On Nov. 22, 2016—just 10 days before the rule was scheduled to go into effect—U.S. District Judge Amos L. Mazzant entered a nationwide preliminary injunction preventing implementation of the Department of Labor’s (DOL) final rule increasing the minimum salary level required to qualify as exempt under the Fair Labor Standards Act (FLSA)’s overtime rules. Many in the construction sector may be breathing a collective sigh of relief as the so-called “White Collar Overtime Exemption” may have significantly impacted the industry.
The discussion regarding increasing the threshold for overtime exemptions began in 2014 with President Obama’s directive that the Secretary of Labor review and “modernize” the current overtime regulations for “executive, administrative and professional employees.” At the time, the DOL estimated that almost 5 million additional white collar workers would be subject to overtime pay rules due to the proposed increase in the exemption amounts, resulting in between $1.18 billion and $1.27 billion in annual additional wage costs for employers. Following its publication of the proposed rule for comment, the DOL received more than 293,000 comments, including comments from businesses and state governments.
The biggest change included in the Final Rule (published May 23, 2016) was the salary level increase for overtime exemptions from $23,660 per year to more than double at $47,476 per year. Accordingly, under the Final Rule, employers are required to pay time-and-a-half to salaried workers who earn less than $47,476, work more than 40 hours in a week, and work primarily executive, administrative and professional duties. Additionally, the Final Rule provided that the minimum salary levels will automatically increase every three years commensurate with the 40th percentile of weekly earnings of full-time salaried workers in the lowest wage census region in the U.S. (currently the southern half of the country).
Those in the construction industry have been particularly vocal given the potential impacts on the costs of doing business in a recovering market. As one National Association of Home Builders economist commented in 2015, the Final Rule would affect at least 116,000 supervisors in the construction sector nationwide. In addition to those in supervisory roles, the Final Rule would also apply to administrative staff and trade association employees. While the magnitude of the impact would have varied from state-to-state, economists estimated that 48 to 60 percent of construction supervisors in some of the most economically disadvantaged states would be impacted. Increasing the application of overtime requirements could also reduce labor market flexibility and increase costs in an industry that was just starting to get back on its feet. With labor availability one of the biggest challenges facing contractors, the rule would only tighten the squeeze on this already limited resource.
Likely in response to objections from its citizens, and with the Final Rule originally scheduled to take effect December 1, 2016, 21 states filed suit against the DOL seeking to enjoin implementation of the Final Rule. The States’ primary argument was that the FLSA’s overtime rules violate the Constitution by regulating the States and coercing them to adopt wage policy choices that adversely affect the States’ priorities, budgets and services. Moreover, the States argued that compliance with the Final Rule would cost millions of dollars in the first year, adversely impacting businesses of all sizes and shapes. Finding the States’ arguments persuasive, and questioning whether the DOL had the authority to promulgate the rule in the first place, the Court granted the injunction. The Court noted, however that the injunction would only preserve the “status quo,” and that the Final Rule would be deemed valid and enforceable if the Court ultimately determined at a later date that the DOL did in fact have authority to make and issue the Final Rule.
With no guidance from the Court on when it will reconsider the DOL’s authority to promulgate the Final Rule, employers should plan accordingly, considering which of its employees would be considered “white collar” employees under the Final Rule, and the likely impacts on the costs of doing business.