Employers of Highly Paid Employees May Find Lack of Clarity in Court's Overtime Rule Delay

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By Christine Pulfrey

A change in the payroll calendar may be all that is needed for employers of highly compensated employees to steer a safe course while awaiting a court ruling on whether the Labor Department's overtime rule takes effect.

Employers of highly compensated employees affected by a district court’s Nov. 22 preliminary injunction that blocked the Labor Department’s white-collar overtime rule from taking effect Dec. 1 are a small subset of those affected, but their uncertainty is compounded by the lack of clarity about to what extent the injunction applies to them.

The final rule ( RIN 1235-AA11) was to increase the white-collar employee overtime-exemption salary threshold for highly compensated employees to $134,004 a year from $100,000. Nondiscretionary bonuses, including commissions and incentive payments, could satisfy up to 10 percent of the salary threshold if paid at least quarterly, the rule said.

Additionally, the weekly salary threshold for the overtime exemption was to have increased to $913 from $455. The annual salary threshold for these exemptions was to increase to $47,476 from $23,660. The rule was to make about 4 million workers newly eligible for time and one-half pay for all hours worked in excess of 40 in a week.

Although the lawsuit that requested the preliminary injunction against the final rule included references to the code section that provides for highly compensated employees (29 C.F.R. 541.601), the injunction excluded this reference from its listing of the regulations that the court blocked. The Labor Department appealed the district court decision ( Nevada v. DOL, 5th Cir., No. 16-41606, order 12/8/16 ).

Determining a New Way to Measure Compensation

Regarding highly compensated employees, Robert M. Hale, partner and chairman of labor and employment at the Goodwin Procter LLP law firm, said: “If the employer hasn’t brought the employee up to the new standard by the end of the calendar year, then they will end up facing a potential liability if the final rule is upheld and found effective retroactive to Dec. 1, 2016.”

“What an employer could do is to establish a new 52-week period for measuring compensation,” Hale told Bloomberg BNA in a Dec. 6 e-mail. “Under the regulations, an employer may use any 52-week period that it designates, but the calendar year will apply if no other period is designated. If an employer uses a different 52-week period, it may be able to see how the situation unfolds before determining whether and, if so, by how much to supplement the employee’s pay.”

Having a 12-month period for measuring the individual’s compensation that starts Dec. 1, 2016, or just before that date gives an employer a longer time period to bring the individual up to the new $134,004 amount, Hale said.

“If the employer says the measuring period for this position is the period of Dec. 1 to Nov. 30 then I don’t see why or how the individual is going to be able to challenge that at a later stage if, indeed, the regulations come into effect,” Hale said. “If the person has gotten paid at least $100,000 up to now, really we are talking about the delta between $100,000 and $134,004, and then it shouldn’t be difficult.”

“Starting the measuring period a little earlier may benefit the employer,” Hale said.

“If they move the start date back, they are just guaranteeing they are essentially double-covering December, for lack of a better word, because they are guaranteeing that under either standard they are covered,” Hale said.

“By backdating the start date nobody is harmed and when the applicable period ends, they can make an evaluation,” Hale said.

For example, if an employee earns $90,000 on a calendar-year basis and an employer wants to ensure that the worker reaches the level for exemption under the current legal standard by the end of 2016, then the employer could pay an extra $10,000 now, Hale said. That would bring the employee up to $100,000 for the last full year, he said. The employer could then say that it has a new measurement basis for employees that starts Dec. 1, 2016, and ends Nov. 30, 2017.

In that scenario, the employer would have fully paid the employee under the current highly compensated test, Hale said. Then, by Nov. 30, 2017, the employer may have to decide if an increase were needed to bring the employee's pay up to the new $134,004 amount, he said.

“However, if you’ve already promised the pay increase, you could not retroactively decrease a person’s pay,” Hale said, noting that employers must ensure that they comply with state wage-payment laws. If employees are at-will, employers can always change on a going-forward basis, he said.

Essentially, there was ambiguity with the court’s decision to omit a reference to highly compensated employees, Hale said. “It is an omission and an omission of any explanation, one way or another,” he said.

Caroline J. Brown, a lawyer at Fisher & Phillips LLP who specializes in wage and hour law, said the omission may have been unintentional.

“It is possible that it is an oversight,” Brown said. “If so, the court could file a motion amending it on its own accord or a party could file a motion to have it corrected.”

Exploring the Omission

The omission was odd, but it “would not affect the logic that was applied by the court,” Hale said. “It would be difficult for somebody to make an argument that the HCE portion of the final rule remains in effect given that the decision in multiple places refers to the enjoining of the final rule,” he said.

There is some consistency in how the injunction was decided, Hale said. The court may have had problems with the salary basis test as the only criterion, he said. An employee who did not meet the salary level could not otherwise be exempt, he said.

“The HCE test is a little different,” Hale said. “You can be exempt at a lower salary rate. It is just that the salary will be taken into account to relax the exemption. The HCE standard is not an absolute standard. It simply modifies the duties standard without eliminating the salary level.”

“It seems like the court is saying that salary can be a factor, and what the HCE does, unlike the basic salary test, is it makes salary a factor to consider and essentially swaps out salary for some duties, if the salary is high enough, saying that is good enough to satisfy the statutory standard,” Hale said.

On Dec. 8, a federal appeals court granted the Labor Department’s request to speed up the process of hearing the department’s appeal challenging the U.S. District Court for the Eastern District of Texas’s preliminary injunction that delayed the white-collar overtime rules from taking effect.

Even with fast-track consideration, the case is unlikely to be resolved before the 115th Congress convenes Jan. 3 and President-elect Donald Trump is inaugurated Jan. 20.

The time line for the appeal calls for the Labor Department, the 21 states that obtained the preliminary injunction and other parties to have filed all briefs with the court by the end of January. Oral arguments before a panel of Fifth Circuit judges are to be scheduled soon after. The court is to rule on the appeal after the oral arguments are made.

The Labor Department filed a motion Dec. 12 asking the federal district court in Texas to await the outcome of the agency's appeal in the case before hearing other motions related to the lawsuit ( Nevada v. DOL, E.D. Tex., No. 4:16-cv-00731, motion to stay proceedings pending appeal 12/12/16 ).

The AFL-CIO filed a motion Dec. 9 with the district court to intervene as a defendant so that, were the department to withdraw from the case, a possibility under the leadership of the incoming Trump administration's labor secretary, the AFL-CIO could continue to defend the final rule.

Congress also could pass legislation to nullify the white-collar overtime rule or pass alternative legislation before the court rules.

For More Information

Follow developments on the overtime rule through a special website.

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