NATNews Blog > January 2017 > DOL Overtime Rule delay: What to do if changes are already in process

    DOL Overtime Rule delay: What to do if changes are already in process

    1/3/2017 9:39:59 AM
    The U.S. District Court for the Eastern District of Texas issued a preliminary injunction prohibiting the Department of Labor’s (DOL) overtime rule from taking effect on Dec. 1. The court was responding to a petition brought by 21 state attorneys general and several business coalitions, arguing the DOL had overstepped its statutory authority.

    The DOL issued a statement following the release of the court’s opinion, saying they disagreed with the court and remained confident “in the legality of all aspects of the rule.” On Dec. 1, the DOL filed an appeal in the case. As expected, the DOL promptly filed an emergency motion for an expedited briefing schedule, hearing and decision. On Dec. 8, the Fifth Circuit Court of Appeals granted the motion, issuing a briefing schedule that requires the final brief to be filed by Jan. 31 and the hearing to take place at the next available date following the close of the briefing.

    Given that the final DOL brief, hearing and decision will not take place until after President-elect Donald Trump takes office, he has an opportunity to significantly influence the fate of the new overtime rule. He could order the DOL to abandon the appeal and send the DOL back to the drawing board to come up with a new rule. On the other end of the spectrum, he could let the appeal run its course and allow the legal battle to be resolved by the court.

    The preliminary injunction has posed a problem for companies who have already adjusted their pay structures, changed employee status or advised their employees of the change to come.
    Christie DeSanctis in writing for the National Association of Realtors noted if the rule eventually makes it through the court and does indeed go into effect, employers may face legal challenges by employees seeking past-due overtime pay if the company has not implemented the new rule.

    “Therefore, employers are encouraged to speak with their legal counsel to determine whether to implement their existing plans to comply with DOL’s overtime rule despite this injunctive ruling or whether to wait for a final outcome by the courts,” DeSantis wrote. “Given the shift in administration and the expressed interest in repealing the rule, it is possible the scheduled threshold salary increases may never occur.”

    Paycor, a Cincinnati, Ohio-based company that provides online payroll services and human resources solutions, hosted a webinar on Dec. 1, in which Attorney Katharine Weber provided an overview of the court challenge to the rule and shared options employers can consider if they already started implementing the new requirements.

    Weber, an attorney with Jackson Lewis P.C. in Cincinnati, Ohio, noted the court held, among other things, that the DOL had exceeded its delegated authority in its interpretation of the Fair Labor Standards Act (FLSA) in that it could not place the salary test above the duties test for the executive, administrative or professional (EAP) exemptions.
     
    “The judge, looking at the plain language of the statute, said employees were really to be defined based on the duties they were asked to fill,” Weber said. “The new rule created a de facto salary test that swallowed up the duties test. The judge said DOL gets its authority from Congress and it is supposed to stay within the confines of what Congress intended. There is no way 4.2 million employees could be exempt today and not exempt tomorrow without a duties test.”
     
    What does an employer do now?
    Weber said employers can be lumped into three groups in terms of where they were in the process leading up to the injunction.
    • Group 1 includes employers who have already implemented changes in anticipation of the final rule. They increased pay, reclassified workers as hourly or salaried non-exempt because the salary level was not met, or reclassified workers due to questions regarding duties.
    • Group 2 includes employers who have already communicated changes in anticipation of the final rule, but have not implemented those changes yet.
    • Group 3 includes employers who have taken no action. They have not communicated or implemented any changes because they were waiting to see how the Texas court would rule on the injunction.
     
    Weber said Group 3 will most likely ride out the appeals storm, noting these cases often take a year or more to run their course, even if the DOL seeks an expedited schedule in the courts. In addition, the entire issue could become moot once Trump takes office, should he push for going back to the drawing board on the rule.
     
    “Any employer that doesn't make the changes faces some potential liability if the preliminary injunction is reversed on appeal,” Weber said, noting employees could come back and claim the effective date was Dec. 1 and therefore demand overtime due after the effective date.

    Weber said a similar attack was made when the companionship exemption was gutted by the DOL, blocked by the courts, and then that injunction was reversed on appeal. There were two cases in which the employees argued for a retroactive effective date of the rule. Jackson Lewis represented the employer in one of those cases in Cincinnati and the employer won the case with the court finding the revised companionship exemption was not retroactively effective. In the other case, the court went the other way. So while employers might think no one would ever argue for a retroactive effective date of the overtime rule, there is some precedence for such an argument, so this remains a potential risk.

    It’s a much tougher call for Groups 1 and 2, according to Weber.

    “If you have already increased pay, do you think you are going to go to your employees and take the raises back?” she asked. “My guess is you are not going to do that. Think about the employee relations nightmare. They are going to be particularly unhappy with you because they may have already spent money based on the increase.”

    Another factor that mitigates against reversing a change already in place, according to Weber, is if the injunction gets unwound and the rule comes back into play, the employer would have to re-implement all those pay changes again.

    “The one thing we know for certain is employees don’t like change,” she said. “If you are going to change their salary three times over the next 12 months, they are not going to be happy. So for the most part, we don’t think this is a viable option for most employers.”

    Weber said employers in Group 1 also face problems if they attempt to restore the exempt status to those employees who they have reclassified as non-exempt. However, employers may have an easier time restoring the exempt status if the employees were unhappy with their reclassification due to the natural decrease in schedule flexibility, the need to keep track of their hours worked and perceived lack of importance. Many employees who were reclassified expressed that they felt like being treated as a non-exempt employee was a step back in their careers.

    “If you want to, you could restore the exempt status,” she said. “To that group of employees, you could explain what has changed and why the rule did not take effect and that you are going to restore their exempt classification. My thinking is most of this group will probably accept the change.”

    In terms of workers who have been reclassified due to questions regarding duties, Weber said an employer can rewind the tape and restore the exempt status of these employees. However, that’s risky because if the employer was concerned that the worker didn’t meet the duties test, and if it turns out that the worker didn’t and still doesn’t meet the duties test, then the employer continues to face potential accrual of liability for unpaid overtime due to the misclassification. When you have a mix of employees, some of whom were reclassified due to not meeting the salary basis test, and some who were reclassified due to concerns about whether they met the duties test, it’s a difficult situation to address.

    In this situation, some employers are choosing to take a consistent approach and treat both groups the same, based on which group or which risk predominates the mix.  

    “It’s a matter of what you want to do, how much uncertainty you want to face with your employees, and the uncertainty about how the law is going to resolve in the end,” she said. “This is a situation where you definitely want to talk to your attorney before making a decision.”

    For employers in Group 2 who have already communicated changes in anticipation of the final rule, but have not implemented them, Weber said they can maintain the status quo or find some other interim solution.

    She said some employers in Group 2 who want to roll back the salary increases are setting up a bonus plan, whereby the employees have to earn the promised increase by meeting certain performance bonus goals.

    “There is some risk associated with doing that,” Weber said. “You create the bonus plan and you pay it out and then the rule gets reversed with a retroactive effective date. In that case you are going to have to also have to pay the increase.”

    In short, a retroactive effective date could mean you pay the same dollars twice, once in bonus and once in salary increase.
     
    Risk mitigation
    In the interim, Weber noted employers may choose not to comply with the new regulations but reduce risk by tracking hours worked, limiting hours worked to the extent practical, and issuing quick, well-planned, true-up payments in the event the injunction is reversed with a retroactive date.
    In conclusion, Weber said the critical thing is for each company to think through all of its options and to be transparent with employees about what is happening with the DOL Overtime Rule.

    The information in this article is provided as a general educational resource and is not intended to, and shall not be deemed to, constitute legal advice. For more information about the new rule, visit www.dol.gov/overtime. For specific questions concerning your situation, please contact an attorney who specializes in labor and employment law.