New Overtime Exemption Rules Nationwide: Status and Impact (United States)

Overview

On November 22, 2016, Judge Amos Mazzant of the United States District Court for the Eastern District of Texas issued an order enjoining the U.S. Department of Labor's implementation and enforcement of the new overtime exemption rules that were set to go into effect just days later on December 1, 2016. The court granted a motion for preliminary injunction filed by the attorneys general of 22 states, in which the states argued among other things that the new rules were unlawfully promulgated and would be likely to cause irreparable harm to the states that requested the injunction. The court also considered amicus arguments made by various chambers of commerce and trade associations, which filed a companion case asserting similar and separate grounds for overturning the Department of Labor's new rules. Although the court's order, and the Department of Labor's appeal thereof, leaves some room for confusion on this point, it appears to apply to all public and private sector employers nationwide.

This QuickCounsel will address the impact of the preliminary injunction; and advise how businesses should adapt their actions to the turbulence that this court ruling could cause.

Impact of the Injunction

First, this is a temporary injunction. It contains strong suggestions of what the court might ultimately do with a final determination regarding whether to invalidate the new rules. It explains various reasons why the rules are unlawful. But, at this time, all of those reasons and the results they might ultimately justify are preliminary.

Second, the Department of Labor immediately appealed the order granting the temporary injunction to the Fifth Circuit Court of Appeals, which granted an expedited briefing schedule. On appeal, the appellate court applies an abuse of discretion standard. Generally speaking, a court abuses its discretion by (1) committing an error of law, such as applying an incorrect legal standard, (2) basing the preliminary injunction on a clearly erroneous finding of fact, or (3) issuing an injunction that contains an error in form or substance. There are aspects of the court's order that the federal government might argue prove each of these points. But it is fair to say that the Fifth Circuit Court of Appeals rarely overturns orders granting preliminary injunctions. Within the past several decades, it has done so very few times.

Third, if it does not win reversal of the district court's order in this case, it is conceivable that the government would seek review by the U.S. Supreme Court. Even if the Court of Appeals were to reverse, the States and Associations could petition the Supreme Court for review.

Fourth, if the plaintiffs ultimately prevail in securing the court's judgment that the Department of Labor's new rules are unlawful, the federal government will have another opportunity to appeal. With the passage of time necessary for the parties to litigate their respective positions through judgment and then to wind their way through the appellate process, it is hard to predict whether an appeal would actually follow. And this sets aside for the moment the possibility that the congress will successfully pass - and the new president will sign - a Congressional Review Act resolution, mooting the need for further litigation at all.

Finally, there remain two fully-briefed motions before the Judge Mazzant, either of which could have an enormous impact on the case: (1) the AFL-CIO's motion to intervene as a co-defendant to defend the new rule; and (2) the business and state government plaintiffs' motion for summary judgment.

If the AFL-CIO is permitted to intervene as a defendant, it could become more difficult for the plaintiffs to work with the government to end the proceedings altogether. Even if the government wanted to lay down its shield and settle the case, the AFL-CIO would still be there to defend the new rule. The plaintiffs' summary judgment motion could be even more impactful. If the district court grants the motion, that would end the case: the new rule would be invalidated, the litigation would end, and the AFL-CIO would have no case to defend.

To put it simply, the court's ruling creates a significant amount of uncertainty that is going to last for a while longer. And it begs the enormous question: What should businesses do in the meantime?

Tips for Businesses

Many businesses were very far along in their plans to comply with the new rules. Many have already begun their communications with employees whose pay or classification would be impacted because of the new rules. Some have already effected changes impacting those employees.

In that light, the injunction - though heralded as a positive development for businesses - has the potential to create significant risk and disruption. A careful hand is required. There is much to consider and much more to do. But here is a deft starting point:

Of course, these are also not the final words on how businesses should adapt their actions to the turbulence that this otherwise positive court ruling could cause. What is important is that business stakeholders consider carefully what their next steps will be and to weigh carefully the costs and benefits of available options.

As an exclusive to ACC members, we have outlined four steps that employers may want to consider immediately:

Businesses should promptly communicate with stakeholders and impacted employees. Stakeholders would include anyone on executive and management teams who were aware of or involved in compliance planning, as well as key HR, compensation/payroll, and other high-touch personnel who are likely to be attuned to issues concerning the new overtime rules.

In preparation for the new overtime exemption rules, many businesses conducted a gap analysis to ascertain the impact/cost of increasing compensation for exempt employees making less than the new required salary level of $47,476 versus reclassifying them. Businesses should now revisit that analysis to ascertain the impact/cost of keeping employees as exempt who would have been reclassified and moving forward with the raises that were or would have been given because of the change in the law.

If there are jobs or employees who have or would have been reclassified but for the Texas court's preliminary injunction and whose duties have not been examined to determine whether they satisfy the test for an exemption, then that examination should be done before they are reclassified again to (or kept in) exempt status.

Acknowledging that the court's order is temporary and could be changed by various influences, businesses should proceed cautiously.

Conclusion

While it's difficult to know how all of this will unfold, it seems clear that the next couple of months could be quite momentous at the district court level, the appellate level, and in Washington, D.C., where new Department of Labor leadership has taken the helm.

Additional Resources