Last week, the United States District Court for the Eastern District of Texas issued an injunction preventing the new federal overtime pay rules from going into effect this Dec. 1. The injunction has nationwide effect.
All employees are presumptively entitled to premium overtime pay under the federal Fair Labor Standards Act (FLSA). However, certain employees can be exempt from the overtime entitlement if they satisfy the duties of their exemption category, are paid on a salary basis, and are paid a guaranteed salary that satisfies minimum amounts specified in Department of Labor (DOL) regulations. The exemption categories are executives, administrators, professionals, computer professionals, outside sales people, and highly-compensated employees.
The regulations. In 2014, President Barack Obama issued an executive order directing the overhaul of the long-standing overtime regulations by the DOL, which went to work and recently finalized regulations that, starting Dec. 1, would roughly double the threshold for exemption status from $23,660 a year to $47,476. The regulations also launched periodic indexing of those minimums. More than 20 states and numerous business groups filed lawsuits challenging the new regulations. Those cases were consolidated in a federal district court in Texas.
The current salary minimums for FLSA exemptions were created many years ago by DOL regulations, not by the Act itself.
The ruling. The federal district court has ruled that DOL exceeded its authority to implement the Act by imposing updated salary minimums for FLSA exemptions that are so high that they might exclude employees whom Congress intended to exempt under the “white collar” exemption categories. The court enjoined enforcement of the new rule; and, because the new rule itself was enjoined, its automatic indexing feature was also enjoined.
For two reasons, the court was careful to deny that this ruling meant that the old (almost meaninglessly low) salary minimums were or are improper. Courts avoid messy retroactive invalidations of laws, and this court made clear that it did not object to the salary minimums in general but only to the high amounts of the new minimums, which it felt would improperly override the FLSA’s focus on duties in a way that the old lower minimums do not do.
What’s next. With the new salary minimums enjoined, most exemption decisions by employers will revert to the “salary basis” and “duties” tests, at least until the injunction is lifted by the courts, superseded by a final decision in the case, or effectively made irrelevant by new actions of the DOL or Congress. A normally-paced appeal of the case to the Fifth Circuit Court of Appeals would not be resolved until after the commencement of the Trump Administration, which is likely to moot the issue by undoing the regulations, making the appeal pointless. And the Fifth Circuit, being the nation’s most conservative federal appeals court, would be unlikely to grant emergency relief to the government or to quickly reverse the district court.
This eleventh-hour reprieve may create employee relations issues for firms that have already announced raises or other responses to the new rules, and employers that have announced or actually implemented pay increase should consult legal counsel before withdrawing such changes, since some states require periods of advance notice to employees of pay decreases.
Contingent labor programs sometimes require or agree that their suppliers will treat assigned workers as FLSA exempt. While many such exemptions are proper, others may be misclassifications. Although legal wage payment is principally the duty of suppliers, the increasing attention of government to joint employment theory gives customers a stake in the proper classification of contingent workers.
The new DOL regulations provided suppliers a convenient occasion for correcting misclassifications without admitting to past errors. If, as expected, the new regulations never take effect, customers should not automatically expect suppliers to restore exempt treatment to assigned employees who have been switched to nonexempt status. They should confer with their suppliers to determine anew the correctness of all exempt classifications going forward and to set or confirm the corresponding future bill rates.