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District Court Issues Nationwide Injunction on New Overtime Rule

Contributor: Michael D'Addio, Principal, Tax & Business

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A federal district judge in Texas issued an injunction on November 22, 2016, banning implementation of the Department of Labor's ("DOL") new rule increasing the minimum salary level qualifying for an exemption from overtime under the Fair Labor Standards Act (FLSA). This action comes one week before the expected date of implementation (December 1). Employers face a number of potential issues in light of this reversal and should consult legal counsel as to its consequences.

Under current regulations, in order for professional employees to be exempt from overtime requirements under the FLSA, they must provide certain types of services and generally must earn at least $455 a week ($23,660 for an entire year).

The new DOL rule in question raised the salary threshold to $914 per week ($47,500 for a full year). This means that anyone earning less than this amount would not satisfy the exemption requirement. The rule was to be effective December 1, 2016. In addition, the highly compensated employee exemption minimum annual salary was also set to increase from $100,000 to $134,004 per year. The Obama administration argued that these salary changes merely kept pace with our modern economy. The old salary levels had not been changed in a long time.

Business groups and the U.S. Chamber of Commerce brought a case seeking an injunction against the application of the new rule as causing irreparable harm to affected businesses. Several states joined in the suit, arguing that the new rule would have a direct impact on their budgets by increasing the compensation of their workers.

The district court judge in Texas agreed that the Department of Labor did not have the authority to raise the salary thresholds that would trigger overtime compensation. The Court said that this should be a Congressional function. Additionally, the Court found that the language of the FLSA exemption is based primarily on the services performed by the employee and should not be controlled by salary levels.

The injunction places a ban on the enforcement of the new regulation before its December 1, 2016, effective date. However, affected employers still face significant issues:

  • The Administration can appeal this decision to the Fifth Circuit Court of Appeals, which can overturn the injunction. With a new presidential administration taking office in January, it is not clear whether this action will be taken. The Trump administration might decide not to continue the case – particularly in light of the President-Elect’s declarations regarding the elimination of job-killing regulations.
  • If the injunction is overturned through court action, employers might find that this action is retroactive to the original December 1, 2016, effective date. There is a case in Connecticut which would support this position. This potentially places employers who observe the injunction at risk for overtime violations.
  • Employers who have taken action to comply with the new regulation and have informed employees of raises and changes in exempt status may face employee relations challenges if they do not change the pay rates. Additionally, they could potentially face legal action by angered employees who may file DOL claims for misclassification under current rules.

Employers should check with their legal counsel before deciding on a course of action regarding this court decision.

 
Contributor
Michael  D'Addio

Principal
Tax & Business
New Haven, CT
 
 
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