CLIENT ALERT: Labor & Employment Law - Where Do We Stand? U.S. Department of Labor's Revised Overtime Rules Under the Fair Labor Standards Act

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A. Overview of Fair Labor Standards Act
The Fair Labor Standards Act of 1938 (FLSA) is a federal law that regulates minimum wage and overtime compensation. Specifically, the FLSA provides a $7.25 per hour minimum wage for all covered employees, and mandates that they be paid time-and-a-half for work in excess of 40 hours per week.

Additionally, the FLSA maintains categories of employees known as “non-exempt” and “exempt”. “Non-exempt” employees are covered by the FLSA. “Exempt” means the employee is excluded from the FLSA overtime provisions. Generally, to be classified as exempt, an employee must be paid the minimum salary and perform the job duties specified under the FLSA and related case law. 

B. Revised FLSA Overtime Rules and Pending Litigation
In May 2016, the U.S. Department of Labor (DOL) announced revisions (“Revised Rules”) to the FLSA. (Such Revised Rules were scheduled to take effect on December 1, 2016, but were ultimately delayed, as discussed below.) The main features of the Revised Rules are:

  • Minimum Salary Level Exemption: Minimum salary for exemption increases from $23,660 ($455 per week) to $47,476 ($913 per week), provided the employee satisfies the applicable duties test. Employees who do not receive the new minimum salary will not be exempt and must be paid overtime. 
  • Highly Compensated Employee (“HCE”) Exemption: Minimum salary for an HCE increases from $100,000 to $134,004, provided such employee satisfies a relaxed duties test by performing at least one of the duties of an executive, administrative or professional employee. This exemption generally pertains to employees receiving a salary, plus some type of bonus, commission and/or other form of incentive compensation. 
  • Automatic Increase: Every three years the minimum salary levels will be increased. The first automatic update is scheduled to take effect January 1, 2020.

In September 2016, however, 21 states, among other business entities (“Plaintiffs”), challenged the Revised Rules in a consolidated lawsuit against the DOL in the U.S. District Court for the Eastern District of Texas (“EDT”). Shortly thereafter, Plaintiffs filed an emergency application seeking an injunction to suspend implementation of the Revised Rules. On November 22, 2016, federal Judge Amos L. Mazzant III (of the EDT), granted Plaintiffs’ application for an injunction, and temporarily blocked the DOL from implementing and enforcing the Revised Rules nationwide. On December 1, 2016, the DOL indicated its intent to appeal Judge Mazzant’s nationwide injunction to the Fifth Circuit Court. The DOL’s Revised Rules are currently on hold pending further judicial review. In particular, the EDT must determine whether: (i) the DOL had the authority to issue the Revised Rules; and (ii) such Revised Rules are valid.

C. To Comply – Or Not To Comply?
If Judge Mazzant’s injunction is reversed by the Fifth Circuit Court, a difficult question arises: Will employers be liable for failing to comply with the Revised Rules for the time period prior to the Fifth Circuit’s reversal? The answer is not entirely clear. In 2015, a similar situation arose. The DOL issued new regulations (the “2015 Regulations”), which the Federal District Court found unlawful. The Circuit Court, however, found the 2015 Regulations valid. The DOL advised it would not enforce violations of the 2015 Regulations that occurred prior to the Circuit Court’s reversal. However, despite the DOL’s guidance, two Federal District Court claimants sued and were held to be entitled to retroactive recovery. (Note, however, another Federal District Court held a claimant was not entitled to retroactive recovery.)

If employers are seeking to comply with the Revised Rules, it is essential they (at the very least):

  1. Determine how many current employees fall within the scope of the Revised Rules;
  2. Determine the feasibility of increasing affected employees’ salaries to meet new salary exemption thresholds under the Revised Rules; and
  3. Reexamine the company’s handbook and/or polices on overtime, and vet the potential negative employee production ramifications in limiting overtime.

D. Employers that Have Already Complied
In the event employers have already made changes to comply with the Revised Rules (e.g. increasing an employee’s salary to the minimum salary level of $47,476), the safest alternative is to leave these changes in place until the pending litigation is resolved. However, if already compliant employers are steadfast in reversing such salary increases in light of Judge Mazzant’s injunction, a careful analysis must be conducted. Specifically, employers must be sure to weigh the likely adverse impact on employee morale verses the financial burden of complying with the Revised Rules – in addition to potential retroactive violations in the event the Fifth Circuit overturns Judge Mazzant’s injunction. Further, inter alia, employers must check applicable state and local law, as many states require that a reduction in compensation be communicated in writing prior to such employee beginning work under the reduced compensation rate.

E. Compliance Audit; Conclusion
Segal McCambridge Singer & Mahoney, Ltd. employment attorneys can assist with auditing your current workforce for compliance under the old or new FLSA overtime rules, and can assist with strategies for implementing compliance changes. For additional information regarding a compliance audit, please feel free to contact the authors.

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