What the Indefinite Suspension of the New Overtime Rule Means for Local Government Employers

For now, the new overtime rule that was scheduled to become effective on Thursday, December 1, will not go into effect. On Tuesday, November 22, a federal trial court judge in Texas issued a preliminary injunction prohibiting the U.S. Department of Labor (DOL) from implementing and enforcing the new rule. Despite being issued in Texas, this is a nationwide injunction. Many employers had hoped that something would put the brakes on the upcoming budget-busting increase in the minimum salary required for an employee to be exempt for overtime. Now that wish has been fulfilled, but it brings with it an indefinite period of uncertainty. A preliminary injunction is only temporary. And no one quite knows what will happen next or when it will happen. So just what is a local government employer to do in the meantime?

Background

Under the Fair Labor Standards Act, employees are entitled to overtime premium pay of one-and-one-half times their regular rate of pay after working 40 hours in a week, unless an exemption applies. If an exemption applies, an employee is said to be “exempt” and is not entitled to overtime pay no matter how many hours they work in a week. An exemption applies if the employee is salaried and the position meets the requirements of the executive duties test, the administrative duties test, or the professional duties test. But even if the employee is salaried and the position satisfies one of the three duties tests, the exemption does not apply if the employee is paid less than the current threshold amount or $455 per week, or $23,660 on an annualized basis. Such a low-paid, salaried employee is entitled to overtime pay after 40 hours.  For an explanation of the salary basis test, see here. For discussion of the executive duties test, see here, the administrative duties test, see here and here, and the professional duties tests, see here and here.

The New Rule

In May 2016, DOL released a final new rule raising the minimum salary an employee must make to be exempt from overtime and, by that act, made many more salaried employees eligible for overtime compensation. The rule may be found here. The new rule would increase that amount from the current $455 per week to $913 per week – that’s an increase of just over 100% from $23,600 annually to $47,476 annually. The new salary minimum was to take effect December 1, 2016.

Also part of the new rule and also scheduled to take effect December 1 were:

• an increase in the minimum salary necessary for an employee to be exempt from overtime as a highly-compensated employee from $100,000 annually to $134,004 annually;
• a provision for automatic updating of the salary thresholds every three years; and
• a new provision allowing employers to include nondiscretionary bonuses in an amount up to 10% of the minimum salary level.

The new rule made no changes to the duties tests and no changes to any of the other rules regarding compensable time and overtime. For a more detailed discussion of the new rule, see my earlier blog post, here.

Challenges to the New Rule

In September 2016, twenty-one states joined together in a lawsuit challenging the new rule in federal court in Texas. The states that are parties to the lawsuit are Nevada, Texas, Alabama, Arizona, Arkansas, Georgia, Indiana, Kansas, Louisiana, Nebraska, Ohio, Oklahoma, South Carolina, Utah, Wisconsin, Kentucky, Iowa, Maine, New Mexico, Mississippi and Michigan. North Carolina did not join the lawsuit, but as the lawsuit challenges a federal law, any decision in the case will have nationwide effect. A copy of the complaint in the case, State of Nevada, et al. v. United States Department of Labor, et al., may be found here.

The states challenged the new rule on a number of grounds. First, the complaint alleges that the new rule and, indeed, the very application of the Fair Labor Standards Act to state and local governments, violates the Tenth Amendment to the U.S. Constitution. It questions the continuing validity of the U.S. Supreme Court’s 1985 decision in Garcia v. San Antonio Metropolitan Transit Authority, which held that the FLSA does in fact apply to the states and their political subdivisions.

The second count alleges that by setting forth the salary basis test, the minimum threshold for the highly compensated employee exemption, and the automatic indexing of increases to the salary threshold, the new rule exceeds the delegation of authority granted to DOL by Congress. The plaintiffs claim that Congress never intended for salary level to substitute for the executive, administrative and professional duties tests as the method for distinguishing between exempt and nonexempt employees.

The third count alleges that the provision for automatic updating of the salary basis test and the highly compensated employee threshold every three years violates the Administrative Procedures Act. A fourth and fifth count allege that the new rule is arbitrary and capricious and that it improperly delegates Congressional authority.

In October 2016, the plaintiffs filed a motion for an emergency preliminary injunction, citing the irreparable harm that the states (and particularly their budgets) would suffer if the new rule were allowed to go into effect on December 1.

The Judge’s Order

Federal district judge Amos Mazzant granted the motion for a preliminary injunction on November 22. He ruled for the plaintiff states on just one of their claims: that the plaintiff states had established a prima facie case that DOL had no statutory authority to set the new rule’s salary threshold and its provision for automatic updating. Judge Mazzant’s opinion and order may be found here.

The Reasoning behind the Decision

Judge Mazzant identified the question at issue as “What constitutes an employee employed in an executive, administrative, or professional capacity?” as those terms are used in the statute. At 29 U.S.C. § 213(a)(1), the FLSA provides that the overtime provisions of the act do not apply to :

any employee employed in a bona fide executive, administrative, or professional capacity (including any employee employed in the capacity of academic administrative personnel or teacher in elementary or secondary schools), or in the capacity of outside salesman (as such terms are defined and delimited from time to time by regulations of the Secretary . . . .

First, Judge Mazzant found that Congress did not define the terms “bona fide executive, administrative, or professional capacity,” choosing instead to delegate to DOL the authority to define the terms through regulations. Nevertheless, the judge found that because Congress did not define those terms, the appropriate approach to interpreting them is to consider their “plain meaning” at the time of the statute’s enactment in 1938. He then proceeded to apply the definitions of those terms from the Oxford English Dictionary’s 1933 definition.

The judge rejected DOL’s arguments that both the plain meaning of the statute and Congress’s delegation of authority allowed it to impose the salary basis and minimum salary threshold tests. Judge Mazzant’s conclusion is a bit startling given that the salary basis and salary threshold tests have been in effect in one form or another since the early 1940s.

What Happens Next in the Court Case?

This is only a preliminary injunction. While the standard for a preliminary injunction is fairly high, the case is not over yet and still must be decided fully and finally decided by the judge. But preliminary injunctions may be immediately appealed. DOL’s next step could be to appeal the decision to grant the preliminary injunction to the federal Fifth Circuit Court of Appeals. An adverse decision there would be appealed to the U.S. Supreme Court.

All of this takes time. Whatever the outcome of an appeal of the preliminary injunction, if the judge finds in favor of the plaintiff states in his final decision, DOL could again appeal to the Fifth Circuit and from there to the Supreme Court (which still has a vacancy – a 4-4 tie there would have the effect of affirming whatever decision the Fifth Circuit made).

As of this writing, DOL has not yet announced how it will proceed.

What Can We Expect from the New Administration?

I don’t presume to predict what actions the Trump administration will take on the new rule or on overtime and the FLSA’s protections for workers more generally. The conventional thinking is that the new administration will be a more pro-business administration. That is a fair guess, but it doesn’t necessarily extend to upending the FLSA as we have known it for over 75 years. But that could be the outcome.

More immediately, however, the DOL under new leadership could choose to abandon any appeal of Judge Mazzant’s decision. The new administration could leave the current overtime rule as it is with its low salary threshold in place or revise it in any number of different ways, such as increasing the salary threshold but by a lesser amount than currently planned. It could do away with the salary basis and salary threshold tests entirely. It could revise the duties tests. Any such changes, however, would require compliance with the federal Administrative Procedures Act. First, DOL would draft and then publish a proposed rule. Then there would be a 60 to 90 day comment period, after which a final rule would finally be published, with another 60 to 90 day period before the rule became effective.

The Legal Perspective:  What Happens on December 1?

Nothing. The court has ordered DOL not to implement or enforce the new rule until there is a final decision in the case. Employers may continue to classify as exempt any position that makes at least the amount of the current salary threshold of $455 per week and satisfies one of the executive, administrative or professional duties tests. Of course, any misclassifications under the duties tests that have been discovered while preparing for the new rule must still be corrected.

Alternatively, employers may comply with the new rule even though they will no longer required to do so. Employers can always compensate their employees more generously than the FLSA requires. So any employer that has already reclassified and started paying their employees in compliance with the new rule and any employer that has undertaken major changes to its payroll system in anticipation of the December 1 effective date may still classify those employees who would be nonexempt under the new rule as nonexempt right now and pay them overtime.

There is a slim possibility that should DOL prevail in an appeal and Judge Mazzata’s order be overturned, a court could find that the December 1 effective date of the new rule applies retroactively. That was the finding of the U.S. District Court for the District of Connecticut last July in an FLSA case involving DOL’s home companion exemption rules (not generally relevant to local governments), which had been temporarily enjoined but ultimately implemented. That decision is itself now under appeal.

The Practical Perspective:  What Should an Employer Do on December 1?

What is right for one employer may not be right for another. What an employer should do on December 1 will have much to do with the particulars of its workforce, its budget, and the plans it had previously made for implementation of the new rule.

Here are some preliminary thoughts:

• An employer may choose to take no action until the issue is resolved in the courts or by the new administration. But before deciding to do so, the employer should consider whether there will there be human resources and payroll operational consequences and costs if it was ready to implement the new rule on December 1. How easy will it be to undo changes made to exempt status classification and to payroll systems?
• Employers who have already reclassified as nonexempt positions making less than the new rule’s salary minimum of $913 per week may choose to proceed as if there were no injunction. The benefit of this approach would be that employees who have been expecting to be newly eligible for overtime would not be disappointed – nor would those currently exempt employees whose salaries were being raised to bring them up to $913 per week. The downside to this approach is that it may cost the employer more than reverting back to the current minimum salary threshold would. And in the event the new rule is ultimately thrown out by the courts or abandoned by the new administration, it will be that much harder to reverse direction down the road.
• Whatever you choose to do, communicate with your employees! They are likely to be confused. There were morale issues raised by preparing for implementation of the new rule and there will be new morale issues raised by not implementing the new rule. The last thing an employer needs is to have employees filing complaints with DOL based on a misunderstanding of what their employer has chosen to do in light of the current unsettled state of the new rule.

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