A federal judge in Sherman, Texas has issued a preliminary injunction which operates nation-wide to bar the Department of Labor's minimum salary rule for certain white collar exemptions from going into effect. Employers have been bracing for drastic changes to their pay practices and exempt/non-exempt job classifications due to a DOL regulation finalized this summer and set to take effect December 1, 2016. This rule more than doubled the minimum salary required to claim certain exemptions from overtime pay. The court's decision to block the rule, issued on November 22nd, came not a moment too soon for thousands of employers facing tough decisions before the rule was to take effect next Thursday.
In a nutshell, the court found that by raising the minimum salary for exempt status to $47,476 was so drastic that it effectively made salary the primary criterion for exempt status, overshadowing the FLSA's intent that overtime exemptions be determined first and foremost by an employee's job duties.
Employers that rushed to give employees raises (in some cases, significant raises) or reclassify them to nonexempt status entitled to overtime pay, well in advance of the rule's effective date, may now be second-guessing their actions. Those employers that were preparing to either hike employees' pay to meet the new minimum salary for exempt status, or reclassify workers to non-exempt status and pay them overtime, no longer have to implement those plans next week as a result of this court decision. The court's injunction is only preliminary in nature and could eventually be lifted; however, given the incoming Trump administration's differences with the outgoing Obama administration, it is now just as likely that the DOL's regulations will never take effect. Still, employers should not assume that there will be no changes forthcoming. Already, legislation has been introduced in Congress that, while less drastic than the DOL's measure, would provide for increases in the minimum salary necessary to certain exemptions from overtime.
With an estimated 4-6 million workers to have been impacted as of December 1st by this now blocked DOL rule, no doubt a large number of employers will be especially thankful this holiday season!
The ruling was issued in a lawsuit filed by 21 states and over 50 business organizations in a Texas district court case challenging the legality of the new Rule in State of Nevada, et al v. United States Department of Labor, 4:16-CV-00731.
As nearly everyone in the business community was aware, the new DOL Rule, which was scheduled for implementation just over one week from the court's ruling yesterday, left many compensation plans and payroll budgets in chaos and many businesses scrambling to make payroll and workforce changes which very often resulted in undesirable changes to both businesses and their employees. The "white collar" exemptions at issue, which pertains to executive, administrative and professional employees, are analyzed under a two part test, both parts of which must be met in order for these employees to be found exempt from overtime: a "duties" test, which reviewed the work performed by the employees and a "salary" test, which as noted by the court was, until recently, low enough that most employees who met the duties test readily met the salary test as well.
Under case precedent, the DOL (like other federal agencies) has authority to interpret ambiguous statutory language enacted by Congress. One of the questions before the court was whether the DOL's Final Rule exceeded its interpretive authority. The court found that it did and that the dramatic increase in the "salary" necessary to qualify for the executive exemption by the DOL's Final Rule created a "de facto salary-only test." The court noted that, "the Department estimates 4.2 million workers currently ineligible for overtime, and who fall below the minimum salary level, will automatically become eligible under the Final Rule without a change to their duties." The court concluded that "Congress did not intend salary to categorically exclude an employee with EAP [executive, administrative and professional] duties from the exemption." The court therefore ruled that it was not bound to defer to the interpretation of the FLSA white collar exemption by the DOL and, thus, the Final Rule "because it is contrary to the statutory test and Congress's intent." The Court held that, "Congress did not intend salary to categorically exclude an employee with EAP duties from the exemption." The court also found that the automatic updating provisional provided in the Final Rule (to ensure that the minimum salary test remained at the 40% of weekly earning of full-time salaried employees) violated the Administrative Procedure Act because the updates did not provide for a notice and comment period.
It is important to keep in mind that while this ruling provides breathing room to the many employers wrestling to manage payroll costs and plans, this decision is only a preliminary ruling. The timing of the ruling, given the results of the recent election, creates an interesting situation. It seems highly likely that an appeal will be taken from this decision, which could result in a reversal of the ruling, but given the reality of this transitional political time an appeal is perhaps less certain than would otherwise be the case.
The takeaway is that the plans that your business developed to address the Final Rule do not need to be implemented on December 1st. If you have already made the changes and wish to change back to your pre-Rule compensation structure, you must give notice to your employees before the pay period in which the change back will be made. In short, if you have the plans to conform to the DOL Rule, feel free to toss them in a bottom file cabinet but don't rip them up just yet!
For any questions or help with issues created by this turmoil, contact one of the attorneys at any of our offices:
Chicago, IL: (312) 629-9300
Davenport, IA: (563) 333-9102
Milwaukee, WI: (262) 560-9696
Minneapolis, MN: (952) 746-1700
St. Charles, IL: (630) 377-1554