Court pumps brakes on Labor Department’s overtime rule

With less than a week remaining until a new Department of Labor rule redefined when overtime pay must be afforded to “white-collar” employees, a Texas judge has suspended its implementation.

On Nov. 22, U.S. District Judge Amos Mazzant, of the U.S. District Court Eastern District of Texas, approved an emergency motion for preliminary injunction, halting the intended Dec. 1 effective date of the rule on a nationwide basis. The delay is effective until a final legal decision is made on the legality of the requirements.

In reaching his decision in State of Nevada v. U.S. Department of Labor, Mazzant agreed with the arguments presented by attorneys general of 21 states, as well as the Plano Chamber of Commerce and more than 50 other business organizations. The Court consolidated the separate business plaintiffs’ action with the state plaintiffs’ action without objection from any of the like-minded parties.

Specifically, the judge found merit with arguments that the rule would create a financial hardship, violate the Administrative Procedures Act, and exceed both the Labor Department’s statutory authority and the Congressional intent of the Fair Labor Standards Act.

The rule in question stems from a memorandum President Barack Obama issued on March 23, 2014, directing the Secretary of Labor to “modernize and streamline the existing overtime regulations for executive, administrative, and professional employees.” The Department received more than 293,000 comments on the proposed rule, including comments from businesses and state governments, before publishing the final version of the rule on May 23, 2016.

The rule modified the Fair Labor Standards Act and its application to white-collar workers. Previously, only employees with an annual salary of more than $23,660 who performed certain duties could be required to work more than 40 hours a week without being compensated with overtime. The new rules reset that threshold to increase the minimum salary level for exempt employees from $455 per week ($23,660 annually) to $921 per week ($47,892 annually), effective Dec. 1. The rule also expanded the definition of “salary basis” to allow non-discretionary bonuses and incentive payments, including commissions, to satisfy up to 10 percent of the standard salary test requirement. Employers are given flexibility in designing systems to make sure appropriate records are kept to track the number of hours worked each day.

The final rule also established an automatic updating mechanism that adjusts the minimum salary level every three years. The first automatic increase was intended to occur on Jan. 1, 2020.

The plaintiffs challenged the lawfulness of the final rule, the Department’s authority to promulgate it, and whether the automatic updating mechanism complied with APA requirements.

Judge Mazzant also agreed that arguments claiming that the final rule is not “based on a permissible construction” of the Fair Labor Standards Act warranted further legal review. “The automatic updating mechanism violates the APA because the salary level is adjusted without a notice and comment period,” he wrote.

“Employers on the verge of increasing salaries or reclassifying employees are facing the most difficult decisions because, by the 11th hour, employees have developed certain expectations. Employers may decide to postpone the changes indefinitely, but they first need to consider what they have communicated thus far to their workforces.”
Kathleen Anderson, Partner, Barnes & Thornburg

“A nationwide injunction is proper in this case,” he added. “The final rule is applicable to all states. Consequently, the scope of the alleged irreparable injury extends nationwide.”

Critics were quick to praise the injunction.

“If the overtime rule had taken effect, it would have resulted in significant new costs—more than $1 billion according to the Congressional Budget Office—and it would have caused many disruptions in how work gets done,” said Randy Johnson, senior vice president of labor, immigration, and employee benefits for the U.S. Chamber of Commerce. The rule would have reduced workplace flexibility, remote electronic access to work, and opportunities for career advancement. This is a great result.”

The National Federation of Retailers was among the business groups included among the plaintiffs. “The Labor Department’s overtime changes are a reckless and aggressive overreach of executive power, and retailers are pleased with the judge’s decision,” says Senior Vice President for Government Relations David French. “The rules are just plain bad public policy, and we are pleased that the judge is allowing time for the case to go forward before they can go into effect. We hope the judge ultimately finds in our favor, and in the meantime this timeout gives Congress a chance to take another look at the impact of these rules.”

The non-partisan Congressional Budget Office recently reported that canceling the overtime changes would benefit consumers by avoiding price increases that would come if companies had to pay their workers more, French noted. While the CBO estimated that the new rules would extend overtime eligibility to an additional 3.9 million workers, it found that only about 900,000 of those employees currently work enough hours to actually receive overtime pay, or 0.6 percent of the U.S. workforce. Those workers would make only an extra $650 a year, the CBO found.

IRRREPARABLE HARM

The following is from a ruling by U.S. District Judge Amos Mazzant in the case State of Nevada, et al v. U.S Department of Labor, et al.
The automatic updating mechanism under the Administrative Procedures Act
Under the Final Rule, the automatic updating mechanism will change the minimum salary level based on the 40th percentile of weekly earnings of full-time salaried workers in the lowest wage region of the country. The State Plaintiffs claim the mechanism violates the APA because the salary level is adjusted without a notice and comment period.
Because the Final Rule is unlawful, the Court concludes the Department also lacks the authority to implement the automatic updating mechanism. Thus, there is no need to address the State Plaintiffs’ other arguments.
For the reasons set forth above, the State Plaintiffs have shown a likelihood of success on the merits because the Final Rule exceeds the Department’s authority under Chevron.
Likelihood of irreparable harm
The State Plaintiffs must demonstrate they are “likely to suffer irreparable harm in the absence of preliminary relief.”
An injunction is appropriate only if the anticipated injury is imminent and not speculative.
Defendants suggest the State Plaintiffs allege only financial injury, which is not enough to justify a preliminary injunction. Defendants also take issue with the State Plaintiffs’ estimates of costs incurred under the final rule.
The State Plaintiffs’ proposed preliminary injunction seeks to enjoin the Department from implementing its Final Rule on December 1, 2016. The State Plaintiffs allege that, in the absence of a preliminary injunction, the significant cost of complying with the final rule will cause irreparable injury. The State Plaintiffs offer many examples of such costs. They submit declarations from seven state officials who estimate it will cost their respective states millions of dollars in the first year to comply with the Final Rule. The Department agrees the Final Rule will cause increased costs.
Besides costs, the State Plaintiffs also allege that compliance costs will impact governmental programs and services. As one example, the State of Kansas must evaluate whether its agencies should increase the salaries of their employees to the new minimum salary level or allow these employees to become non-exempt and eligible for overtime.
In particular, the Kansas Department for Children and Families and the Kansas Department of Corrections have over fifty percent of employees affected by the final rule.
The Kansas Department for Children and Families and the Kansas Department of Corrections are unable to increase salaries to comply with the final rule, as “limited resources of both agencies are already being prioritized toward . . . critical, public safety-related functions.”
As a result, agencies with budgets constraints, such as the two in Kansas, have relatively few options to comply with the final rule—all of which have a detrimental effect on government services that benefit the public. Should the State Plaintiffs ultimately prevail on the merits of their suit, this type of injury cannot be redressed through a judicial remedy after a hearing on the merits.
Accordingly, State Plaintiffs have shown they will suffer irreparable harm if the preliminary injunction is not granted.
Source: U.S.  District Court, Eastern District of Texas, Sherman Division.

Research conducted for NRF, the world’s largest retail trade association, found that the new overtime regulations would “force employers to limit hours or cut base pay in order to make up for added payroll costs, leaving most workers with no increase in take-home pay despite added administrative costs.” A separate survey found that the majority of retail managers and assistant managers the regulations are supposed to help “oppose the plan, citing losses in schedule flexibility, benefits, and professional development opportunities that would come with switching from salaried to hourly positions.”

“Judge Mazzant agreed with what NCCR and our coalition allies have been saying all along: that the Labor Department’s ill-conceived overtime regulation is a dramatic government overreach causing significant harm to small businesses and their employees around the country,” added Rob Green, executive director of the National Council of Chain Restaurants. “The regulatory ‘timeout’ imposed by Judge Mazzant should allow Congress to vote to stop the regulation once and for all and would also let the incoming Trump administration create a more realistic and workable overtime solution based on sound economic considerations.”

Among those not happy with the ruling was Ross Eisenbrey of the Economic Policy Institute, a non-partisan think tank with a focus on including the needs of low- and middle-income workers in economic policy discussions. He called the injunction “an extreme and unsupportable decision … and a clear overreach by the court.” The court found, essentially, that “the Labor Department does not have the authority it has exercised since 1938, under 10 presidents, including FDR and George W. Bush, to set a minimum salary requirement for overtime exemption.”

For 78 years, the Department of Labor has used salary as well as duties to determine overtime eligibility. Congress has amended the Fair Labor Standards Act many times and has never objected to the salary test,” he said in a statement. “The law is clear on this. The District Court’s ruling is wrong. It is also a disappointment to millions of workers who are forced to work long hours with no extra compensation and is a blow to those Americans who care deeply about raising wages and lessening inequality.”

As for companies affected by the rule, they may be forced to hold tight until the legality of the rule is addressed.

“Many employers have already made changes to job classifications and pay in anticipation of the Dec. 1 deadline,” says Kathleen Anderson, a partner with law firm Barnes & Thornburg. “Employers wondering if they should ‘undo’ those changes should first do a careful review and analysis with their employment counsel. Employers on the verge of increasing salaries or reclassifying employees are facing the most difficult decisions because, by the 11th hour, employees have developed certain expectations. Employers may decide to postpone the changes indefinitely, but they first need to consider what they have communicated thus far to their workforces.”

What happens next? The timeline is unclear, Anderson says. The Texas court could issue a permanent injunction, but the timing of such an action could be many months away. The incoming Trump administration could try to settle the litigation and withdraw the offending regulation.  Or, the incoming Congress could block the new threshold and other Labor Department rules. “There is a bill in Congress all ready to reject the new overtime rule and other Obama Administration regulations,” she says. “It would not be surprising for some form of that bill to pass the next Congress and be signed by then-President Trump…I do not expect for the salary threshold in the new regulation to survive.”