Last week, a Texas federal district court granted a temporary injunction in State of Nevada v. U.S. Department of Labor, blocking the implementation of a new Department of Labor (DOL) overtime regulation that was previously scheduled to go into effect today, December 1, 2016.
The new regulation was developed in response to a 2014 directive from President Obama to the Secretary of Labor, instructing the DOL to revise federal regulations for executive, administrative, and professional overtime exemptions, aiming to ensure that the salary threshold for these exemptions—i.e., the minimum annual salary an employee must make before they could possibly be considered “exempt” from overtime requirements—more accurately reflected current income distribution.
On May 18, 2016, the DOL announced the final version of the rule. The new regulation would more than double the annual salary threshold for overtime exemptions, raising it from $23,660—the current minimum, which was set in 2004—to $47,476, the 40th percentile of earnings of full-time salaried employees in the South, the lowest-income U.S. Census Region. In addition, the regulation mandated that the overtime salary threshold be automatically updated every three years to allow for inflation and wage growth. The new salary level would entitle over four million additional employees to overtime pay for hours worked in excess of 40 in a work week, which, the DOL stated, would lead to better wages for workers, more reasonable hours, and improved work-life balance and productivity, among other benefits.
However, the DOL’s announcement sparked widespread controversy. To comply with the new requirements, many employers would need to raise exempt employees’ annual salaries to meet the new threshold or start paying them at the overtime premium rate for hours worked over 40 in a work week. Some feared that such a large and sudden jump in the salary threshold would have disastrous economic ramifications, particularly for small businesses. Others worried that companies would be incentivized to terminate formerly overtime-exempt employees or severely restrict their hours, rather than raising their salaries or paying them overtime.
In State of Nevada v. U.S. Department of Labor, 21 states sued to invalidate the regulation, alleging that it would unconstitutionally “[regulate] the States and [coerce] them to adopt wage policy choices” and that it would “[harm] the public by increasing state budgets, causing layoffs, and disrupting governmental functions.” On October 12, 2016, the plaintiff states filed for emergency injunctive relief, seeking to prevent the DOL from implementing and enforcing the new overtime regulations.
The sought injunction was granted on November 22, 2016, by Judge Amos Mazzant, a district judge for the Eastern District of Texas, who found that the plaintiff states had “established a prima facie case that the Department’s salary level under the Final Rule and the automatic updating mechanism are without statutory authority.” Consequently, the DOL’s overtime rule is barred from taking effect, pending the ongoing litigation.
The last-minute injunction has left some employers and employees confused and frustrated, as many businesses had already renegotiated their employees’ compensation structures to comply with the new rule in advance of the expected December 1 implementation date. Although compliance with the new DOL regulation presented a significant financial burden to many companies, employers fear the potential legal and morale repercussions of reclassifying employees who had expected a raise, in some cases a very significant one. Unless the court stays or vacates the injunction or the DOL appeals the order to the Fifth Circuit, the federal overtime exemption threshold will remain, for now, at $23,660—and, with the incoming Republican administration, the future of the regulation is left in doubt.