Federal Court Temporarily Halts Nationwide Enforcement of New DOL Overtime Rule

November 23, 2016

On Nov. 22, 2016, a federal court in Texas issued a preliminary injunction temporarily halting nationwide enforcement of the U.S. Department of Labor’s new final rule regarding Fair Labor Standards Act overtime regulations pending ongoing litigation.

Originally scheduled to go into effect on Dec. 1, 2016, the new final rule significantly expanded overtime eligibility by raising the salary threshold (also known as the salary level) needed for employees to qualify as “exempt” from overtime, so long as they meet other FLSA exemption requirements, as we previously reported in our May and June 2016 alerts.

The final rule more than doubled the salary threshold from $455 to $913 per week (and from $23,660 to $47,476 per year), and the salary threshold for “highly compensated” employees increased from $100,000 to $134,004 per year. In addition, under the final rule — published by DOL on May 18, 2016 — the salary threshold amounts were scheduled to update automatically every three years based on certain economic “indexing” benchmarks, with the first update to occur on Jan. 1, 2020.

Twenty-one states (along with the U.S. Chamber of Commerce, the National Association of Manufacturers, the National Retail Federation and other employer groups) sued in September 2016 to block the new overtime rule. The lawsuits sought an order from the U.S. District Court for the Eastern District of Texas declaring the rule unlawful and a permanent injunction against the DOL on a nationwide basis to prevent the new rule from going into effect.

The states have argued, among other things, that “as a consequence of the new salary level test, tens of thousands of state employees (and millions of private employees) . . . will now have their overtime exempt status eliminated, with no change in their actual duties, based solely on the amount of salary that [employers] choose to pay them.” The states and the employer organizations also argued that, although used for decades, the salary threshold test (and the new automatic indexing mechanism put in place to raise it every three years) exceeds the scope of the original FLSA statute and is a “DOL invention,” effectively “grafting the salary level test” onto the FLSA’s exempt duties test. They further argued that the planned, indexed increases of the salary threshold are invalid because DOL “lacks any authority to increase overtime obligations in the future without providing notice and an opportunity for public comment.”

Following a hearing, the court issued a ruling on Nov. 22, 2016, temporarily halting the rule’s enforcement nationwide. In its preliminary injunction order, the court ruled that DOL exceeded its authority in establishing a new minimum salary-level for executive, administrative and professional (EAP) employees. According to the court, when Congress enacted the FLSA, it unambiguously intended the EAP exemptions “to depend on an employee’s duties rather than an employee’s salary.” State of Nevada, et al. v. U.S. Dept. of Labor, et al. (E.D. Tex. Nov. 22, 2016). Thus, while Congress delegated authority to DOL to “define and delimit” the EAP exemptions, it did not intend to grant authority to DOL to establish a minimum salary level. Therefore, the court concluded, DOL exceeded its delegated authority, and the rule cannot stand: “If Congress intended the salary requirement to supplant the duties test, then Congress, and not the Department, should make that change.”

Importantly, and perhaps a predictor of whether the court will later permanently enjoin the rule, it also held that DOL’s final new rule is not “based on a permissible construction of [the FLSA].” According to the court, the significant increase to the salary level in the new rule “creates essentially a de facto salary-only test.” But Congress “did not intend salary to categorically exclude an employee with EAP duties from the exemption.”

Finally, with respect to the new rule’s mechanism for automatically updating the salary level every three years, the court concluded that, in light of its view that DOL lacked authority to increase the salary level at all, DOL necessarily lacked authority to implement automatic increases.

Although this ruling is an initial victory for employers, the injunction is preliminary only and, while it stops the overtime change from going into effect on Dec. 1 pending further challenge (including an anticipated appeal by DOL), it may not be the death knell for the new rule. The court (or a court of appeal, or even the Supreme Court) may still ultimately decide that the new rule is enforceable.

Regardless of the final outcome of litigation to stop or delay the new overtime rule’s enforcement, it is also widely anticipated that the Trump administration will call on DOL to review the rule after the president-elect assumes office. However, any change to the rule will require DOL to undergo the same notice and rulemaking process it went through in enacting the current rule. Alternatively, the Trump administration could direct DOL to halt efforts to challenge the court’s ruling or otherwise enforce the new rule, permitting the preliminary injunction to become permanent. Further, a Republican-controlled Congress and a Republican president could seek to enact amendments to the FLSA to supersede the DOL rule.

Given its strongly stated views about the unenforceability of the new overtime rule, it appears most likely that the court will convert the preliminary injunction into a permanent injunction, and strike down the rule in its entirety. The Obama DOL will almost certainly appeal such a ruling. However, a final decision could take months, or even years. In the meantime, employers do not need to comply with the new DOL overtime rule, which otherwise would have become effective on Dec. 1. This means that employers no longer need to increase their employees’ salaries to $913 per week to maintain their exempt status, convert employees below the $913 threshold to non-exempt status, or comply with any of the other new requirements under DOL’s final new overtime rule.

For further information or questions about the impact of the preliminary injunction ruling on the new overtime rule, please contact the authors, your McGuireWoods contact, or a member of the firm’s labor and employment group.