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  • InsideTrack
  • December 07, 2016

    Overtime Pay Regulation Changes Halted, Employers/Employees in Limbo

    A federal district court recently issued a nationwide injunction against new overtime rules that would have allowed more employees toreceive overtime compensation. For now, the regulations remain in limbo, but survival is in doubt.

    Jesse Dill

    clock time stopped by chain

    Editor's note: The original version of this article suggested that lower paid attorneys could be subject to the final overtime rules. Practicing attorneys are specifically exempt under the current rule. The exemption was retained in the final rule.

    Dec. 7, 2016 – A nationwide injunction has halted the implementation of the new U.S. Department of Labor (DOL) regulations that were expected to make more than four million more employees eigible for overtime compensation.

    Judge Amos L. Mazzant of the U.S. District Court for the Eastern District of Texas issued the order on Nov. 22, 2016. Although not a final decision, the ruling places a signature development of the Obama Administration in serious doubt.

    Fair Labor Standards Act Exemptions

    The federal Fair Labor Standards Act (FLSA) requires qualifying employers to pay employees a premium rate of compensation at one and one-half times their regular rate, for all hours worked over 40 per workweek. A common misconception is that if an employee is paid on a salary basis, the individual is automatically exempt from receiving overtime compensation.

    Jesse R. DillJesse R. Dill, Marquette 2010, practices employment law with Walcheske & Luzi LLC, Brookfield and Appleton. He assists clients with all aspects of employment law, including compliance counseling and litigation.

    However, payment on a salary basis is just one of three requirements an employee must meet to be exempt from overtime pursuant to the FLSA’s three most common blue collar exemptions: the administrative, executive, and professional exemptions.

    Under current law, employees must receive salary compensation of at least $455 per workweek, which equates to $23,660 annually. Further, an employee must actually perform certain job duties to qualify for exemption from overtime.

    For the executive exemption, the employee must: 1) have a primary duty of managing the enterprise; 2) customarily and regularly direct the work of others; and 3) have the authority to hire or fire employees or their recommendations to hire or fire must be given considerable weight.

    To qualify for the administrative exemption, the employee’s primary duty must be the performance of office or nonmanual work related to the management or general business operations of the employer, and the employee must use the exercise of discretion and independent judgment with respect to matters of significance.

    Lastly, the professional exemption requires that the employee’s primary duty be the performance of work requiring advanced knowledge, which must be in a field of science or learning that is acquired through a prolonged course of specialized intellectual instruction.

    Like any other employees, individuals employed by law firms must qualify to be exempt from overtime. This includes paralegals and lawyers, who typically qualify for exemption under the professional exemption. Individuals employed as lawyers may also be made ineligible for overtime compensation under the FLSA pursuant to a fourth exemption known as the highly-compensated worker exemption.

    The highly-compensated worker exemption currently applies to employees who receive at least $100,000 in annual compensation, whose primary duty is the performance of office or nonmanual work, and who must customarily and regularly perform at least one of the duties or responsibilities of the executive, administrative, or professional exemptions.

    Obama’s DOL Overtime Update

    The DOL’s overtime exemption update was first announced by President Obama in 2014 by memorandum directing the federal agency to update the regulations.

    Following President Obama’s directive, DOL published its Notice of Proposed Rulemaking on July 6, 2015. DOL received public comments on the proposed rule through September 2015. Under the proposed rule, DOL suggested updating the salary threshold for administrative, executive, and professional employees from the current level of $455 per workweek, or $23,660 annually, to $970 per workweek or $50,440 annually. DOL’s proposed rule also sought to increase the highly-compensated employee exemption to $122,148 annually.

    After receiving comments, DOL announced its final rule on May 18, 2016. Consistent with the proposed rule, the final rule raised the salary threshold for the administrative, executive, professional, and highly-compensated employee exemptions.

    However, the salary thresholds differed from the proposed rule. DOL’s final rule changed the salary level for the administrative, executive, and professional exemptions to the slightly lower amount of $913 per week, or $47,476 annually.

    Additionally, the DOL final rule slightly increased the salary level for the highly-compensated employee exemption to $134,004 annually. The duties portion of each exemption did not change under the final rule. The final rule also included an indexing provision that changed the salary levels every three years. The overtime rule revisions were set to take effect beginning Dec. 1, 2016.

    The Eastern District of Texas Decision

    Texas, together with 21 other states (including Wisconsin), and the U.S. Chamber of Commerce brought lawsuits against DOL on Sept. 20, 2016, seeking injunctive relief to stop the overtime changes from going into effect.

    The plaintiffs brought each lawsuit in the U.S. District Court for the Eastern District of Texas. On Nov. 22, 2016, Judge Mazzant granted the plaintiffs’ requested nationwide, preliminary injunction to halt the final rule’s changes.

    To be successful in seeking preliminary injunctive relief, the plaintiffs had to demonstrate multiple factors including a substantial likelihood of success on the merits, which received the majority of attention in the court’s opinion.

    To address the salary threshold increase, the court examined Congress’s intent in passing the FLSA. As explained by the court, the FLSA states, “any employee employed in a bona fide executive, administrative, or professional capacity . . . as such terms are defined and delimited from time to time by regulations of the Secretary [of Labor]” are exempt from minimum wage and overtime requirements.

    The court determined that the FLSA did not present a definition of the terms “executive,” “administrative,” or “professional.” After examining dictionary definitions from sources at the time Congress passed the FLSA, the court concluded, “These words related to a person’s performance, conduct, or function without suggesting salary.”

    To Judge Mazzant, Congress intended DOL to define the executive, administrative, and professional exemptions by duties rather than by a minimum salary level. In significantly raising the minimum salary level, the court determined that DOL “exceeds its delegated authority and ignores Congress’s intent by raising the minimum salary level such that it supplants the duties test.” Thus, the court concluded that the DOL’s final rule set to go into effect less than 10 days from his decision was unlawful. Consequently, the court also found that the automatic indexing provision of the final rule was also unlawful.

    Nationwide Scope of Injunction

    While the plaintiffs before Judge Mazzant sought a nationwide injunction in pursuing relief, DOL argued that any injunction issued by the court should be limited to the states that were a party to the lawsuit and presented evidence of irreparable harm.

    However, Judge Mazzant determined a nationwide injunction was appropriate pursuant to Califano v. Yamasaki, 442 U.S. 682 (1979), which held that “the scope of injunctive relief is dictated by the extent of the violation established, not by the geographical extent of the plaintiff class.” Judge Mazzant cited the interests of both employees and employers in not creating federal exemptions that vary by state in finding a nationwide injunction to be appropriate.

    Aftermath of Preliminary Injunction

    In response to Judge Mazzant’s grant of preliminary injunctive relief, DOL issued a statement that it “strongly disagrees with the decision by the court” and that it is “currently considering all of our legal options.”

    Following this statement, on Dec. 1, 2016, the Department of Justice on behalf of the DOL filed a notice to appeal the preliminary injunction to the U.S. Court of Appeals for the Fifth Circuit.

    Conclusion

    Although employers widely hailed Judge Mazzant’s ruling, it did not extinguish all challenges for businesses. Announced on Nov. 22, 2016, a large number (if not the vast majority) of employers were preparing for the rule to go into effect on Dec. 1, 2016.

    At the very least, this meant communicating changes in compensation to employees whose exempt status was expected to change, re-allocating job duties and responsibilities, and implementing payroll changes.

    In light of the court’s decision and DOL's notice of appeal, employers are now left to grapple with whether to keep in place changes made in anticipation of the new rule, revert to previous compensation practices, or find a different solution.

    President-elect Donald Trump has not presented any strong signal as to how he may direct the DOL to proceed under his administration, now less than two months away.

    During the presidential campaign, Trump did not indicate any outright opposition to the regulations but commented that he may seek to exempt small businesses or introduce the increases gradually. For now, the regulations remain in limbo but have an uphill climb to ultimately survive.


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