After the Labor Department issued new rules last May that doubled the salary threshold under which workers were eligible for overtime pay, many companies undertook an employee-by-employee review of compensation and hours worked to determine how to minimize any financial fallout.
But now that a federal district court in Texas has issued a preliminary injunction stopping the rules’ scheduled implementation on Dec. 1, companies may be in a quandary over whether to go forward with their plans.
Businesses have largely cheered the ruling, because in most cases the new regulations would have inflated labor costs. But it does present some thorny issues.
Most of the changes companies planned to make involved employees earning a salary in between the existing minimum threshold for overtime eligibility — $23,660 — and the DoL rule’s new minimum of $47,476.
In some cases, workers exempted from the overtime-pay requirement whose earnings were relatively close to the new threshold were to be given raises in order to preserve the exemptions. In other cases, salaried employees were to be converted to hourly employees, or salaried exempt workers to salaried non-exempt workers, depending on various pay-and-hours-worked scenarios.
“Many companies had announced their plans to their work forces,” notes Robert Young, a labor attorney and partner with Bowditch & Dewey. “In some cases that meant raising people’s salaries, so what happens now? As a practical matter and an employee morale matter, it’s going to be very hard to walk that back.”
Indeed, while the temporary injuction is, for the most part, a positive development from an expense point of view, “it could actually be a negative for companies that have been proactive and adjusted to the change already,” says Wayne Imrie, a management liability underwriter at Beazley, a specialty insurance firm. “Trying to undo those changes could be very costly, especially for very large organizations.”
The smaller category of companies that had made assessments of employees and decided what steps to take, but had not yet announced those plans to their work forces, are in a better position, says Sushma Tripathi, vice president of workforce planning and benefits for ADP.
“For them it’s easier to pull back,” she says. Still, she notes, “employers should be careful.” That’s because the Labor Department may appeal the case — actually multiple cases, brought by 21 states as well as a coalition of business groups including the U.S. Chamber of Commerce — to the Fifth Circuit Court of Appeals in New Orleans. And even if no appeal is forthcoming, Congress could choose to amend the Fair Labor Standards Act (FSLA), which provides for the overtime exemption, to specify a higher salary threshold.
If an appeal were successful or Congress were to act, weeks or months from now, companies could wind up liable for paying retroactive wages to some employees going back to Dec. 1. “Companies have to assess their tolerance for this type of risk,” Tripathi says.
However, attorneys have different views on just how likely it is that the Labor Department will actually file an appeal.
“The grounds for an appeal is a legal issue as to whether the Department of Labor overstepped its bounds with these regulations,” says Young. “But with a change in presidential administrations coming, it’s very unclear whether the new one would pursue an appeal.”
On the other hand, labor attorney Bryan Stillwagon of the law firm Sherman & Howard characterized an appeal as “almost certain.” Therefore, he says, companies should “stay the course for now. It’s hard to put the genie back in the bottle.”
Specifically, Stillwagon offers the following recommendations for companies:
Tripathi notes that the possibility of an appeal could lessen after Donald Trump takes office.
“While we have no crystal ball and cannot predict what a Trump administration would do, one can guess that it might direct the DOL to abandon the appeal, because Trump previously stated that he thought that small businesses should be exempt from the proposed increases in minimum salary for the white-collar exemptions,” she says.
Tripathi adds that Trump might prefer to take a more gradual approach to raising the minimum salary levels, instead of the almost 100% increase contemplated by the DOL’s rule, or he may prefer no increase at all.
If the notion of an appeal is abandoned and the district-court judge makes his temporary injunction permanent, it would probably spell the end of the DOL’s rules, according to Tipathi. “That course of action might be easier politically than trying to alter or rescind the regulations, which would require rulemaking — a lengthy and time-consuming process,” she says.
Stillwagon, for his part, acknowledges the possibility that the new administration could quash any DoL effort to appeal. But, despite businesses’ good cheer over the court decision, he argues that the impending administration “has been pitching itself as being more favorable to business. One of the lawsuits was filed by a collection of chambers of commerce, so clearly there might be a favorable relationship with the chambers, and the administration may want to take actions that please them.”
Further, Stillwagon sees a good chance — regardless of politics — that if an appeal were filed, the appeals court would overrule the district court’s decision and re-implement the new overtime regulations.
“It was an unusual opinion, and many people were surprised by it, given the fact that we’ve had a salary test [for overtime eligibility] for about 80 years without a successful challenge,” Stillwagon says. “So there’s a chance that the district court judge’s analysis may be found to be off.”
Young too was surprised at the ruling. “Typically courts afford wide deference to agencies — in this case, the Labor Department — charged with implementing statutes,” he says.
In making his ruling, the judge focused narrowly on regulations providing that not only a salary test but also a duties test must be performed to determine a worker’s eligibility for the overtime exemption.
More specifically, under the FLSA, exemptions are granted for those employed “in a bona fide executive, administrative, or executive capacity.”
The judge looked at the term “capacity” and found, based on definitions from the late 1930s when the FLSA was enacted, that “capacity” could only be defined by the duties such employees performed, and not by how much they were paid.
The opposing legal argument is that the use of the word “capacity” does in fact give the Labor Department the right to require a salary test — that earning a certain level of salary is “part of what being an executive, administrator, or professional means,” says Stillwagon.
In fact, Stillwagon suggests, the lower-court ruling, if upheld, could lay the groundwork for an outright elimination of the salary test. “The judge’s reasoning and arguments are the exact ones that one would make in challenging the salary test as a whole,” he says.
Either way, if companies are hoping for a quick resolution to this matter in order to facilitate compensation management, they may be out of luck. If there is an appeal, whoever loses will likely turn to the Supreme Court, according to Stillwagon.
“Whether the Supreme Court would take it up, I don’t know,” he says. “But I think the stakes are such that either party would certainly apply for” a writ of certiorari.
Meanwhile, some companies may be especially frustrated by the prospect of a delay in resolving the overtime-pay issue.
During the 2008-2009 recession, companies that downsized their head count redistributed the work that had been performed by departing employees among those that remained. Often, that meant higher-level workers picking up the slack left by lower-level ones. “Some of those people’s jobs got diluted,” asserts Tripathi. “So, how much of the work they’re doing now is really exempt?”
Many companies were intending to correct such issues concurrently with the changes they’d planned to implement in response to the new regulations, she says. But at present, pending a DoL decision on filing an appeal — and, if it does file, the outcome of that action — such plans are in a state of limbo.