In a stunning development that will affect millions of U.S. businesses, a federal judge overturned a Department of Labor rule regarding overtime pay just one week before the rule was set to go into effect.
On November 22, a U.S. district judge granted a preliminary injunction stopping the implementation of a new DOL rule scheduled to become effective on December 1. This rule would have dramatically increased the number of salaried employees in the U.S. who could become eligible to receive overtime pay.
A Little Background
Earlier this year, the DOL issued a rule change that would have more than doubled the salary threshold for receiving overtime pay, raising it from $455 per week (or $23,660 per year) to $913 per week (or $47,476 per year). In addition, the annual salary threshold for determining whether certain highly compensated employees are exempt was also scheduled to rise from $100,000 to $134,004.
As a result of the change, it was estimated that more than 4 million salaried workers would have become eligible for overtime pay when they worked more than 40 hours per week. Retail and service industries and nonprofit groups would have likely borne the brunt of this change, experts predicted.
The rule would have forced many businesses to make a tough choice: Convert salaried employees to hourly status and then ensure that they don’t work overtime (i.e., more than 40 hours per week) or raise salaries up to the new threshold. Either option could easily result in double-digit labor cost increases that many low-margin small businesses simply can’t afford.
The National Retail Association estimated that 2.1 million retail and restaurant workers would have been affected by the rule. It said the rule would have been likely to “reduce job-advancement opportunities for workers, increase the use of part-time workers, and cut the hours of full-time workers.”
Also, the American Action Forum estimated that the wages of the employees affected by the rule would have actually declined by an average 0.8% and the number of hours they worked would have fallen by an average of 0.2%.
One less-publicized impact of the new rule would have been an increase in business’ payroll tax liability. This would have occurred due to companies paying overtime to more employees working more than 40 hours per week, or paying higher salaries to some employees in order to maintain their overtime exemptions.
So What Happened?
A coalition of business groups and 21 states filed lawsuits in September claiming that the salary threshold increase stipulated by the new overtime rule was arbitrary. In his ruling issued on November 22, the district judge said that the federal law governing overtime doesn’t allow the DOL to decide which workers are eligible for overtime pay based on salary levels alone.
So what’s next? The DOL says it believes the rule is legal and is currently reviewing its options, but hasn’t decided whether or not to appeal the judge’s decision. However, given the pending inauguration of Donald Trump as President – who cited this rule specifically while on the campaign trail as one of the types of burdensome business regulations he’d seek to abolish if elected — it appears doubtful that an appeal would be worthwhile.
Please give us a call if you have more questions about how this ruling might impact your business.
