Just a couple of days before sitting down to Thanksgiving dinner with our loved ones, a federal judge blocked a groundbreaking Department of Labor rule designed to provide overtime eligibility for up to 4.2 million white-collar workers in the United States. The block was initiated only one week prior to the rule’s effective date.

The rule, one of President Obama’s signature initiatives to boost wages for salaried workers, was blocked by way of a preliminary injunction by U.S. District Judge Amos L. Mazzant III, who was nominated by President Obama in June 2014. In his recent ruling in State of Nevada, et al v. U.S. Department of Labor, U.S. District Court for the Eastern District of Texas, No. 16-cv-731, Judge Mazzant stated that the Department of Labor overstepped its authority when it issued the new overtime rule on May 18.

The overtime rule would have raised the minimum salary threshold for executive, administrative and professional employees from $455 per week to $913 per week, effective on December 1, 2016. The rule was expected to affect nearly all industries, with the most significant impacts felt by not-for-profit organizations, restaurants, hotels, and retail establishments.  For a deeper description of the rule and its unintended consequences, click here.

By increasing the salary threshold for overtime pay without modifying the duties test that is also considered for determining overtime eligibility, Judge Mazzant ruled that the Department of Labor had essentially created a “de facto salary-only test.” Such a move, according to Judge Mazzant, did not align with Congress’ original intent in determining overtime eligibility, which considers an employee’s duties in addition to their salary. Judge Mazzant stated that any such changes must be passed through Congressional action, and not by the Department of Labor alone.

Twenty-one states and numerous business groups participated in the lawsuit, and applauded Judge Mazzant’s ruling. The injunction serves as a temporary block of the Department of Labor’s overtime rule nationwide, even for the states that did not participate in the lawsuit.

The Department of Labor strongly opposes the ruling, and is currently considering what their next steps will be in this matter. It is likely that the case will be appealed to the 5th U.S. Circuit Court of Appeals in New Orleans.

What should employers do now?

It goes without saying that this news came as a surprise to many employers across the country, leaving them with many questions. After all, they had devoted significant time, money and resources to learning the new rule and bringing their companies into compliance with the new requirements, only to learn that the rule had been blocked with its future left hanging in the balance.

The injunction means that, for the time being, employers can continue to pay overtime based on the current salary threshold of $455 per week. Nevertheless, it would behoove employers to consider whether any of their employees are currently not receiving overtime under the current rules, given the amount of press this issue has received over the past couple of years. Even under the current rules, determining overtime eligibility can be a complex task, and depends heavily upon the facts and circumstances surrounding each employee’s job duties and salary level. Not paying overtime to an employee who is otherwise eligible can leave companies vulnerable to legal action and significant damages.

Any changes that businesses may have enacted to comply with the new overtime rule should remain in place.  This holds true especially if management has communicated these changes with their employees, including changes that have been made to employee compensation.  It is very difficult to undo these types of changes, and trying to do so would likely cause turmoil within an organization.

The Obama administration will surely want to resolve this matter before the President’s term ends on January 20. Assuming the case goes to appeal, it is possible that the appellate court may not reach a decision until after President-elect Donald Trump is sworn into office.

Trump recently selected Andrew Puzder, CEO of the parent company that owns the Hardee’s and Carl’s Jr. fast food restaurants, to be his Labor Secretary.  Puzder was one of the most vocal critics against the Department of Labor’s overtime rule when it was passed earlier this year.  In a Forbes op-ed he penned on May 18, 2016, he argued that the new overtime rule would unduly increase the regulatory burden on employers, while giving rise to reduced opportunities for employees to earn bonuses and promotions within their organizations. 

This move by Trump suggests that his administration may ultimately squash the overtime rule if they are left to decide its fate.  However, for the immediate future, know that this matter is not yet resolved, and we will keep you up to date on any developments that occur.

Joseph Wutz is a manager based out of our Buffalo, NY office.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.

Joseph Wutz

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