The New Rule

In May 2016, the Department of Labor, under the direction of President Obama, issued a final rule updating the overtime provisions of the Fair Labor Standards Act.  The Department raised the minimum annual salary for employees exempt from overtime pay from $23,660 to $47,476.  The Department set December 1, 2016 as the effective date for the new rule, implementation of which would have affected over 4 million employees.

Underlying the new overtime rule is the desire to protect workers from being over-worked and under-paid.  As the United Food and Commercial Workers union stated in 2015, the previous threshold of $23,660 is below the poverty line, and reflects only one salary threshold increase since 1975.  As long as employers could classify their workers as “managers,” they could avoid paying them overtime.  The new rule would have required employers to either raise the salaries of low-level managers to meet the $47,476 threshold, or reclassify them as hourly employees entitled to overtime pay.  It was intended to encourage employers to spread employment, and hire multiple workers to perform a job rather than forcing a single worker to work 70 hours a week.  Critics argue the rule would hurt small businesses and reduce jobs.

As many employers were making changes to come into compliance with the new rule by the approaching December 1 deadline, a federal judge in Texas ordered a preliminary injunction barring nationwide enforcement of the rule.  A number of private business groups and 21 states had challenged the rule as an overreach of executive power.  The district judge agreed, claiming Congress, not the Department of Labor, should be responsible for making changes to the minimum salary requirement.

Employer Responses

Given the timing of the injunction on November 22^nd—issued less than two weeks before the effective date of the rule—workers have been left in a state of confusion.  The new FLSA rule was expected to have the greatest impact on non-profits, retail, hotels, and restaurants.  While the rule is currently enjoined, its impact can still be seen across a number of industries.  Korn Ferry Hay Group conducted a survey shortly after the injunction was issued, in which it reported 56% of employers still planned to comply with the new FLSA regulations.  65% of employers that had already planned to increase threshold salaries for exempt employees said they would continue to do so.  According to the vice president of compensation strategy at Salary.com, 40% of their corporate clients raised salaries or reclassified workers in anticipation of the new rule.

Walmart was one of the largest employers leading the charge, which raised salaries for entry-level managers from $45,000 to $48,500 in October.  Kroger, a supermarket chain, also said it would go forward with its planned increases, because it was “the right thing for us to do for our people.” While raising salaries just above the threshold likely began as the most cost effective way to comply with the new rule, it is significant that a number of large employers have maintained these changes.  For those companies that had already promised salary increases, going back would not only negatively impact workers’ lives, but “would be hugely damaging from an engagement and productivity perspective,” said Brian Kropp, HR practice leader at CEB.  Kropp suggests this means even more workers will benefit, because other companies may also to raise salaries in response to market demands if their competitors are providing better offers.

But not all employers see it this way, and many are holding off or turning back on promises to raise salaries.  Employees at the University of Maryland and Arizona State University were told their employers were not moving forward with pay increases given the district court ruling.  Representatives of Carrolls Restaurant Group, which owns over 700 Burger King franchises, and JAE Restaurant Group, which owns over 175 Wendy’s franchise, reported by phone that they were also holding off making changes due to the injunction.

Larger companies that already made moves to implement large-scale pay changes before December 1 may feel compelled to move ahead, given pressure from their employees and the media.  Others, especially those who believe their employees were unaware of their rights, may be more likely to keep quiet until the litigation is resolved.  In a series of phone interviews for Slate, a number of companies indicated they believed their employees were largely unaware of the scheduled pay increases, which they cited as a justification for delaying compliance under the court ruling.  Representative Steve Chabot of Cincinnati, in speaking out against the rule, echoed the argument of many opponents that “the vast majority of employers want to treat their employees well,” and thus regulations to project employee salaries were unnecessary.  The disparities in compliance with the rule seem to conflict with this statement.

Looking Ahead

The fate of the overtime rule remains uncertain under the Trump presidency.  Under the Obama administration, the Department of Labor appealed the preliminary injunction to the Fifth Circuit in December.  The Trump administration was then granted an extension until May 1 to file their reply brief.  In the meantime, a number of possibilities remain.  The district court could issue a final ruling on the summary judgment question before the appeal.  The Trump administration could decide to no longer defend the rule, to repeal it, or replace it.

President Trump promised in August to roll back the overtime regulations, claiming they would harm small businesses.  Shortly after Andrew Puzder withdrew from consideration for Secretary of Labor, Trump announced Alexander Acosta as the new nominee.  Some reports have called Acosta, the current Dean of Florida International University College of Law, a more “conventional” choice and viewed the change as a success.  AFL-CIO President Richard Trumka said “unlike Andy Puzder, Alexander Acosta’s nomination deserves serious consideration.”

However, it is still not clear that Acosta would defend the Obama administration’s overtime rule.  Allied Progressive Executive Director Karl Frisch criticized Acosta as someone who would not likely fight for workplace safety and fair wages.  According to Bloomberg BNA, some Republicans have discussed replacing the rule with a more modest proposal, raising the threshold salary to $35,000.  Gregory Jacob, former DOL solicitor and friend of Acosta, thinks this is unlikely and he is more apt to withdraw the rule by publishing notice in the federal register.  Catherine Ruckelshaus, general counsel for the National Employment Law Project, points out that a positive court ruling would make it difficult for President Trump to repeal, given that a repeal would have to go through notice and comment.  Furthermore, continuing with the litigation presents “a tension between whatever desire they have to invalidate the rule and accepting a legal theory which… reduces their rulemaking authority,” says Sachin Pandya, employment law professor at the University of Connecticut.

Even if the rule goes undefended or is withdrawn, it is still having an impact.  Slightly over half of affected employers appear committed to compliance, and it is possible others will face market pressure to join.  In the end, employer compliance may depend on raising awareness among employees and on the efforts of consumers and the media to call out large corporate employers who do not raise salaries.