On Tuesday, November 22, 2016, Judge Amos Mazzant of the U.S. District Court in the Eastern District of Texas (a 2014 Obama-appointee) issued a preliminary injunction barring implementation of the U.S. Department of Labor’s (DOL) new rule (“Final Rule”) raising the salary threshold for certain overtime exemptions under the Fair Labor Standards Act (FLSA).  The Final Rule was set to go into effect in less than two weeks – on December 1, 2016.  The Court’s order halting implementation applies “nationwide,” i.e. to all states, and is effective immediately absent further judicial order.  It remains to be seen whether the DOL will appeal or seek other relief, or what final position it will take on the effectiveness of the order.

As we reported in prior blog posts, in May of this year, the DOL issued a Final Rule that raises the federal salary basis for exempt employees to $47,476 per year, effective December 1, 2016.  The Final Rule increases the salary threshold level for the highly compensated employee exemption from $100,000 per year to $134,004 per year, and adjusts salary levels automatically every three years.  The Office of Management and Budget estimated the new rule will extend overtime coverage to more than 4 million employees nationwide.

The November 22, 2016 Order calls the Final Rule into question.  California public and private employers will have to await further developments in the coming days to determine whether the DOL can mount an effective litigation strategy to overturn the order, or concede that it will have to forego implementing the Final Rule for the time being.

Background – The Judicial Challenge

On September 20, 2016, two federal lawsuits were filed in the Eastern District of Texas against the DOL seeking to overturn the Final Rule. The lawsuits – one filed by a coalition of twenty-one states (State of Nevada et al. v. U.S. Department of Labor) and the other filed by a coalition of business groups (Plano Chamber of Commerce et al. v. U.S. Department of Labor) – advance numerous legal theories to challenge the rule, including that the DOL failed to follow proper procedures when adopting the new salary threshold and that the automatic indexing for upward adjustments runs contrary to the terms of the FLSA. The lawsuit filed by the states also argues that the Final Rule is unconstitutional because the DOL does not have the power to dictate how state governments pay their employees and spend state resources. The states’ lawsuit argues further that the FLSA delegates too much power to the DOL and that the 1986 decision extending the FLSA to the states, Garcia v. San Antonio Metro. Transit Authority, should be overruled.  The lawsuits also ask the courts to block enforcement of the rule.

On October 12, 2016, the state plaintiffs moved for an emergency order that temporarily enjoins (or halts) the implementation and enforcement of the Final Rule pending further judicial review.  Shortly thereafter, the lawsuits were consolidated.  Oral arguments on the plaintiffs’ emergency stay were held November 16, 2016.

The November 22, 2016 Decision

To prevail on their motion for preliminary injunction, the plaintiffs were required to demonstrate a number of factors, including that there is a substantial likelihood that their case will succeed on the merits and that the plaintiffs are likely to suffer irreparable harm if the injunction is not granted.

In its evaluation of whether the plaintiffs’ lawsuit would succeed on the merits, the Court first examined plaintiffs’ argument that the FLSA has been unconstitutionally applied to the states.  Although the Court found persuasive plaintiffs’ argument that the Supreme Court’s Garcia decision may have been implicitly overruled, the Court ultimately concluded that Garcia has not been specifically overruled thus the FLSA applies to the states.

However, the Court agreed with the plaintiffs in finding that the Final Rule’s new salary threshold conflicts with the statutory text of the FLSA because it gives too much weight to the salary component of the exemption, i.e. doubling the salary threshold in effect made that test “supplant” the statutorily-mandated “duties test.”   The Court reasoned that, because the DOL promulgated regulations that conflict with the text of the FLSA, the Final Rule is contrary to Congressional intent and therefore likely to be declared unlawful.  As for irreparable harm, the Court agreed with the plaintiffs that implementation of the Final Rule would increase costs, which, for the states, means a detrimental effect on government services that benefit the public.  The Court also found that the balance of hardships weighs in favor of granting the preliminary injunction because the defendants failed to articulate any harm suffered by delaying implementation of the Final Rule.  The Court further found that the public interest is best served by an injunction because the legality of the Final Rule should be determined with finality prior to implementation.

Finally, citing, in part, to an August 2016 decision by another Texas Federal Judge that issued a nationwide injunction to ban enforcement of the Department of Education’s rule related to transgender bathroom policies, the Court determined that proper scope of the injunction is nationwide because the Final Rule is applicable to all the states.

The full text of the Order is available here.

DOL Response

In a written statement released after the November 22, 2016 Order was issued, the Department of Labor stated “[w]e strongly disagree with the decision by the court, which has the effect of delaying a fair day’s pay for a long day’s work…We are currently considering all of our legal options.”  It remains to be seen whether the DOL will appeal the order or seek other relief.  The appeal would be heard by the Fifth Circuit Court of Appeals, which is generally regarded as one of the more conservative Circuit Courts.  Moreover, it is possible that Congressional action to overturn or amend the DOL regulations will gain momentum if legislation reaches President-elect Trump’s desk with the regulation placed on hold by the Courts.

What Should Be Done Now?

The state of the law is uncertain in all regards.  Legal counsel should be consulted about steps to take.  Any employer who has been planning to raise compensation levels per the new regulations should hold off on taking concrete action pending further developments.  We will report on further significant developments as we learn them.