In a stunning development, a federal district court in Texas has issued a nationwide injunction blocking implementation of the new salary basis rule under the Fair Labor Standards Act (“FLSA”) mere days before it was scheduled to take effect on December 1, 2016. The ruling will have a significant impact on businesses throughout the United States and raises uncertainty as to whether the increased salary basis threshold will be upheld moving forward.

As we have previously reported, the U.S. Department of Labor (“DOL”) issued a final rule on May 23, 2016 that established a new salary threshold requirement in order for employees to be considered exempt under the FLSA’s “white collar exemptions” (i.e., executive, professional, and administrative employees). Previously, the threshold was set at $23,660 per year ($455 per week), which meant that employees who were paid a salary of at least $23,660 and otherwise satisfied the applicable duties test to be considered an exempt executive, professional, or administrative employee were not required to be paid overtime compensation for hours worked in excess of 40 hours in a single workweek. The DOL’s new rule would have doubled the applicable salary threshold by increasing the salary basis requirement to $47,476 per year ($913 per week).

In issuing the final rule, the DOL noted that the original salary basis requirement was premised on the assumption that “exempt” workers would earn salaries well above the minimum wage and have greater benefits and job opportunities than “non-exempt” workers, which warranted the exemption from overtime pay. However, the DOL indicated that the salary basis threshold had not kept up with increases in the cost of living and therefore issued the final rule as an update to “reset” the minimum salary level in line with the original intent of the FLSA. To avoid drastic increases associated with a similar “reset” in the future, the final rule also included language that would increase the salary basis threshold every three years to adjust for increases in the cost of living index.

Challenge to DOL’s Final Rule / Court Ruling

After the final rule was issued, 21 states (including Nebraska) collectively filed a motion for injunctive relief in the U.S. District Court for the Eastern District of Texas in an attempt to stop the new rule from going into effect. The case was consolidated with a similar challenge filed by various business groups. After hearing the arguments, Judge Amos Mazzant granted the motion for preliminary injunction, indicating that the DOL exceeded its authority by enacting the final rule. Judge Mazzant found that Congress intended for the white collar exemptions to be based on an employee’s actual job duties, rather than the employee’s salary. In the court’s view, the final rule’s “de facto salary-only test” that categorically excluded employees performing exempt duties from the white collar exemptions violated Congressional intent, and was therefore unlawful. The court found that the DOL also lacked the authority to implement the automatic increases to the salary basis threshold. The decision is a surprise and calls into question whether the final rule will ultimately go into effect.

There is also a question as to the court’s ability in this case to issue a nationwide injunction. The Supreme Court has not definitively ruled on that issue, but such injunctions have been upheld in the past. The DOL has already stated that it intends to challenge the ruling, and the injunction is still preliminary in nature meaning that the issue will be further vetted before a final determination is made. However, an element of obtaining preliminary injunctive relief is that the court believes the party seeking the injunction is substantially likely to succeed on its claim. Further, the Eastern District of Texas is located in a traditionally conservative judicial circuit, so the DOL would appear to face an uphill battle to win its appeal unless the issue is challenged all the way to the U.S. Supreme Court level. A final consideration is that the new presidential administration has already expressed an intent to roll-back certain regulatory actions taken over the past few years and could abandon any challenge mounted in the next month.

Next Steps for Employers

What does all of this mean from an employer’s perspective? There is no way to know whether the DOL’s final rule will ultimately go into effect. However, in light of the injunction, we recommend that employers maintain the status quo. If you have not taken action to implement the new rule, we recommend proceeding based on the prior salary threshold for purposes of classifying employees as “exempt” or “non-exempt” under the FLSA. Given the extensive actions taken by many employers to prepare for the new requirements, this may involve notifying employees that scheduled changes have been put on hold and that employees will continue to be classified in the same way until further guidance is issued on this topic. If you have taken action, there are additional points to consider. Employers who have already provided raises to employees in an attempt to meet the new salary basis threshold should proceed with caution before readjusting employee wages. Although such changes may have been made in anticipation of the final rule, revoking increased wages that have already been adjusted or promised could expose the employer to liability for breach of contract or tort claims for unpaid wages. If changes are made to an employee’s salary, employers must also consider compliance obligations under state law regarding notification periods before such changes go into effect.

Employers should also keep in mind that the above discussion only addresses the salary basis test and not the duties test for determining whether an employee is properly classified as exempt. For those employers who have conducted a review of their positions in anticipation of the new overtime rules but have determined that certain positions should be reclassified based on a failure of the duties test, this injunction has no effect on that determination and such positions should not be switched back to exempt status.

Employee Benefits Considerations

In addition to increasing the compensation paid to certain employees in response to the new overtime rule, employers also may have amended (or may be in the process of amending) their retirement plan benefits, which are generally closely tied to participant compensation. Employers should be aware that if a decision is made to maintain salary increases, the corresponding retirement plan benefits may increase unless the plan is amended. If you have not yet examined the implications of an increase in salary for retirement plan benefits, please contact us for a preliminary analysis based on your plan’s unique benefit design structure.

If you have specific questions regarding how this development may affect your business, please contact any member of the Koley Jessen Employment, Labor and Benefits Practice Group to further discuss.

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