Employers across the country woke up this morning to news that a Texas District Court judge has blocked the DOL’s overtime rule from taking effect on December 1, 2016.  This represents a stunning turn of events for employers. They will now be able to continue to treat as exempt from overtime “white collar” workers who are paid a salary of at least the current minimum level of $23,660 per year without raising their salary to the proposed new minimum of at least $47,476, as the new rule had required. But, anticipating the new rule taking effect on December 1, many employers had already re-classified employees as non-exempt or raised their salaries to maintain the exemption or communicated the anticipated changes to their workforce.  And even those employers who have waited until the last minute to ready themselves for compliance have been left scratching their heads as to next steps, now that the rule will not, at least for now, take effect.  This post explores the court’s decision and employer’s potential responses to it.

What Did the Court Say?

The Court reasoned that when Congress enacted the Fair Labor Standards Act’s so-called “white collar exemptions,” it intended to exempt from the FLSA’s minimum wage and overtime rules, workers who performed executive, administrative, and professional (“EAP”) duties.  It ruled that while Congress gave DOL the authority to “define and delimit” what types of duties might qualify as EAP duties, “nothing in the EAP exemption indicates that Congress intended the [DOL] to define and delimit with respect to a minimum salary level.”  The Court found that DOL had essentially supplanted the EAP duties test by extending the EAP exemptions only to those paid a weekly salary of at least $913 per week ($47 476 annually).

Quoting from the DOL’s Final Rule itself, the Court noted “white collar employees . . . earning less than $913 per week will not qualify [under the new rule] for the EAP exemption, and therefore will be eligible for overtime regardless of their job duties and responsibilities.”  Thus, the Court found the new rule had the effect of denying the exemption to employees being paid a salary less than $47,476 even though those employees performed exempt EAP duties.  This, according to the Court, violated Congress’s intent to exempt all employees who performed EAP duties, rendering the new rule unlawful.

The Court was careful to note that it was not limiting the ability of the DOL to utilize a salary-level test entirely; rather, it was focused on whether the amended salary-level the DOL utilized in this instance was unlawful.  Although speaking from the Eastern District of Texas, the judge issued the enforcement ban on a nationwide basis impacting all employers.

Thanks for the legal analysis, but what I really care about is what I should do now!

The Legal Implications

Legally, for most employers, there is nothing further you need to do, and you can, for all intents and purposes, just sit tight.  For one thing, the injunction could be appealed to the Fifth Circuit or the Supreme Court and that could take some time.  We haven’t even heard from DOL what it plans to do next, including whether it plans to appeal. It is still considering its options.

Further, this ruling will not impact employers’ need to comply with applicable state law, where it differs from the federal law.  For example, California and New York’s minimum salary levels are scheduled to increase in the coming years regardless of what happens to the DOL’s overtime rule.

For those employers who were utilizing the new rule as an opportunity to conduct a more thorough audit of your classification decisions with a focus on the job duties test, which the new rule did not propose to change, we advise that you consult with counsel regarding next steps with respect to those audits.  Regardless of whether the rule ever goes into effect, if you misapply the job duties test and thereby misclassify employees, it could be very costly.

Lastly, employers must understand that reversing course must be a forward, not backward, looking exercise.  You cannot try to recoup any wages previously paid to employees, whether in the form of a salary raise or in additional overtime, without facing potential wage and hour violations.

Other Factors to Consider

Employers must also consider the business implications of unwinding the changes you have already made or announced you would make. Consider what costs would be incurred in the form of lower employee morale, productivity and turnover and any administrative costs you will incur, if the changes are rolled back.  Would the employee welcome being converted back to overtime exempt?  For example, some may value the long-term career growth opportunity over the short-term bump in overtime pay.  If you raised salaries, how would the employee react to reducing that salary back to its previous level?  If those costs will outweigh the labor cost savings you will enjoy, think twice before switching course.  Consider also whether reversing course will put you at a competitive disadvantage as to your industry peers who may have committed to keep the changes in place.  The same goes for employers who have not made any changes or notified employees about any contemplated changes to date.  These employers must ask if continuing to “do nothing,” will it make them less competitive in the market.

Further, employers should consider whether their employees will be talking about this new development at the water cooler or over social media.  Consider whether it makes sense to send an appropriately-tailored communication to the workforce or an appropriate segment of the workforce that aligns expectations accordingly.  Try to use this as an employee relations opportunity in the face of the uncertainty created by this decision, including where employees may have spent months developing certain expectations and engaging in financial planning.