How to Proceed After Last-Minute Overtime Rule Freeze

Lisa Nagele-Piazza, J.D., SHRM-SCP By Lisa Nagele-Piazza, J.D., SHRM-SCP November 23, 2016
How to Proceed After Last-Minute Overtime Rule Freeze

A judge's surprising decision to stop the federal overtime rule the week before its Dec. 1 effective date has left many HR professionals confused about what to do next.

Judge Amos Mazzant of the U.S. District Court for the Eastern District of Texas placed a nationwide hold on the rule, leaving the existing Fair Labor Standards Act (FLSA) exempt salary threshold intact—for now.

FLSA Overtime Rule Compliance

For more overtime compliance news, tips and tools, check out the SHRM resources provided below:

· FLSA Overtime Rule Resources Guide
· Overtime Rule Blocked: Now What?
· Compliance Checklist · Infographic

The ruling is temporary, and the final outcome could depend on a number of factors, including Mazzant's final ruling in the case, a potential Department of Labor appeal and the stance that President-elect Donald Trump's administration will take on wage and hour issues.

[Update: On Dec. 1, the DOL appealed the decision to the 5th Circuit.]

"We have been telling employers to sit tight while the uncertainty persists," said Michael Arnold, an attorney with Mintz Levin in New York City. "Legally, there is nothing they have to do for now, but there are business decisions that will need to be made."

The current salary threshold of $23,660 would have been raised to $47,476 if the new rule had taken effect. Many employers had the option of raising salaries above the exempt threshold or reclassifying exempt employees to nonexempt.

What an employer's course of action is going to be may depend on how far down this path it has traveled already, according to Michael Jones, an attorney with Reed Smith in Philadelphia.

[SHRM members-only toolkit: Calculating Overtime Pay in the United States]

Regardless of how they decide to move forward, employers should have a clear communications strategy and an open dialog within the workplace, said Russell Bruch, an attorney with Morgan Lewis in Washington, D.C.

They may want to have a designated HR staffer to answer employee and manager questions alike and to ensure a consistent message, he added.

"If an employer is in a position to [reverse] changes scheduled to take effect next week, it can do so with some confidence, solely on the basis of this decision," said Gerald Hathaway, an attorney with Drinker Biddle & Reath in New York City. "Many employers, however, already have the changes teed up to go into effect next week. Those employers can send a communication to employees indicating the changes were made based on the regulation taking effect Dec. 1, but the changes will be re-evaluated as further legal developments occur."

Already Made Changes?

Some employers are asking if they are legally obligated to revert back to the current rule if they have already reclassified employees to nonexempt or bumped their salaries to comply with the higher threshold, Arnold said.

"Employers have no legal obligation to unwind the changes," he explained. "They will have to consider what costs they will incur if they do roll back the changes, including cost to employee morale and the administrative expenses. If those potential costs outweigh the possible labor-cost savings, employers may want to think twice before reversing."

Arnold emphasized that employers that do decide to reverse any changes they have already implemented can't recoup wages they already paid at higher rates.

Whether employees' salaries were raised or they were paid overtime wages in anticipation of the rule, those payments can't be taken back, he said.

If an employer has already implemented the changes, it has to weigh the pros and cons of reverting back, Jones said. From a morale standpoint, the employer may want to leave a change in place, especially if it wasn't a large increase.

In industries with tight profit margins, such as the retail and restaurant industries, employers may be at a labor cost disadvantage if they implemented the rule early and their competitors never put the changes in place, Jones noted. Absorbing costs that their competitors aren't could have a significant impact on margins, so those employers might have to think harder about whether to revert back, he said.

"Some of those employers have been planning and communicating with employees but haven't actually made changes," Jones added. "They may have to walk back the message that these changes were coming, but that's a little easier than adjusting pay back down."

On the flipside, some businesses may be less competitive if they don't put the changes in place and can't attract qualified workers because other employers in their industry already made the changes and are offering higher wages.

"In some cases, you may be in a business where an employee is looking for career development opportunities and would welcome being converted back to exempt," Arnold said. "That might not be the case for other businesses."

"There's no hard-and-fast rule here," he added. "It really is an employer-by-employer or industry-by-industry evaluation."

Haven't Made Changes Yet?

The injunction isn't final, and it isn't clear when the district court will make a final determination or what will happen if the DOL appeals the ruling.

"Take it with a grain of salt, but a lot of the information out there suggests that the new administration is going to make some changes and may revisit the overtime rule," Jones said. "If employers haven't implemented any changes yet, they may want to wait and see what the final decision on this looks like."

He said it is impossible to know for sure, but there could be a smaller increase to the salary threshold and the implementation could be phased in over time.

Employers in states like New York and California need to consider pending laws that will increase the state salary threshold for exemption, Arnold said. Employers in those states may decide to move forward anyway in anticipation of those state-law changes.

Bruch said employers should think about the reasons they were planning to make the changes. "If an employer hasn't made the changes yet and was just doing this to comply with the law, it should probably hold off."

He suggested that employers can say, "We think you were properly classified as exempt, and we aren't going to make the change at this time."

He noted that there could be other reasons employers are implementing these changes. "They may be taking the opportunity to address misclassification issues or may simply be moving up a merit increase to Dec. 1 that was initially scheduled for Jan. 1."

Those employers might choose to move forward with the changes.

"Other employers that have already communicated the changes may want to move forward to avoid uncertainty and to be consistent with one message," Bruch said. "They might decide not to rock the boat."

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