New Federal Overtime Rule Faces Roadblocks

New Federal Overtime Rule Faces Roadblocks

The holiday season is when many employers announce raises, bonuses, and other increases in compensation. This holiday season, millions of workers were going to become newly eligible for overtime under the Department of Labor’s new overtime rule. However, a Texas federal judge recently blocked the new federal overtime rule from going into effect. Now, it is uncertain whether the overtime rule will be invalidated altogether. Many workers who were expecting a pay bump under the Department of Labor’s new overtime rule will have to wait for a raise that may never come.

Under the Fair Labor Standards Act (FLSA), the federal law governing minimum wage and overtime in the United States, there are three factors that must be generally satisfied in order for an employee to be properly classified as exempt from payment of overtime compensation for hours worked over forty in a week. First, an employee must satisfy the salary basis test, which generally means that their pay cannot be reduced based on variations in the quantity or quality of their work. Second, the employee must be paid at least a minimum salary (salary level test). Finally, the employee must perform executive, administrative, or professional duties (duties test). (There is also a computer employee exception for computer systems analyst, computer programmer, software engineer, or other similarly skilled worker who perform certain computer-related tasks, who need not meet the salary basis test but must be paid at least $27.63 an hour.)

Under the old overtime rule, individuals making as little as $23,660 annually could be properly classified as exempt employees. This meant that employees making more than $23,660 were not legally entitled to payment of overtime compensation (i.e. time and one half their normal hourly rate) if they worked more than 40 hours in a week, as long as they performed executive, professional, or administrative duties. The new rule requires that employees be paid at least $47,476 annually before they can be properly classified exempt from overtime. Workers who make less than $47,476 would need to receive time-and-one-half for any hours worked in excess of 40 hours a week.

However, a Texas court recently decided that the federal Department of Labor did not have the authority to set a minimum salary level for the FLSA overtime exemption. Instead, the court held that Congress intended for the Department of Labor to define only the duties of executives, administrators, or professionals. If the court’s reasoning stands, it is possible that one prong of the exemption test—the salary level test—could vanish altogether.

The Texas court issued a preliminary injunction, which only prevents the federal overtime rule from going into effect temporarily. The court has not yet made a final ruling on the overtime rule. However, the court’s decision granting the preliminary injunction does not bode well for the new rule, as it holds that the states opposing the new overtime rule have a likelihood of succeeding in permanently striking down the rule. The Department of Labor has appealed the judge’s decision to the Fifth Circuit Court of Appeals.

For those employees living in California, California state law still applies, which has its own salary level and duties test. For example, employees in California must earn a salary that is at least two times the state minimum wage for full-time employment. That makes the current California salary floor $41,600 annually. This will increase to $43,680 on January 1, 2017, when the minimum wage increases to $10.50 an hour (for all employers employing 26 or more workers). Additionally, California requires that in order to be properly classified as exempt, an employee must spend at least 50% of his or her time on exempt duties.