Court Delay Leaves Employers Uncertain After Raising Salaries to Meet New Overtime Rule

The most comprehensive resource available for payroll professionals. This service provides payroll news, white papers, custom research answers, webinars on the hottest payroll topics, survey and research reports, in addition to access to Bloomberg BNA’s Payroll Library™.

By Christine Pulfrey

Employers prepared to be in compliance with the Labor Department’s overtime exemption rule, which was to take effect Dec. 1, face difficult choices and uncertain consequences after a federal district court issued a preliminary injunction Nov. 22, putting the rule on hold, legal experts said.

What actions employers should take may depend on where they were in compliance preparations and how willing they are to accept the risks accompanying the outcomes that may emerge.

The ruling had the kind of strange effect of rewarding employers that procrastinated because larger employers cannot implement such a change overnight, said Brett Sutton, a partner with the Sutton Hague law firm. They had to plan and make a decision about announcing it, said Sutton, who counsels clients on labor and employment issues.

Weighing Salary Options vs. Employee Morale

For employers that already made changes in anticipation of the rule that was to take effect this week by increasing the salary level for certain employees who would have been nonexempt but wanted to keep the exemption, it will be difficult to retract those increases from an employee-morale standpoint, said Jeffrey W. Brecher, who leads the wage and hour practice at the Jackson Lewis law firm.

“If you have already told employees who are making a $30,000 salary that your salary is going to go up to $47,476 and then you tell them that is on hold, you can do that legally, but you have to assess the impact on morale a few weeks before Christmas,” Sutton said, noting that a raise cannot be revoked for work already performed.

Employers have the right to modify individual pay for at-will employees, “but if you have set forth a new compensation in written agreement for a term, you may have a contractual obligation,” Brecher said. However, the ruling is only a preliminary injunction. If it were reversed, employers would again have to increase workers’ pay, he said.

Many employers may not want to be in the position of flip-flopping with a potential reversal and the potential for change when President-elect Donald Trump takes office Jan. 20, Brecher said. Those employers might consider keeping raises as is, he said.

Retroactivity a Risk for Employers

Employers that reclassified workers may decide to change and reclassify the employees again to exempt status, Brecher said. “It will depend on what the employee response was to the reclassification,” he said.

Some workers may like that they are receiving overtime pay, and some may not like that they lost flexibility, Brecher said. If there is employee resistance, then employers may consider reclassifying the workers, pending final resolution of the lawsuit on the overtime rule. Employers would be at some risk if the injunction is lifted and the rule takes effect retroactively to Dec. 1, said Robert M. Hale, partner and chairman of labor and employment at the Goodwin Procter LLP law firm.

In 2015, for example, home-care workers employed by third parties were eligible for overtime under a Labor Department rule that was to take effect Jan. 1, 2015. In December 2014, a federal district court issued a preliminary injunction that delayed the rule, Brecher said.

Several months elapsed between the time the injunction was issued and reversed, upholding the rule. Employers that did not allow those home-care workers to earn overtime during the injunction were subject to lawsuits from workers who claimed they were entitled to overtime from the date when the rule was to have taken effect rather than from the date when the matter was resolved.

District courts are struggling with this issue, but it is less likely that the Labor Department would investigate employers during this period of uncertainty, Brecher said.

Some employers may want workers to record hours or potentially limit employees to working fewer than 40 hours in a week so that they do not have an issue in the event the white-collar overtime preliminary injunction were reversed and employers were faced with the question of whether workers should have received overtime pay during the preliminary injunction period, Brecher said.

For employers that did not announce changes to comply with the rule, “I would do nothing and wait and see with the decision, but I would say to those employers that now is a good time to examine employees’ duties to make sure their primary duties are exempt and that they meet the duties test,” Sutton said.

A number of employers viewed the new regulations as a way to look more closely at their overtime classification policies, Hale said. While the rules only addressed the salary level, many employers recognized that they were vulnerable in terms of related classifications and planned to make changes, Hale said.

If employers believed that workers were not properly classified because of job duties, “the fact that the regulations may be enjoined for some period of time does not change the fact that the employers concluded that their classifications may be vulnerable under the duties test,” Hale said. Employers that planned to make changes because of the findings still should make the changes, he said.

State laws also should be considered. “Some states have their own laws when it comes to white-collar exemptions, California being one of them,” Sutton said. “They need to remember that California has its own exemption rules and some other states do as well,” and employers have to comply with state laws, he said.

In California, the minimum salary threshold is to increase to $43,680 on Jan. 1, 2017, an amount that is close to what the federal increase was to be, Sutton said, referring to the $47,476 minimum annual salary threshold that was to take effect under the overtime final rule, an increase from $23,660.

Inauguration and Timing

“It is unlikely that anything meaningful is going to happen before the inauguration of the new president,” Sutton said.

“The U.S. Labor Department will likely file an appeal with the Fifth Circuit and ask for an expedited ruling, but the Fifth Circuit may not act so quickly,” Brecher said. “It is possible the case could be briefed and argued before Jan. 20, 2017, but not before Dec. 1.”

The Texas district court that issued the preliminary injunction now must consider if a permanent injunction should be issued, Brecher said. If the Labor Department appeals the preliminary injunction, the court likely would await the outcome of the appeal before proceeding, he said.

However, the Fifth U.S. Circuit Court of Appeals generally is considered to be conservative, Brecher said. If an appeal to the Fifth Circuit fails, the Labor Department could ask for a review by the entire Fifth Circuit, rather than just a panel, to affirm or reverse the ruling, he said. The case then could be appealed to the Supreme Court.

Trump has not addressed the issue, so it is unknown what he would do, the experts said.

“They have a lot on their plate with Obamacare and immigration, so I don’t know if the first legislation [Trump] wants to sign nullifies this rule,” Brecher said, noting that he could see legislation signed to delay the rule.

Trump could direct the Labor Department to abandon an appeal or a new Congress could pass legislation that nullifies the rule or strikes a compromise on an increased salary level, but with a more graduated scale, Brecher said.

“There is a bill pending that would delay the rule until June 1, 2017,” Brecher said, referring to H.R. 6094, Regulatory Relief for Small Businesses, Schools and Nonprofits Act, which was passed by the House on Sept. 28. Trump could sign the bill and mute an appeal, he said.

Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.