Don’t you love it when you get all ready for a party, and at the last minute it gets cancelled? Although the new overtime exemption rules were not going to be a “party” for employers by any stretch of the imagination, many still felt a bit perplexed when a Texas judge pulled the rug out from under the Department of Labor just days before the new overtime exemption rules were to go into effect and after many employers had spent months preparing to comply.
Without going into too much detail, the judge decided that the new rule’s salary level (which more than doubled the level set over ten years ago) went too far and exceeded the level of authority normally given to the Department of Labor to interpret the Fair Labor Standards Act. The judge believed that Congress “defined the [white collar] exemption with regard to duties, which does not include a minimum salary level,” and that the new rule’s salary level supplanted the duties test. Here’s the key portion of the judge’s ruling:
The broad purpose of 213(a)(1) was to exempt from overtime those engaged in executive, administrative, and professional capacity duties. Since the FLSA was enacted, the Department has promulgated regulations to define and delimit the EAP exemption. To be exempt from overtime, the regulations require an employee to (1) have EAP duties; (2) be paid on a salary basis; and (3) meet a minimum salary level. The Final Rule raises the salary level from $455 per week ($23,660 annually) to $913 per week ($47,476 annually). The salary level was purposefully set low to “screen out the obviously nonexempt employees, making an analysis of duties in such cases unnecessary.” . . . The Department has admitted that it cannot create an evaluation “based on salary alone.” . . . But this significant increase to the salary level creates essentially a de facto salary-only test. . . . Congress did not intend salary to categorically exclude an employee with EAP duties from the exemption.
Basically, the judge saw the new salary level as “the tail wagging the dog.”
So, what now? If you have already planned to transition some of your employees from exempt to non-exempt or up wages for some to meet the new salary level, and you have already talked to your employees about it, think about going through with it for a couple of reasons. First, it is entirely possible the Texas judge’s ruling will be overturned in whole or part since the Department of Labor has appealed the decision to the Fifth Circuit Court of Appeals. Do you really want to back out of the transition at the last moment, only to have to restart it? Second, it’s entirely possible President-Elect Trump and the Republican Congress will enact a change to the Fair Labor Standards Act in early 2017; it’s even possible (although not probable) President Obama and the current Congress could agree on some type of alteration, like a gradual phase-in period for the new salary level. Why not make the planned transition and then see how things play out in the next four-to-six months? Once things are finalized — either through the appellate process or a new law — you can decide whether to maintain the post-transition status for your employees.
Remember, the “default” rule under the Fair Labor Standards Act is that everyone is eligible for overtime unless a specific exemption applies. Assuming you have no issues with employees working off-the-clock and you calculate overtime rates correctly, paying hourly wages and making employees overtime eligible (the route a lot of employers were taking to comply with the new rules) will help insulate your business from wage and hour claims.