Federal Judge Blocks New Overtime Rule

OvertimeAn increase in overtime coverage implemented by the Obama administration has been blocked by a federal judge appointed by President Obama. Judge Amos Mazzant in Texas granted a preliminary injunction that prevents the new rule from taking effect as scheduled on December 1.

The injunction was granted at the request of 21 states that did not want to increase the wages of state workers by paying overtime to employees who are presently classified as exempt. More than 50 business organizations also joined in the lawsuit.

A judge who grants a preliminary injunction will usually, but not inevitably, make the injunction permanent. The decision might be reversed on appeal, but the Trump administration may decide to drop the appeal. Alternatively, Congress may take action that would prevent the rule from taking effect regardless of the judicial outcome.

The New Overtime Rule

With the exception of “exempt” employees, any person who works more than 40 hours in a week for an employer is entitled to overtime pay under federal law. States have their own overtime laws, but most employees are entitled to benefit from the federal overtime rule unless state law is more favorable.

Exempt employees are paid a salary rather than an hourly wage. The exemption of those employees from overtime recognizes that they are well compensated, in part because they are expected to work as many hours as the job requires in exchange for their salary.

The standards that determine whether an employee is exempt from overtime can be complex. As a general rule, an exempt employee has the kind of discretion and authority that are usually associated with managerial or professional employment. The first (and easiest) step in deciding whether an employee might be exempt from overtime is to ask whether the employee is paid a threshold salary. Employees who are paid less than the threshold salary cannot be classified as exempt.

The threshold salary was set at $23,660 ($455 per week) in 2004 and has not changed since then. The Obama administration increased the threshold salary to $47,476 ($921 per week). The new regulation would have required most employers to pay overtime to workers earning less than that amount, whether they were paid on an hourly or salaried basis.

The new regulation also provides for an automatic adjustment in the threshold salary that triggers overtime protection. The regulation uses a formula to determine the adjustment. The rule requires the threshold to be recalculated every three years.

Impact of the New Rule

If it takes effect, the new rule is expected to increase wages of 4.2 million workers. Some of those workers will receive a raise so that they will meet the new threshold salary. Others will receive more income because they will be paid overtime for the extra hours they work.

The increase was controversial within some parts of the business community. Some businesses contended that the increase was too great, despite the fact that the threshold had not been revised in more than a decade.

Some businesses responded to the announced rule by giving raises to key employees because it did not want to pay overtime to those employees. For example, Wal-Mart increased the salaries of its assistant managers from $45,000 to $48,500 to assure that they will remain exempt.

On the other hand, Fazoli’s had announced a plan to reclassify its 125 assistant general managers from salaried employees to hourly employees. Fazoli’s did not want to increase their pay to the threshold that would exempt them from overtime. Fazoli’s abandoned its reclassification plan after the judge blocked the new overtime rule.

Whether businesses that gave raises in anticipation of the new rule will rescind them in light of the judge’s ruling is uncertain. Lowering pay is bad for employee morale and may prompt employees to seek greener pastures.

The Judge’s Ruling

The district court rejected a claim that the new regulation interferes with the right of states to make their own overtime laws applicable to state and local employees. Supreme Court precedent foreclosed that claim, which would, if accepted, negate federal overtime law, not just the new rule, as it applies to state employees.

The court did, however, accept the claim that the new regulations exceed the authority that Congress granted to the Department of Labor. The court ruled that the law defines exempt employees in terms of their duties, not in terms of a threshold salary. The Department was granted the authority to define the duties that make a job exempt (and to revise those definitions when necessary), but the court did not believe that Congress granted the Department the authority to define exempt positions in terms of a threshold salary.

The court’s logic would suggest that the Department had no authority to set a threshold salary in 2004, yet Congress did nothing in the intervening years to change the law. That might suggest that Congress approved of the Department’s approach, or at least that it lacked the political will to change the law in a way that would have forced more low-paid workers to labor long hours without receiving overtime.

The court nevertheless granted an injunction that prevents the new rule from taking effect anywhere in the nation. The Obama administration has appealed the ruling.

The Trump Administration

The Department of Justice (representing the Department of Labor) asked the Fifth Circuit to expedite its appeal so that the validity of the new overtime rule could be resolved quickly. However, the Justice Department, now under the leadership of the Trump Administration, recently asked the Fifth Circuit to delay briefing so that the new administration can decide how to proceed.

The administration presumably opposes the rule and might be satisfied with the injunction that blocked it. If that is the case, the Justice Department might withdraw the appeal. The administration might also decide to revise the rule, although that process — which requires public comment and review — often takes years. Asking the appellate court to dismiss the appeal would be simpler. On the other hand, having campaigned as a champion of the working class, President Trump may decide that failing to support the new overtime law would be difficult to explain to the voters who elected him.

President Trump's first choice to become Secretary of Labor, Andy Puzder, had criticized the new overtime rule prior to his nomination. Puzder withdrew his nomination after Senate Republicans began to question his fitness for the Cabinet position. His replacement, Alexander Acosta, is a less controversial choice. Acosta's opinion about the challenged overtime rule will likely be the subject of questioning at his confirmation hearing.

Republicans in Congress are committed to repealing the overtime increase, based on the assumption that it will increase business costs that will be passed on to consumers in the form of higher prices. Some analysts suggest that, with corporate profits at nearly an all-time high, businesses can afford to pay their employees more while competition might restrain price increases that might otherwise flow from salary increases. Given that Republicans are now in control of both the legislative and the executive branch of government, however, it seems unlikely that the overtime rule will take effect any time soon.

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