Texas Federal Court Halts Implementation of New Federal Overtime Rule Nationwide

On November 22, 2016, a federal court in the Eastern District of Texas halted implementation the Department of Labor’s rule amending the salary basis test for overtime exemptions in the Fair Labor Standards Act (FLSA). The rule was scheduled to take effect December 1, 2016.  (Nevada v. DOL (E.D.Tex. 11/22/16) No. 4:16-cv-00731.) The court granted a preliminary injunction, which temporarily delays the DOL’s rule from taking effect nationwide.

The DOL rule would have required employers to pay executive, administrative, and professional (so-called “white collar”) exempt employees at least $47,476 per year to be exempt from overtime.  Until further action by the court, the federal salary basis will remain at its current level of $23,660.

The Department of Labor published its final rule on the salary basis test in May.  Shortly thereafter, 21 states sued the DOL arguing that the DOL exceeded its authority in setting a salary threshold that more than doubled previous levels.  The U.S. Chamber of Commerce and other business organizations filed a separate lawsuit, which was consolidated with the Nevada v. DOL case.  On Tuesday, the court in Texas found that the DOL’s dramatic increase to the salary basis threshold created “essentially a de facto salary-only test,” which exceeded the authority granted to the DOL to interpret the FLSA.

The court also found that the higher salary threshold effectively eliminated from exempt status many employees who perform exempt duties, but fail to qualify solely due to the salary earned.

The lawsuit also asks the court to decide whether the DOL overstepped its authority in creating an automatic increase in the salary basis test every three years.  The first increase is set to take effect on January 1, 2020.

What happens next depends on several factors.  The preliminary injunction stops the DOL rule from taking effect until the court makes a final decision on the validity of the DOL’s rule.  As the court explained, “A preliminary injunction preserves the status quo while the court determines the department’s authority to make the final rule as well as the final rule’s validity.”

In the meantime, the DOL is considering its legal options, which may include appealing the court decision.  The DOL stated:

We strongly disagree with the decision by the court, which has the effect of delaying a fair day’s pay for a long day’s work for millions of hardworking Americans. The department’s overtime rule is the result of a comprehensive, inclusive rulemaking process, and we remain confident in the legality of all aspects of the rule.

If the DOL does not appeal the preliminary injunction, the parties will litigate whether a permanent injunction should be issued to stop the DOL rule from taking effect.  In that case, the court may take months to reach a decision.  President-elect Donald J. Trump may also initiate changes in the DOL, which falls under the Executive Branch, possibly leading DOL to withdraw the rule and propose an alternative.

For employers in California, the salary basis threshold under state law is $41,600 and is unaffected by the federal court ruling.  The salary basis test for exempt employees in California will increase to $43,680 on January 1, 2017, when the state minimum wage increases to $10.50 per hour.  Exempt employees must also satisfy a separate duties test to qualify as exempt, under both federal and state law.

As noted in our May 19, 2016 post the FLSA salary threshold does not apply to teachers or academic administrators.  (29 C.F.R. §§ 541.303(d), 541.204(a)(1).)

Many employers have taken steps to comply with the DOL rule.  Efforts to delay implementation at the last moment may be problematic if increases in pay or changes in status have already been communicated to employees.  Given the new uncertainty of the DOL’s rule, employers — including public educational entities — should monitor the salary basis issue and consult with legal counsel regarding compensation options.  If you have questions regarding the status of exempt employees and implementation of changes to compensation, please contact one of the authors.

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