Is the Department of Labor (DOL) overtime rule nowdead? Will the overtime rule be modified to a more modest version?Much uncertainty remains regarding the recently announced overtimerule in both the legal and the political sphere.

The Legal Landscape

In a ruling announced on Nov. 22, just days before a Dec. 1effective date, U.S. District Judge Amos L. Mazzant of the EasternDistrict of Texas halted nationwide the effectiveness of the newregulations. These regulations would have more than doubled thesalary level required to be paid by employers to those employeeswho are classified as exempt from receiving overtime pay.

The DOL has appealed the ruling, and the court has granted theDOL’s request for the appeal to be heard on an expeditedbasis.

The Current Political Landscape

Trump has appointed a known opponent of the new overtime rule tobe Secretary of Labor. Some Congressional Republicans are planningan attempt to revoke the new regulations in the new Congressthrough use of the Congressional Review Act.

The legal and political landscape has created uncertainty, andmany employers wonder what to expect. A more detailed analysis isherein, but several strategies are being explored on both fronts,either to halt the rule in its entirety, or to modify its dramaticincrease of the salary level to a more modest “phased-in”approach.

Related: Dems want to revive overtime rule state bystate

In the interim, it appears those employers who already hadannounced and implemented changes in salaries orclassifications did not attempt to reverse those changes despitethe Nov. 22 ruling. Those employers who had not yet implemented anychanges, even if already announced, have tended to postpone theannounced changes pending further developments in the case orpending further guidance from a Trump-administration DOL.

The DOL Rule-Making And Its Impact

As most readers know, the Fair Labor Standards Act (FLSA)requires employers to pay employees at least the minimum wage forall hours worked and additional pay (an overtime premium) of 1.5times the employee’s “regular rate” of pay for all hours worked bythe employee in excess of 40 hours in a workweek.

The FLSA exempts certain employees from these requirements dueto their status as an executive, administrative, or professional(EAP) employee. The FLSA authorizes DOL to “define and delimit”these exemptions.

In 2014, President Obama directed the DOL to update andmodernize these exemptions. At the time, and for many years prior,the DOL had used three tests to determine whether an employee wasexempt under the EAP classifications:

1. Whether the employee was paid “on a salaried basis” (“the salarybasis test”);

2. Whether the employee was paid a sufficiently high salary thatwas no less than a DOL-determined level (“the salary level test”);and,

3. Whether the employee actually engaged in certain job duties thatqualified for the applicable exemption (“the job duties test”).

Two years after President Obama’s directive, the DOL issued afinal rule that significantly increased the “salary level test.”The final rule more than doubled the salary leveltest, increasing it from $455 per week to $913 per week (or $47,476annually); increased the salary level of the highly compensatedemployee (HCE) exemption from $100,000 to $134,004; and establishedan automatic update to these salary levels every three years basedupon certain criteria, namely: 1) Standard salary level would beincreased every three years based on the 40th percentile ofearnings of all full-time salaried workers in the lowest-wageCensus Region; and 2) The HCE threshold would be increased everythree years based on the 90th percentile of full-time salariedworkers nationally.

The new DOL rules were scheduled to have taken effect Dec. 1,2016. After the announcement but before implementation, employersacross the country began evaluating the impact of the new rules ontheir labor costs.

The analysis involved a complex audit process, and for some —especially small businesses and non-profits — the new rule createdan existential budget crisis.

Employers had to determine whether employees previouslyclassified as exempt should have their salaries increased to thenew level in order to preserve their exempt status, or, in thealternative, whether employees should be re-classified asnon-exempt. Labor costs were not the only concern.

Savvy employers knew that re-classification would impact morale,as persons previously labeled as exempt would be re-classified asnon-exempt and face a sense of loss in prestige for their jobs;those employees also would be required to track their hours worked,for some, a cumbersome and demeaning process. Details as seeminglyminor as off-duty access to email and other company systems mightbe impacted.

Some praised the final rules, claiming that the DOL’s actionswould help the middle class and would extend the right to overtimepay to approximately 4.2 million workers who previously had beenclassified as exempt. Others were critical, noting that the newovertime rules would have unintended consequences of job loss,especially among entry-level manager jobs where young workers oftenenter the job market.

In addition, the burden on private-sector employers wasprojected to be $1.5 billion each year, with the DOL estimating theaverage annualized direct employer costs to be $295.1 million, inaddition to the expected annual transfer of $1.2 billion of incomefrom employers to employees as a result of the rule. Further, coststo state and local governments were expected to be $115.1 millionin the first year alone.

The Lawsuit and Its Ruling

Twenty-one states filed a federal lawsuit in Texas against theDOL, challenging the final rule. Over 50 businesses filed suit aswell. The two lawsuits were consolidated into one proceeding. Theplaintiffs argued that the DOL had exceeded its authority inannouncing the new salary level.

The plaintiffs asked the court to enter a preliminary injunctiondesigned to stop the allegedly unlawful rule from taking effectduring the pendency of the lawsuits. In their request, theplaintiffs argued that the DOL exceeded its authority because thenew salary level was increased to such a degree that the tests forthe EAP exemptions had become, in essence, a salary level testonly.

On Nov. 22, in a ruling few expected, Obama-appointee Judge AmosL. Mazzant ruled that the plaintiffs had a substantial likelihoodof prevailing on their argument that the DOL had exceeded itsauthority. Judge Mazzant ordered a halt to implementation of thenew salary level, at least temporarily, until the court couldconsider more fully whether the regulations were properlyauthorized.

More specifically, Judge Mazzant found improper the DOL’sapplication of a minimum salary level when the plain meanings of“executive,” “administrative,” and “professional” read togetherwith the statute, made it clear that “Congress defined the EAPexemption with regard to duties, which does not include a minimumsalary level.”

By increasing the salary threshold so significantly, the DOL hascreated “essentially a de facto salary-only test.” In directconflict with Congress’ intent, explained the court, the DOL’sfinal rule requires employers to extend overtime pay to anyemployee, regardless of his/her job duties, whose pay is below theheightened salary level. “[T]he Department exceeds its delegatedauthority and ignores Congress’s intent by raising the minimumsalary level such that it supplants the duties test.”

The district court also noted that the minimum salary leveloriginally established in regulations years ago “was purposefullyset low” to exclude those workers who were clearly nonexempt. Thecourt’s injunction does not address the lawfulness of asalary-level test in general, but specifically enjoins theapplication of the DOL’s increased salary-level test in its finalrule as exceeding the agency’s delegated authority.

The DOL issued a statement “strongly disagreeing” with thedistrict court and has appealed the ruling to the U.S. Court ofAppeals for the Fifth Circuit. The circuit court has granted theDOL’s request to expedite the appeal. However, even on theexpedited schedule, the case will not be “ripe” for considerationuntil after the new administration and new Congress take office.

What Can We Expect?

As employers wait and see what will happen, a few significantquestions emerge:

1. Does the ruling mean the new salary level will nevergo into effect?

No. The legal ruling only halts the effectiveness of the newsalary level pending further action by the court or pending whatoccurs on appeal. It remains possible the new salary level could gointo effect in the future. However, the ruling does provide the newadministration with an opportunity to stop, or modify, the newsalary level. The legal landscape has provided significantopportunity for change through the political landscape.

2. Will the Trump Administration and the new Congresskill the DOL salary level rule?

Perhaps. There are prominent signals that the DOL salary leveltest, as currently announced, will not take effect. President Trumphas appointed Andrew Puzder as Labor Secretary. Puzder is aknown critic of the new overtime regulations as bad for businessand bad for those workers they were designed to help. In thepending lawsuit, the Trump Administration could drop the appeal, orattempt to “settle.”

Dropping the appeal, or settling, likely would result in apermanent injunction. The DOL could then conduct new rule-making toimplement a new salary level at a more modest level — a “phase-in”that some in Congress on both sides of the aisle proposed inlegislation months ago; or, the new DOL could decide to take nofurther action to increase the current salary level of $455 perweek.

Congressional Republicans could use the Congressional Review Actto pass a joint resolution in the new Congress to kill the overtimeregulations, since the regulations were announced toward the end ofthe prior congressional session.

This option, which is rarely used, prevents the DOL from issuingsubstantially similar regulations, making it questionable whetherthe DOL could raise the salary level at all. More interestingly,however, the court’s ruling raises a significant legal question asto whether a salary level of any amount is authorized by statute.If that ruling is made permanent as noted above, that legalquestion persists.

Employers Response

Of those employers that had already implemented salary increasesand/or reclassifications in accordance with the new salary level,most kept those actions in place. Those employers recognized thatit would be more disruptive to attempt to “undo” the salaries orreclassifications, regardless of whether the new regulationsultimately are implemented.

Of those employers that had only announced changes but had notyet implemented them, there was a “mixed bag.” Some employers didnot wish to renege on the announced plans, especially salaryincreases; but often, those employers explained to their employeesthat they might not get another “raise” in calendar year 2017 inlight of the December 2016 increase. Other employers did postponethe announced salary increases due to strong concerns aboutincreased labor costs, especially smaller employers andnon-profits.

In addition, those employers who faced significant morale issueswith the planned reclassifications (i.e., employees upsetat “loss of prestige” or having to track hours), used theopportunity to postpone any reclassifications given the moraleissue. Other employers tended to proceed with the announcedchanges.

Is There Anything Further An Employer Should DoNow?

No, assuming the employer did some analysis around thepreviously announced Dec. 1 effective date. Other than whateveraudit the employer did at that time, there are no other “proactive”steps to take. However, given the nature of the EAP exemptions,regular audits — especially of those jobs “near the edges” — is awise practice.

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Tim K. Garrett is a member at Bass, Berry & Sims PLC(Nashville, TN). Reach him at [email protected].