On Nov. 22, 2016, a federal district judge in Texas enjoined the U.S. Department of Labor's (DOL) final rule increasing the minimum salary level threshold to qualify for an exemption from the overtime requirements of the Fair Labor Standards Act (FLSA). Prior to the entry of the nationwide preliminary injunction, the new rule was scheduled to take effect on Dec. 1, 2016, and expected to expand overtime coverage to roughly 5 million employees.

Currently, based on regulations from 2004, in order for white-collar employees to be exempt from overtime requirements, they must meet certain job duties-related tests and, with few exceptions, be paid on a salary basis at a rate of at least $455 per week ($23,660 per year). The new rule nearly doubles the weekly guaranty threshold to $914 per week ($47,500 per year). The highly compensated employee exemption minimum annual salary requirement was set to increase from $100,000 to $134,004 per year. The new rule also included an automatic update to the annual salary thresholds every three years based on changes in the consumer price index.

The underlying case in which the preliminary injunction was issued involves a challenge to the rule by several states, business groups and the U.S. Chamber of Commerce. These plaintiffs alleged that the DOL exceeded its regulatory authority by raising the salary threshold too high and by providing automatic updates. The preliminary injunction will allow the case to be fully adjudicated before any changes are implemented. 

It is unclear if the rule will ultimately withstand judicial scrutiny, in full or in part. Likewise, it remains to be seen if the preliminary injunction will survive an appeal by the DOL to the U.S. Court of Appeals for the Fifth Circuit. Complicating matters further, even if an appeal is initiated, the Trump Administration may change course and drop its defense of the rule.

Considerations for Employers

Employers that have been engaged in efforts to ensure compliance with the new rule by the Dec. 1 deadline now have a reprieve, albeit possibly only a temporary reprieve. There are, however, a number of important considerations to keep in mind before deciding whether to discontinue efforts to comply with the new rule by Dec. 1.

First, to the extent employers have already communicated with employees regarding the anticipated compliance changes, retraction of those changes should be carefully evaluated from an employee relations perspective. Employees who are prepared for salary increases or overtime pay may have an adverse reaction upon learning the additional pay is no longer forthcoming. Employees who do not fully understand the basis for the retraction may be more likely to contact the DOL or a plaintiff's attorney, thereby triggering unanticipated audits and claims. This may be of particular concern for employers that have employees currently misclassified as being exempt from overtime pay.

Second, employers that have not yet communicated with employees regarding anticipated compliance changes, but that were preparing to also address any misclassifications triggered by a misapplication of the FLSA duties test, rather than the salary level threshold, are wise to proceed with those reclassifications. However, without the built-in narrative surrounding reclassifications mandated by a change in law, a new messaging strategy may be needed.

Third, if the preliminary injunction is dissolved either by the district court judge or on appeal before the Fifth Circuit, there is a possibility that employers that elected to defer compliance will have liability exposure for those employees who should have been treated as nonexempt after Dec. 1. Should the DOL prevail, failing to comply with the regulations due to the preliminary injunction may not qualify as reasonable cause and the employer could be held liable.

Finally, for those employers that have not yet taken any steps to evaluate their current employee classifications under the FLSA, self-auditing is still recommended. It is possible that the some version of the final rule may still become law in the coming year. Even if the changes set forth in the new rule are entirely discarded, it is likely that plaintiffs' attorneys and DOL auditors will be evaluating the applicability of the FLSA's duties tests for employees earning less than $47,500 per year with increased scrutiny.

Article by Kara M. Ariail and Phillip M. Schreiber

Holland & Knight