses from coast to coast have spent the last several months analyzing and making plans to implement the Department of Labor’s new overtime rules which basically doubled the compensation floor for salaried employees and were to go into effect on December 1, 2016.  That all changed Tuesday, November 22^nd, when U.S. Federal Judge Amos Mazzant issued a nation-wide injunction halting the implementation of the rules. The injunction was the result of a lawsuit filed by 21 states and a number of business groups seeking to halt the implementation of the rules on the basis that the salary threshold was not authorized by the Fair Labor Standards Act under which the rules were implemented and would cost the states more than $115 million in additional compensation in the first year with an even bigger impact on businesses covered by the rules. Government estimates put the overall cost at $1.2 billion per year for each of the first 10 years following implementation.

While it is likely that the Department of Labor will immediately appeal the ruling to the Fifth Circuit Court of Appeals and will seek to vacate the injunction, it is unknown if the Appellate Court will act to vacate the injunction, pending a full trial on the merits, or will leave the injunction in place. If the injunction is vacated, the rules will go into effect as scheduled. If it is not, employers will not be bound by them and will have to decide whether to voluntarily implement the new standards while the matter is being sorted out in the Courts.

At stake is the take home pay of roughly 4.2 million U.S. workers who currently are not eligible for overtime if they fall within one of the exempt classifications (bona fide executive, administrative, professional and outside sales employees) and receive a salary of no less than $455 per week ($23,660) annually). The new rules left the duties tests intact but increased the weekly salary threshold to $913 per week ($47,476 annually). Accordingly, any salaried employees who stay in their same job with the same duties earning between the old and new thresholds were due for a raise on December 1^st unless their employer changed their compensation structure to pay them overtime if they worked over 40 hours.

The timing of the injunction is sure to be difficult for employers. Because December 1^st coincides with almost no one’s fiscal year, many employers have already implemented the changes and will find it difficult to retract them. Those who have not yet implemented the changes, but have already announced to their employees an intention to adopt the new salary floor, will now have to consider if they want to walk back the raises in light of the Court’s ruling or whether they will implement the raises even though they may not legally be required to do so. The former course will surely be contentious while the later may engender good will with the employees if they are advised that the raises are being granted even in the absence of the mandate.  Each employer will have to assess what is in its overall best interest. Hopefully, the Fifth Circuit will move quickly on the issue so that employers will not unnecessarily antagonize their work force with a retraction of a raise or can at least use this ruling as a positive message to its employees regarding their value to the organization.

The Employment Practice Group is closely monitoring this issue and will issue an update just as soon as further action in the courts provides some useful direction. In the meantime, we stand ready to answer any questions that may arise as to options for reacting to this last minute ruling by the Court.