Texas Federal Court Blocks Overtime Rules

On Tuesday, November 22, 2016, the U.S. District Court for the Eastern District of Texas entered a nationwide preliminary injunction prohibiting the new FLSA regulations governing overtime from going into effect as scheduled on December 1, 2016. The final regulations, which were issued on May 18, announced new overtime exemption rules for executive, administrative, and professional employees (“the white collar exemptions”), the most significant change being an increase of the salary level test for the exemptions from $455 per week to $913 per week, or $47,476 annually for a full-year worker. A mechanism exists in the new rules for automatically updating the salary level threshold every three years. 

The injunction came in a lawsuit filed by a number of states challenging the final rule, which had been consolidated with a similar case brought by over fifty business organizations. The states moved for an emergency preliminary injunction on October 12, and a hearing was held last week. While some observers of the litigation had commented that it was possible the Court ultimately might strike the automatic update mechanism, the likelihood that the entire regulation would be enjoined appeared remote.

In its ruling, the Court enjoined implementation because the new rule exceeded the text of the Fair Labor Standards Act as well as the scope of DOL’s authorization to issue rules “defining and delimiting” the white collar exemptions. Hence, the rule was not entitled to deference by the Court.

The Court reasoned the FLSA defines the executive, administrative and professional exemptions in terms of duties and does not mention a minimum salary level. Nor does the FLSA’s delegation of authority to the DOL to “define and delimit” the scope of the exemptions encompass the ability to define a minimum salary level that impermissibly supplants the duties test, which the Court held happened in this instance. In other words, the new rule in the Court’s view raised the salary level so high that workers who performed exempt duties would not qualify for the exemption solely because of their salary level, and this was impermissible.  

In two footnotes, the Court observed that establishing a salary-basis test does not supplant the duties test and Congress’ intent, and disclaimed to be making a general statement on the lawfulness of the salary-level test for the exemptions. Rather, the Court claimed that it was “evaluating only the salary-level test as amended” under the new rule.

As of this writing, no announcement has been made as to whether the DOL will seek an emergency appeal to the Fifth Circuit, nor has the incoming Trump Administration stated whether it will continue to defend the validity of the new rule in the litigation when it takes over the DOL on January 20, 2017. What should an employer do now?

From a technical legal standpoint, an employer need not do anything at least until the injunction is lifted, if that ever occurs. However, employers have been preparing to respond to the new rule on or before the December 1 deadline for many months, and each individual employer’s response has been dictated by the employer’s circumstances. Consultation with counsel is recommended.

A few employers have announced raises for those currently exempt employees whose salaries already were close to the new salary level threshold; those employers can move forward or not as they deem appropriate.

Other employers have announced transitions of exempt workers to non-exempt status effective December 1. Some of those transitions were dictated solely by the new rule and engendered accompanying morale issues; employers should consult with counsel as to whether those transitions can or should proceed or be reassessed or put on hold at least for the immediate short-term until the fallout of this Court ruling and the plans of the future Trump Administration are known.

Some employers who have planned transitions of exempt workers to non-exempt status in preparing for the new rule may have discovered that some employees previously had been misclassified as exempt. These employers should consult with counsel on how these issues should be addressed.

Nyemaster Goode’s Labor & Employment practice routinely counsels its clients on compliance with federal and state wage and hour laws.  If you have questions about this development, our Labor & Employment attorneys are available to assist.