The overtime rule appeal: What should employers do?

Wednesday January 4th, 2017

RulingWhen the Labor Department’s overtime rule was published May 23, it was met with support from the 4 million Americans who would benefit from it and opposition from businesses that claim it would be a financial and administrative burden, forcing them to cut jobs and hours to cover payroll costs.

The overtime rule, which doubles the salary threshold under which workers are eligible for overtime pay, taking it from $23,660 to $47,476 and updates it every three years based on inflation, was scheduled for implementation on Dec. 1.

On Oct. 13—in what was viewed as a long-shot effort—a group of 21 states filed an emergency motion asking a federal judge to issue a nationwide injunction to prevent implementation of the overtime rule.

The states argued that the Labor Department exceeded its authority with the overtime rule because it focuses on the salary a worker makes—not the duties performed—to determine overtime eligibility. They also challenged the provision that adjusts for inflation of the salary threshold every three years. A preliminary injunction, they argued, would preserve the status quo while the court determined the Labor Department's authority to make the final rule and the final rule's validity.

While employers were advised to move forward with implementation, the Texas court surprised nearly everyone by halting the rule on Nov. 22, just days before its Dec. 1 effective date.

Judge Amos Mazzant agreed with the states’ argument that the Labor Department should have focused on the duties workers perform in determining whether a worker qualifies for the overtime exemption. Granting the injunction, he dismissed the rule’s provision that would have automatically updated the salary threshold every three years.

What Should Employers Do Now?

Although the overtime rule was halted before enforcement could begin, many businesses were already starting to comply with the new overtime requirements. How businesses respond to the injunction hinges on the state of their preparation.

For instance, the largest U.S. private-sector employer, Wal-Mart Stores Inc., began complying three months early by raising starting manager salaries to $48,500 from $45,000. Wal-Mart is expected to preserve the raises.

For businesses that did not communicate any changes to workers—or that communicated changes but did not implement them—the decision to follow the existing overtime rule or reclassify workers based on the new rule is entirely up to them.

However, the injunction is temporary and businesses must be prepared if the new overtime rule is upheld and enforced retroactively, making them liable to pay workers reclassified as nonexempt for any overtime hours worked.

Businesses should consider the legal risks when deciding whether or not to stick with current regulations or follow the new overtime rule in the event Judge Mazzant’s ruling is overturned by appeal.

Next Steps for the Overtime Rule

What happens next hinges on the appeals process and what President-elect Donald Trump wants to do. Trump has expressed concern about the impact the overtime rule would have on small businesses but it’s not clear if he’s willing to revert to the $24,000 threshold under current regulations.

Trump’s announcement of Andrew Puzder, chief executive officer of CKE Restaurants Inc., as his labor secretary selection may be an indication as to the priority of new overtime thresholds. Puzder has spoken out against the overtime rule.

The U.S. Court of Appeals for the Fifth Circuit has requested initial briefs in the appeal of the decision that blocked the Obama administration’s overtime rule be filed by Jan. 17, with final briefs due Jan. 31. From there, the court said it will hold oral argument during “the first available sitting” thereafter. The court will rule on the appeal after oral arguments.

For more detailed information on the specifics of the new overtime rule, refer to our previous posts on this topic:

Is the Overtime Rule Vulnerable? Opponents May Focus Lawsuit on Mathematical Soft Spot (Sept. 20)

The New Overtime Rule: What It Requires, Whom It Affects (June 28)

New FLSA Overtime Rules Make Accurate Time Tracking More Important Than Ever (May 31)