NATSO ALERT: Federal Judge Suspends Overtime Rule; Dec. 1 Effective Date No Longer In Place

In a stunning decision, a federal judge in Texas issued a nationwide injunction against the Department of Labor's (DOL) regulation expanding the number of workers who would be eligible for overtime pay.  The regulations would have dramatically increased the salary threshold for exempt employees to $47,476 per year from $23,660. The new rules were scheduled to take effect on Dec. 1.

NATSO members are advised that the regulatory environment surrounding these regulations remains fluid, and that the Nov. 22 ruling could be overturned in the coming weeks. It is clear, however, that employers no longer need to be in compliance with the new overtime rules by the approaching Dec. 1 deadline.

The Nov. 22 ruling is a "preliminary injunction" pending a final decision on the merits. In other words, the judge in the case determined that plaintiffs -- 21 states -- were likely enough to succeed that the rules should not be allowed to take effect until a final decision is reached. A hearing on the merits will take place in the coming weeks with a decision likely soon after, though the precise timing is uncertain.

It is rare for a judge to reverse himself after issuing a preliminary injunction. Thus, in all likelihood the judge will simply affirm his ruling and it will be up to Donald Trump's Labor Department to appeal or let the ruling stand. As a practical matter, Trump's Labor Department is not likely to appeal a ruling striking down his predecessor's regulation. (President-Elect Trump has promised to reverse many Obama administration regulations.)

Therefore, the Overtime Rule that employers have spent more than a year preparing for is likely never going to be implemented.

At the same time, these preparations may not be entirely for naught. It is possible that the federal courts will reverse the Nov. 22 ruling and reinstate the new Overtime Rule. At the same time, some observers think it is possible that next year Congress will compromise and raise the current salary threshold for exempt employees, albeit to a lower threshold than the Obama Administration proposed (although, as further discussed below, the Nov. 22 ruling leaves in doubt whether any salary threshold is permissible).

Further complicating the picture is the fact that many employers have already implemented changes assuming that the new rule would take effect. For example, some employers have converted salary employees to hourly, or raised the pay of some employees to levels that exceed the new, higher threshold that was struck down. It is difficult for employers to reverse such decisions. This might lead larger employers to be more amenable to a future overtime compromise that would effectively extend a salary increase to their smaller competitors.

As alluded to above, however, the judge's ruling casts doubt on whether any salary level threshold is permissible under the Fair Labor Standards Act (FLSA).

Since that law was enacted in the 1930s, the DOL has interpreted it as requiring employers to pay overtime to:

(i) all employees who were paid less than a certain salary threshold (which has been periodically raised over time); and

(ii) those employees who earn more than that salary threshold but whose "primary duty" is administrative or ministerial work. This "primary duty" question is determined by a "duties test" that employers generally view favorably, believing it is fact-specific and provides sufficient flexibility to enable managers and assistant managers to perform ministerial work as needed without automatically being entitled overtime pay.

The judge in the case, whom President Obama appointed, said that the DOL's proposed salary threshold increase would have effectively made exceedingly large segments of the workforce automatically eligible for overtime based solely on their income, and that this was never Congress' intent.

However, the ruling went so far as to suggest that the DOL lacks the authority to establish any salary limit. Perhaps recognizing that this would contradict decades of labor law, the judge included a brief footnote stating he was not deciding the general legality of establishing a salary limit, only the particular increase that was being challenged. Presumably if the salary threshold is ultimately found to be unlawful, overtime eligibility would then hinge entirely on an application of the "duties test."

Thus, although it is clear that the current rules governing employer overtime eligibility will not change on Dec. 1 as many had anticipated, the situation remains fluid.