A federal court put a hold on implementation of the United States Department of Labor’s new overtime rules set to take effect December 1.  Here is how to understand the case and its impact.

Twenty One States Fought Implementation of the Overtime Rules

The State of Nevada and twenty other states filed suit in the Eastern District of Texas to stop implementation of overtime rules set to take effect December 1.  By now most businesses are aware of the proposed rule passed in May 2016 which was set to take effect on December 1.

Here’s what happened in developing the overtime rules.

On March 23, 2014, President Obama issued a memorandum directing the Secretary of Labor to “modernize and streamline the existing overtime regulations for executive, administrative, and professional employees.” 79 Fed. Reg. 18, 737.

The reasoning was that the salary level test had not changed since 2004 when it was set at $23,660 annually.  The Department of Labor held public comments and adopted a new rule on May 23, 2016 raising the salary level test to $47,892 annually and establishing an automatic increase every three years based upon the 40th percentile of weekly earnings in the lowest wage region of the country.

Twenty one states filed suit to prevent implementation of the new rules.  Over 50 business organizations also filed suit in a separate action which was joined with the States’ lawsuit.  Both argued the economic impact would be severe and the Department exceeded its rulemaking authority.

Here’s the problem with the overtime rules

The States had a problem with federal government overreach which they claimed violated the 10th amendment.  The Federal Judge appreciated that argument but current US Supreme Court rulings make it clear the States lose.  However, the problem for both the States and business organizations was the economic impact.

Prior to this rule a business of any size could establish job duties for executive, administrative and professional employees and set a salary.  Many key administrative professionals in small businesses earn a salary below $47,892 a year.   Think of a youth director at your church (pastors are exempt from these rules).  Most small churches simply can’t pay that salary.

Effective December 1 the youth director would have to be paid that amount or be moved to an hourly position and paid overtime for any week in which the youth director put in more than 40 hours.  Mission trips, youth outings, Easter, Christmas – the overtime would crush a small church.  The same was true for thousands of small businesses.

Here’s the impact of the overtime rules

An estimated four million workers would have received raises on December 1.  Before we call the Federal Judge Scrooge for limiting these workers allotment of coal, we should consider the impact.  Some employees who were being paid close to the new line probably did lose a pay increase.  Most, however, would have lost full-time employment.  Employers would move them to an hourly status and likely cut hours to avoid the impact of overtime.

Certainly every employer should strive to fairly compensate employees.  One of the best ways to maintain good employees is through appropriate compensation, but mandating a doubling of the salary test threshold was going to have negative consequences.  Sadly many businesses in preparation of December 1 spent a lot of money in webinars, classes and on lawyers developing new HR policies and position descriptions to comply with the anticipated new law.

Here’s what to know now about the overtime rules.

The Federal Judge issued an injunction stopping the new rules.  The new rules are not going into effect.  You will operate as you always have in the past.  The Judge ruled the Department had the authority to define the scope of roles established by Congress, but not the amount of compensation.  So the agency can determine what constitutes an executive, administrative or professional, but not what that person should be paid.

As stated by the Court, “If Congress intended the salary requirement to supplant the duties test, then Congress, and not the Department, should make that change.”

For the foreseeable future the new rules are dead.

Mandates often create unintended consequences.  I agree with the reasoning of the court.  However, I also agree that a full-time salary of $23,660 may be lawful, but it certainly isn’t ideal.   For the four million workers impacted, I hope employers will make their best efforts to provide raises.

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