On 22 November 2016, a federal court in Texas blocked the enactment of the amendments to the federal white collar exemptions for executive, administrative, and professional employees that were set to go into effect next week on 1 December 2016. Finding that the Department of Labor (DOL) had exceeded its authority in increasing the salary basis for these exemptions, the court entered a nationwide preliminary injunction against the amendments going into effect.
In March 2014, President Obama announced his intention to "modernize and streamline" the overtime regulations, which were last updated in 2004. At that time, in addition to the duties requirements, the minimum salary basis for the white collar exemptions was set at USD455 per week. In July 2015, the DOL published the proposed rules, which sought to "update the salary level required for exemption to ensure that the FLSA intended overtime protections are fully implemented." As we reported earlier, the DOL published a Final Rule on 18 May 2016, with an effective date of 1 December 2016, almost doubling the minimum salary an employee must earn to qualify for a white collar exemption. The Final Rule also set automatic increases beginning in 2020 to the salary minimums for these exempt employees and increased the salary threshold for the highly compensated employee exemption.
The Challenge to the Overtime Rules and The Court's Preliminary Order
Twenty-one states filed a lawsuit in federal court in Texas challenging the Final Rule as exceeding the DOL's authority. Agreeing with the states' arguments, the court held yesterday that "Congress intended the [white collar] exemption to depend on an employee's duties rather than an employee's salary," and that the DOL exceeded its authority and ignored Congressional intent by raising the minimum salary. According to the court's Order, "[i]f Congress intended the salary requirement to supplant the duties test, then Congress, and not the [DOL], should make that change." As a result, the court issued a nationwide preliminary injunction.
The court's preliminary injunction is just that, preliminary. While the stay has immediate effect, the court will be setting a hearing for a permanent injunction where it has the power to reverse this preliminary Order and permit enactment, possibly with short notice to employers. In the interim, the government may seek to appeal the court’s preliminary injunction Order to the Fifth Circuit Court of Appeals. Regardless of the outcome of these proceedings, employers can also expect a lengthy appeal process, with the Supreme Court possibly weighing in. Simultaneously, the newly-elected Republican Congress or the Trump administration may also unravel or revise the salary basis minimum in the meantime.
The DOL's Final Rule, and consequently the court's Order, did not alter three important aspects of exemptions to overtime:
- The court did not stay the proposed amendments for employees who are classified as exempt under the highly-compensated exemption. That regulation, at 29 CFR § 541.601, was not listed nor included in the court's preliminary Order. As such, employers should be prepared to implement the salary increase for highly-compensated exempt employees, up from the current salary basis of at least USD100,000 annually, to the new salary basis at USD134,004 annually, effective 1 December 2016
- The current requirements for the duties required of executive, administrative, or professional employees to be exempt remain unchanged
- Some states, such as California, already have their own salary minimum for exemptions that exceed the federal law requirements. Indeed, the court Order noted the importance of state rights to govern wages for employees within their states
Actions for Employers
Since the Final Rule's publication in May, US employers across the nation have prepared action plans to increase salaries of their exempt employees to meet the new salary requirements by 1 December 2016. With this preliminary injunction, employers have more time to consider options. US employers should consider the following actions:
- Employers who were set to increase salaries for white collar employees on 1 December 2016 to satisfy the Final Rule can stay that action for now. But employers should have an action plan ready to quickly raise salaries for exempt employees impacted by the changes when and if necessary, in case the court or Congress requires implementation of the Final Rule with short notice
- Employers who have already re-classified certain employees from exempt to non-exempt merely because of the salary minimum can now revisit that decision. There are undeniable employee morale issues and administrative headaches whenever an employer changes an employee's exempt status however, including disruption, administrative and payroll changes, and training for how the employee tracks work time and expects to be compensated. Consequently, changing employees back to exempt status based on this Order should not be taken lightly, as employers may need to revisit this decision yet again when the court's final Order is made, or if Congress or the Trump administration takes action. Such employers can also choose to leave the employees classified as non-exempt for now until the courts, Congress, or the Trump administration make a final decision
- Employers who examined positions and made changes to exempt states based on the white collar employee duties requirements should stay the course, as the duties test remains untouched and indeed was reinforced by the court's Order. Similarly, employers who were set to increase salaries for the highly-compensated exempt employees should continue with plans to do so by 1 December 2016
- Have communication plans in place for workforce questions on whether employees are properly classified or entitled to a wage increase—including those who currently make more than the new salary levels—due to the publicity generated by the Final Rule and the Texas court's recent Order. US employers who choose to delay already announced changes because of this court ruling will need to send out a new communication explaining the delay is caused by a federal court Order enjoining the amendments
If you would like to discuss how the new overtime rules will impact your organization, please contact your Baker McKenzie lawyer or any of those in our Employment Counseling and Litigation practice.