Federal judge in Texas blocks implementation of new overtime regulations: what does this mean?

Just a few days ago (November 22, 2016), a federal judge in Texas granted an injunction against enforcement of a change in Department of Labor overtime regulations scheduled to go into effect next week, on December 1, 2016.

By way of recap, the regulation would  double the minimum salary requirement for a worker to be considered exempt from overtime, from $455 per week to $913 per week.  What that would mean is that anyone who earns less than the new threshold must be paid time and a half for overtime, regardless of the kind of duties they perform (see post below for further explanation of the regulation).  The Department of Labor had estimated that 4.2 million U.S. workers would become entitled to overtime pay on December 1 based on the new threshold earnings alone.

That was a game changer in itself, and it seems like the game has changed again.

Here is what happened.  A group of states brought a lawsuit in September seeking to enjoin enforcement of this rule, arguing, among other things, that the Department of Labor exceeded its statutory authority by raising the salary threshold.

Judge Amos Mazzant of the United States District Court for the Eastern District of Texas ruled yesterday that the two-fold  increase in the threshold salary was beyond the authority delegated to the Department of Labor  by Congress, and issued a preliminary injunction barring enforcement of the rule pending a final determination on the merits of the case.

By way of background, the Department of Labor, as an administrative agency,only has the authority to make rules when Congress delegates that authority to it.  The federal statute that created the overtime rules stated that employees were exempt if they were "bona fide executive, administrative, or professional" employees, and delegated to the Department the responsibility for defining what kinds of employees fell into those categories.

The Department of Labor did so, ultimately creating a labyrinth of regulations addressing the kinds of duties that would be considered exempt. The Department has also employed a minimum salary test, at varying amounts, since 1940 as a threshold requirement for exemption from overtime.

The state plaintiffs in this case argued that, though the salary test has been in use for decades, this was "always as a DOL invention" and "has never been ratified by Congress." They further suggested that the reason the salary test had not met with serious challenges before now was because "the threshold was set low enough that the DOL’s perversion of the statute, in practical terms, affected so few actual EAP employees."  In other words, the explanation for the fact that this structure (a threshold salary plus an evaluation of exempt duties) has been in place and accepted for over 75 years is that the previous salary threshold only excluded the lowest paid employees from overtime rights.

Interestingly, according to the Department's brief, in the extensive period allowed for comments on the proposed regulations, many opponents (including states like the plaintiffs) had submitted comments critical of the regulations, but none had questioned the existence of the threshold salary test, instead criticizing the degree to which the Department proposed to raise that number.

It also appears that the plaintiff's assertion that the salary test had not "met with serious challenge" is not altogether true: both the Department and Judge Mazzant cited a Fifth Circuit Court of Appeals decision from 1966 in which the court specifically upheld the use of a salary test as a legitimate exercise of the Department's discretion (Wirtz v. Mississippi Publishers Corp., 364 F.2d 603), an opinion that seems to have been followed by several trial courts over the years, and does not appear to have been overruled or questioned by the Court of Appeals.

What does this mean for employers still trying to figure this out?  It is hard to say.  On the one hand, December 1 will now come and go without the new requirements being put into place.  On the other hand, the Department has the right to appeal, and from a preliminary look at the papers in the case, it appears there they would have a reasonable argument if they did.  If the injunction is overturned, there is a possibility the the effect of the regulations would still be retroactive to December 1.  The Department may choose not to go after employers for noncompliance during that interim period, but it is a separate question whether individual employees who believe they should have been paid overtime would bring private lawsuits.

Workers who stood to benefit from this change (people currently earning between $455 and $913 per week) will be understandably frustrated by this new development.  Employers, however, may be equally frustrated.  Many employers have already implemented pay increases to bring exempt employees above the new threshold, or otherwise modified their compensation structure to be in compliance with the new regulations. And everyone faces uncertainty in the interim, with no way of knowing whether or to what extent the Department of Labor regulations will have the force of law after the trial and/or appeal process play out.

Then there is the additional wrinkle of a new Presidential administration, one that has already promised to roll back many federal regulations.

Perhaps the best way to manage this uncertainty is to take steps to manage the amount of overtime worked in your business.  There is nothing wrong with a strict policy that requires management approval of overtime, and that approval can be denied.  If all the things that need to get done can't get done without any employee working more than 40 hours in a week, there is also nothing wrong with bringing on new employees, even temporary employees, to ensure that all time worked is "straight" time, not overtime, regardless of the exemption status of your employees.

Another  point that many employers miss is the importance of accurately tracking hours.  If the new regulations stand, they will affect a large number of workers who don't traditionally punch time cards. If overtime pay becomes an issue for them, and you do not have a system for tracking how much they worked, you may find yourself in a contest of credibility if they later claim to be entitled to overtime pay.



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How do the new overtime regulations affect your small business?

The rules are changing, soon, and in a big way.  New Department of Labor overtime regulations take effect on December 1, 2016, which will significantly expand the number of employees who must be paid at an overtime rate for hours worked over 40 per week.  Will these changes affect your business?

The answer is almost certainly.  Under current overtime laws (Massachusetts and federal), an employee is exempt from overtime only if two things are true: First, he or she is paid on a salary basis and earns at least $455 per week, and second, his or her actual job duties fall into one of the exempt categories (a bona fide executive, administrative, or professional employee- more on these later).

Who falls within the exempt duties has been fertile ground for litigation for years, and the new regulations don't change that reality.  What is so significant about the regulations is that they raise the threshold earnings from $455 per week to $913 per week, almost doubling it.  In plain language, it means that no matter what an employee's duties are, or whether you currently classify them as exempt from overtime, if they make less than $913 per week (approximately $47,000 per year), they must be paid overtime under the federal laws (1.5 times their hourly rate for all hours worked over 40 in any given week).

To make matters worse, it is your obligation as the employer to keep a record of hours worked, which means if you don't have accurate records you may find yourself on the losing end of a dispute about whether an employee actually worked overtime.

Finally, you should be aware of the consequences if an employee files a successful claim for unpaid overtime.  You could be responsible for two or three times the amount of unpaid overtime, and the employee's legal fees (in addition to what you have to pay your own lawyer).

How can you address this change in your business?  You could, of course, raise the rate of pay for affected employees to preserve their exempt status.  This is, however, a significant increase in expenditures, and depending on the number of employees you have, simply may not be possible.

Other steps you might consider:

• Make sure you have a policy and controls in place to ensure that any overtime worked is approved in advance by management, so that you are not caught by surprise by overtime expenses, and so that you can make sure that the work being done at the increased rate is necessary and worth the expense.

• Make sure you have a reliable means of tracking hours- if you do not have good records of time worked, you may have difficulty defending a claim for overtime compensation where is a dispute about the number of hours actually worked.  If your employees work in a fixed location where there are defined business hours, this is not difficult to do.  If you have employees who can and do perform work remotely, you may want to look into available time tracking apps that you can require your employees to use when they start and stop working.

• You can legally adjust the base compensation going forward to offset increased overtime expenses- so long as the employee is paid the Massachusetts minimum wage, and so long as the change is not retroactive, this is legally allowed, though as a business matter it could have extremely negative effects on morale and retention, and might cause real hardship for your employees.

Some things you should not do:

• You should not ignore the change in law in reliance on your good relationship with employees, even if they are family.  We have seen more of these relationships sour than you might think, and if they do, you could find yourself with significant liability to an unhappy employee.

• You should not try to convert any employees to independent contractor status to avoid overtime obligations, at least not without getting legal advice from an employment lawyer.  There are very strict rules in Massachusetts about who may and may not be treated as an independent contractor, and the penalties for getting it wrong can be harsh.

If you are unsure how to address the new law in your  business, or if you are reading this after December 1, 2016 and think you might already have a problem, a consultation with an experienced employment law attorney would be well worth the cost, and could save you both money and headaches in the future.


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