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Federal Court Temporarily Blocks New Overtime Rules at the Eleventh Hour

November 23, 2016

On November 22, 2016, less than ten days before significant changes to Fair Labor Standards Act (FLSA) overtime regulations were set to go into effect, the United States District Court for the Eastern District of Texas issued a nationwide preliminary injunction preventing implementation of the final rules increasing the minimum salary levels for most white collar exemptions. The pending case is State of Nevada et al. v. United States Dep’t of Labor et al., Civil Action No. 4:16cv00731. Specifically, the Court’s ruling puts on hold an expansion of overtime compensation protection for an estimated 4.2 million workers in the United States including over 200,000 health care workers.

FLSA Exemptions

The FLSA generally requires employers to pay employees the federal minimum wage and overtime compensation at the rate of 1.5 times their regular rate of pay for all time worked over 40 hours in a single workweek. A number of exemptions to this rule always has existed. The most common exemptions are the so-called “white collar” or “EAP” exemptions. 29 U.S.C. § 213(a)(1). These exemptions apply to any employees with executive, administrative or professional job duties, as defined by federal law, who also are paid a minimum weekly salary of a predetermined amount.

The minimum salary required for most exempt employees has been $455 per week since 2004. Earlier this year, the Obama administration issued final rules through the U.S. Department of Labor (DOL) that would have more than doubled the minimum salary requirement. Had the rules gone into effect on December 1 as planned, employees who satisfy job duty requirements for a white collar exemption would have become eligible for overtime pay unless the employee’s weekly salary was at least $913 (which equals $47,476 per year). The new rules also called for the minimum salary amount to be adjusted every three years so that it equals the 40th percentile of earnings of full-time workers in the lowest-wage Census Region at that time.

The revisions also would have modified the highly compensated employee exemption. Federal regulations currently exempt from overtime requirements an employee who annually earns at least $100,000, who is guaranteed compensation of at least $455 per week, whose primary duty is office-based work, and who customarily performs at least one of the duties required for the white collar exemptions. The new rules raised the annual required earnings threshold for this exemption from $100,000 to $134,004 and the weekly guaranteed compensation to at least $913 per week. They also required this exemption threshold will be increased every three years so that it equals the 90th percentile of full-time salaried workers in the United States at that time.

State of Nevada v. DOL

In September, a group of 21 states (the States) filed suit in federal district court to block the new regulations from going into effect. The suit contends that the revisions overstep the federal government’s power by forcing state governments to pay dramatically increased wages to millions of employees thereby altering employment relationships and mandating that States cut services and programs and “wreck” their budgets. The States also argue that the automatic change to the salary thresholds every three years violates federal law. Additional claims are laid out in the Complaint, but the Court deferred ruling on them as it was not necessary for purposes of the pending motion.

On October 12, the States filed an emergency Motion for Preliminary Injunction Request for Oral Argument, and Expedited Consideration to stop the new rules from going into effect while the legalities of the changes could be fully considered. In its Memorandum Opinion and Order, the Court granted the States’ motion and preliminarily held that the States would likely be able to prove that the Final Rules violate the FLSA. The Court also ruled that the U.S. Department of Labor exceeded its delegated authority under the FLSA by including the automatic salary updates in the rule and ignored Congress’ intent. As a result, the Court blocked the new rules from going into effect nationwide, for both public and private employers, until a final decision may be reached.

A preliminary injunction is only an interim decision and is not final. In this case, the injunction allows the Court time to review the merits of the case before ruling finally on the validity of the revised regulations. Practically speaking, many cases settle after the issuance of a preliminary injunction and a complex combination of variables will impact whether and how this case proceeds.

Actions for Employers

The DOL may choose to challenge the court’s ruling, but any significant changes are unlikely before the Trump administration takes office. Also noteworthy is the fact that any appeal by the DOL will go to the conservative United States Court of Appeals for the Fifth Circuit, a court perceived to be likely to uphold the decision of the district court. Given President-elect Trump’s stated desire to roll back the FLSA Final Rules, at least for small businesses, there is a strong likelihood that his administration and any new Secretary of Labor will decline to take any steps to salvage the regulations. Prior to the Court’s ruling, Congressional leaders had signaled that repealing the new regulations was to be a priority in the upcoming legislative session.

Until the Court reaches a final decision on the overtime rules or new regulations are promulgated, employers may choose to continue applying the long-standing salary thresholds ($455 per week for the EAP exemptions) for administrative, executive, professional, and highly compensated employees. This strategy will work best if some or all classification or compensation changes have not yet been made.

Many employers already have adjusted employee classifications and/or compensation in anticipation of the final rules going into effect. These employers will likely prefer to allow these changes to go forward, at least in the short term. Continued litigation may impact the validity of the FLSA final rules and it will be next year before the Republican executive and legislative branch priorities are clearer.

If you have questions or need assistance regarding compliance with FLSA requirements and other employment laws, please contact Kimberly Daniel or Jonathan Sumrell at (866) 967-9604.

The information contained in this advisory is for general educational purposes only. It is presented with the understanding that neither the author nor Hancock, Daniel, Johnson & Nagle, PC, is offering any legal or other professional services. Since the law in many areas is complex and can change rapidly, this information may not apply to a given factual situation and can become outdated. Individuals desiring legal advice should consult legal counsel for up-to-date and fact-specific advice. Under no circumstances will the author or Hancock, Daniel, Johnson & Nagle, PC be liable for any direct, indirect, or consequential damages resulting from the use of this material.