A federal court in Texas put a hold on the implementation of the U.S. Department of Labor’s overtime rule.  That rule, which was scheduled to take effect on December 1, 2016, was intended to expand significantly the number of employees entitled to overtime pay under the federal Fair Labor Standards Act.  However, the court postponed that effective date until it can fully consider whether the Department is authorized to promulgate the rule’s increases in the salary-based exemptions.

The Department of Labor has for decades used a salary test as well as a duties test to determine whether certain “white collar” employees are exempt from the minimum wage and overtime protections of the federal Fair Labor Standards Act.  The Department’s latest rulemaking (addressed in this prior CFS Review blog post) would significantly raise the minimum salary level required for an exemption, making an estimated additional 4.2 million employees eligible for the Act’s protections.

However, last week a court held that plaintiffs challenging the rule have a “substantial likelihood of success on the merits,” and otherwise are entitled to a preliminary injunction.  Judge Amos Mazzant of the U.S. District Court for the Eastern District of Texas stated that Congress intended the white collar exemption to depend on an employee’s duties rather than his or her salary.  The Department has significant leeway to establish the types of duties that might qualify an employee for the exemption, but the judge wrote that the Act does not authorize the Department to rely upon a minimum salary level.  The court stated that the Department’s rule would raise the salary level so high that the salary test would effectively supplant the Department’s duties test, and that doing so exceeds the agency’s authority.  With that, the court ordered that the Department is prohibited from implementing or enforcing the rule, pending further order of the court.

Many employers, including providers of consumer financial services, may have spent the past several months trying to come into compliance with the rule, by considering whether certain employees must be reclassified as nonexempt, or otherwise revising those employees’ compensation arrangements to maintain their exemption.  The court’s ruling does not prohibit employers from continuing with those implementation plans, although in the end it is unclear whether those efforts were necessary.  The extent to which the Department may rely on a salary test for those exemptions in the future may also be up for further debate.  This uncertainty will remain until the court issues a final ruling and any appeals have run their course.  In any case, employers must still comply with overtime requirements under applicable state law, which may apply more broadly than the federal Act and the Department’s rule.