Early in 2016, at the direction of President Obama, the Department of Labor (DoL) issued long awaited reforms to how overtime would be handled across the country. The new rule, inventively called the Overtime Final Rule, is only the seventh time the Department of Labor has adjusted its rules for the changing times since nearly 80 years ago in 1938. It would also be the first such adjustment in twelve years. However, while the rule was initially set to take effect at the beginning of last month, the it’s looking more and more like the Overtime Final Rule may be even more long awaited than expected. A ruling out of a Texas district court, temporarily preventing the Overtime Final Rule from moving forward, was recently upheld on appeal.
What Does the Rule Cover?
So first things first, what exactly would the Overtime Final Rule do and why would anybody try to stop it? The Overtime Final Rule was designed to update the salary exemptions to overtime. Basically, if you make more than a certain amount–and your job requires a fairly high level of independent judgment and discretion on your part–an employer doesn’t need to pay you for overtime hours worked. Overtime generally includes any hours in excess of 40 in a week, 8 hours in a day, or being required to work more than 6 consecutive workdays. The Overtime Final Rule would have nearly doubled the cutoff point in pay before you are exempt from overtime. The new cutoff would have jumped from exempting anybody making more than $455 per week all the way up to only excluding employees making $913 per week. This amount would rise every year for the next three years to allow employers more time to adjust to the changes. The DoL expected this change to make around 4.2M employees eligible for overtime pay around the country. The new rule also sought to clarify the fairly murky area of the exact kind of jobs that can be overtime exempt. However, it was the fact that it would require employers to make such huge changes in how they pay their employees that led to it being challenged as vigorously as it has been. While rule may leave many employees excited about the prospect of a potential raise or overtime pay, the same prospect filled many employers with dread at having to budget in those changes as the DoL predicted that 4.2M new non-exempt employees would cost employers over $295M.
The response to the rule when it was first announced in May of 2016 was swift–a barrel of lawsuits against the DoL, its divisions, and its agents. 21 states, the Plano Chamber of Commerce and over 50 different businesses all sued in Texas District Court to try and put a stop to the new changes by arguing that the changes overstepped the DoL’s authority. This led to Judge Amos Mazzant out of Texas issuing an unexpected emergency motion, days before the Overtime Final Rule was set to take effect, which prevented rule from moving forward anywhere in the country. The federal government has appealed the ruling but until that case sees light–it’s currently in briefing until at least January 31st of this year–the Overtime Final Rule is stalled.
Is This the End of the Overtime Final Rule?
To call the Texas District Court’s ruling a setback to the DoL would be a dramatic understatement. The case is still ongoing, upcoming decisions in the case include a request to stop the rule permanently. However, as it stands the rule is stalled not dead–although the changing political climate may see the DoL abandon the case entirely.
With President-Elect Trump set to take office in a few weeks, there will be a changing of the guard at the DoL and until that changing of the guard it’s very unlikely there will be much action on the case. Once the changing of the guard does occur, President-Elect Trump has appointed Andrew Puzder as his Labor Secretary–an outspoken critic of the Overtime Final Rule. With this in mind, it seems unlikely that the case will be a high priority for the new administration and it may even be dropped–ending any chance of the DoL’s overtime changes taking effect. Even if the case moves forward and the rules end up taking effect, a conservative majority in Congress would allow Republicans to kill the rules using a joint resolution under the Congressional Review Act.
However, while things aren’t looking particularly good for the DoL’s rules, the case is far from over. The Texas AFI-CIO–a prominent labor union–is currently seeking to join the case as a defendant in order to take over the case should the DoL end up walking away from it. What’s more, the Congressional Review Act is an option that is very rarely used. There may be life in the Overtime Final Rule yet. So how do you plan for a future where the legal environment is totally up in the air?
What Do You Do Now?
So how do you move forward as a business? Many have been busily preparing to adjust for the changes, however that in and of itself presents a challenge to employers. What’s more, failure to properly classify an employee when it comes to overtime exemption can lead to costly lawsuits and fees.
The two options to deal with the changes is to either provide raises or reclassify employees. Raises hit the bottom line while reclassification hits employee morale through the perceived loss of prestige and can require removing autonomy from an employee–sometimes even necessitating barring that employee from activities such as accessing emails while off duty.
As it stands, the Overtime Final Rule is simply not in effect and thus employers do not need to currently comply with its rules. However, the injunction did not block all amendments the rules proposed–keeping sections increasing the cap on overtime exemption for particularly highly paid employees from $100,000 per year to $134,000 per year. Thus, it’s important as an employer to be certain that employees exempted on this basis are properly classified.
As to the remainder of the rules, there are basically two camps–employers who have already made changes to address the Overtime Final Rule and those who have not. If you’ve made no changes, it makes sense to stay the course for now while preparing a plan to quickly move yourself in line witht he rules should they end up taking effect.
If you have made changes, the situation is a bit more complicated. Rescinding raises and employment changes can be a tricky business, beyond the fact that it’s a painful HR move, it can give rise to legal claims against your business depending on how salaries or pay were agreed to.
As an employee it is important to keep an eye on where this law goes and make sure you are being compensated properly according to the law. If you have been reclassified or given a raise, look to your employment agreements and figure out whether your employee can take back what they’ve given you. What’s more, remember that an employer can rarely take back wages already paid under a restructured compensation plan. Generally they will be limited to reducing future pay.
Surprisingly, businesses have by and large moved forward as it the ruling from Texas never happened. Studies show the majority of small businesses–84% of them–have simply moved forward with raises, reclassifications, and employment agreements as if the rules had taken effect. This is good news for employees. However, many small businesses can ill afford the costs of such changes if they don’t have to. For employees and employers alike, keep an eye on this case in the coming months–it has to come out of legal limbo sometime.