Nov. 22, 2016 Federal Court Blocks Implementation of New Federal Overtime Rule

Today, a federal district judge in Texas issued an order blocking implementation of the new rule governing the exemptions for executive, administrative and professional employees under the federal Fair Labor Standards Act (FLSA).  The rule would have increased the “salary threshold” (minimum salary) for these employees to $913 per week ($47,476 per year) effective December 1, 2016.  

Analysis

The FLSA requires that all employees engaged in interstate commerce (i.e., nearly all employees nationwide) be paid no less than the federal minimum wage (currently $7.25 per hour) for all hours worked.  It also requires that employees be paid overtime pay for all hours worked in excess of 40 in a week.

The FLSA exempts from the minimum wage and overtime requirements any employee employed in a bona fide executive, administrative, or professional capacity.  These are often referred to as the “white collar” exemptions.  The FLSA authorizes the U.S. Department of Labor (DOL) to establish regulations to interpret these exemptions.  For decades, the regulations have included both a “duties test” and a “salary test” for an employee to be eligible for any of the three exemptions.  The DOL has periodically issued new regulations changing the duties tests and increasing the salary threshold.

In May 2016, the Obama Administration announced a final rule to increase the salary threshold from its current level of $455 per week ($23,660 per year) where it has remained since 2004, to $913 per week ($47,476 per year) effective December 1, 2016, and to establish a mechanism to automatically increase the salary threshold every three years based on changes in the Consumer Price Index.  You can read more about the final rule in our May 18, 2016 E-Update.

In September 2016, several states filed a lawsuit to block implementation of the rule, contending the DOL exceeded its authority when it established a salary test.  On that same day, 50 business organizations filed a companion lawsuit that included similar arguments.  In today’s ruling, Judge Amos Mazzant of the United States District Court for the Eastern District of Texas, agreed with the plaintiffs, finding that while the FLSA grants the DOL authority to establish a duties test, there is no statutory authority for the DOL to establish a salary test or an automatic updating mechanism.  The court issued a preliminary injunction prohibiting the DOL from implementing or enforcing the new rule.  

The district court’s ruling is a “preliminary” injunction, meaning it can be reconsidered at some later date.  Any final ruling by the district court can be reversed by a federal appeals court or the United States Supreme Court.

No Effect on California Law

Although today’s ruling is effective nationwide, it affects only the federal FLSA regulations, and not state laws.  California has its own regulatory scheme establishing white collar exemptions for executive, administrative and professional employees, and the California exemptions are not affected by the court’s ruling.

California’s salary threshold for white collar exempt employees is set at twice the state minimum wage for a 40-hour work week.  Under the current $10 state minimum wage, California’s salary threshold is $800 per week ($41,600 per year).  On January 1, 2017, California’s minimum wage will increase to $10.50 per hour, which will cause the California salary threshold to increase to $840 per week ($43,680 per year).

What Employers Should Do

At this point, it is difficult to predict the fate of the new rule.  Because it is a preliminary injunction, it will likely be addressed further by the district court, but probably not soon.  Adding to the uncertainty is the upcoming transition from the Obama Administration to the Trump Administration, which will include the appointment of a new Secretary of Labor.  So, even the government’s future support for the new exemption rule is in question once we reach 2017.  

What we know now is that the new rule that was scheduled to go into effect on December 1, 2016, will not do so.  However, its longer term fate is uncertain, which is problematic for creating compliance and communication strategies.  Given the array of risks posed, and the uncertainty of what will occur next, employers affected by today’s decision should consult with counsel and consider their options as the best path depends on what communication has already occurred to employees, what changes have been implemented, how quickly an employer can respond to new salary rules, and the organization’s appetite for risk.  

This E-Update was authored by Aaron Buckley.  For more information, please contact Mr. Buckley or any other Paul, Plevin attorney by calling (619) 237-5200.