Is Costly Obama Overtime Rule Facing Extinction?

department-of-labor-logoAs the Obama era makes its exit, many recent regulations also may be on their way out as well. Among them: a Department of Labor rule that would expand eligibility for overtime pay for over four million currently salaried workers. On November 22, a Texas federal court, in response to challenges filed by 21 states and several business groups, issued a preliminary injunction blocking enforcement. “The State Plaintiffs have shown a likelihood of success on the merits because the Final Rule exceeds the Department’s authority,” concluded the court. Should the DOL not appeal, either the Trump-led DOL will withdraw the rule or the new Congress will repeal it. Either way, employees and employers would be better off. Had the rule gone into effect as scheduled on December 1, some unwelcome problems would have erupted.

Union Corruption Update has analyzed the overtime regulation and its likely consequences on three previous occasions. Back on March 13, 2014, President Barack Obama issued an executive order directing the Labor Department to develop a regulation to raise the $23,660 a year ceiling for overtime eligibility on behalf of salaried workers. That threshold had been in effect since 2004. Salaried employees making between these figures would be converted to hourly status to become eligible to be paid time-and-a-half wages for hours worked in excess of the 40-hour week. “Overtime is a pretty simple idea,” Obama said at a White House signing ceremony. “If you have to work more, you should get paid more.” The initiative was part of a campaign to reduce income inequality. Several weeks earlier, during his State of the Union Address, the president said: “Inequality has deepened. The cold, hard fact is that even in the midst of a recovery, too many Americans are working more than ever just to get by, let alone get ahead.” That February, Obama signed an executive order raising the minimum wage of employees of federal contractors from $7.25 an hour to $10.10 an hour, a partial victory in his quest for a $10.10 an hour overall federal minimum. He also proposed broadening eligibility for the Earned Income Tax Credit.

Organized labor and its allies were elated over the prospect of a hike in the salaried employee overtime bar. “It is time to update those (overtime salary threshold) levels and index them to prevent more and more workers from losing overtime protection every year,” noted the AFL-CIO on its website. Business groups took a different view. Eric Reller, spokesman for the National Federation of Independent Business, remarked: “The president’s plan to increase overtime pay demonstrates another anti-business policy – coming on the heels of a proposal to increase the minimum wage, increase the minimum tipped wage, rising health care costs, as well as ever-growing, costly and unwieldy regulations.” David French, senior vice president of government relations for the National Retail Federation, similarly noted: “Just on the surface, this looks like an enormous new administrative burden.”

The Labor Department’s Wage and Hour Division went to work on a preliminary rule. On June 30, 2015, the department released a Notice of Proposed Rulemaking, triggering an avalanche of nearly 300,000 public comments. Finalizing the rule would be no cakewalk. But the big day eventually came. On May 18 of this year, the DOL published the final rule. It would raise the annual income threshold for overtime eligibility among salaried workers to $47,476, slightly more than double the existing $23,660. A worker with a base salary of $35,000 or $45,000, for example, would be paid on an hourly basis in order to obtain overtime eligibility. An estimated 4.2 million employees overall would be affected. The rule also: contained a cost-of-living adjustment every three years; applied to businesses with at least $500,000 in annual sales; and established a new threshold for “highly compensated” employees of $134,004, up from $100,000.

On the surface, the rule change seemed overdue. After all, the income threshold hadn’t been raised in a dozen years. And paying salaried employees at the overtime rate for overtime hours worked seemed like the fair thing to do. But like so many other forms of government wage-setting, a mandated salary-to-wage conversion has serious design flaws. Employers would have plenty of incentive to skirt around the mandate either by reducing base pay, cutting scheduled hours or reclassifying workers as contractors. Affected workers also would have less flexibility in scheduling. Younger salaried employees in particular might see their career advancement hindered. Overtime-related lawsuits, which for years have risen substantially, more than ever would clutter the courts.

Sen. Tim Scott, R-S.C., and Rep. Tim Walberg, R-Mich., anticipated the future. And they sought to avoid it. This March 17, two months before the announcement of the final rule, the two lawmakers introduced the Protecting Workplace Advancement and Opportunity Act (S.2707, H.R. 4773) to nullify the rule and require the Labor Secretary to assess the impact of any future rule changes on small businesses. The legislation would be in accordance with the Congressional Review Act of 1996, which gives the House and Senate a window of opportunity of 60 days of continuous session to pass a joint resolution of disapproval following any rule taking effect.

The judicial front also saw action. On September 20, officials in 21 states filed suit in U.S. District Court for the Eastern District of Texas to enjoin the Department of Labor from enforcing the overtime rule. Led by Attorneys General Ken Paxton (Texas) and Adam Laxalt (Nevada), the lawsuit challenged the rule on grounds that it usurps congressional authority and invites job losses. In a prepared statement, Paxton said: “Once again, President Obama is trying to unilaterally rewrite the law. And this time, it may lead to disastrous consequences for our economy.” Filing a complaint of their own was a broad coalition of business groups. The court consolidated the two cases in October.

With the December 1 launch date approaching, the suit got top priority. In seeking a temporary injunction, the plaintiffs argued before U.S. District Judge Adam Mazzant III that Section 213(a)(1) of the U.S. Code excludes executive and administrative workers from minimum wage and overtime rules; thus, the Labor Department had exceeded its authority. The plaintiffs also argued that the rule would pose irreparable harm to the public because its costs would deprive people of essential government services. On November 22, Judge Mazzant, though an Obama appointee, sided with the plaintiffs, issuing a temporary injunction against enforcement. He wrote:

To be exempt from overtime, the regulations require an employee to: 1) have [executive, administrative or professional] duties; 2) to be paid on a salary basis; and 3) meet a minimum salary level…The salary level was purposefully set low to “screen out the obviously nonexempt employees making an analysis of duties in such cases unnecessary”…But this significant increase to the salary level creates essentially a de facto salary-only test.”

As the injunction is temporary, it does not deal with the merits of the case. But that latter issue may be on the near horizon. The Labor Department explained its position this way: “We 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 for millions of hardworking Americans. The department’s overtime rule is the result of a comprehensive, inclusive rule-making process, and we remain confident in the legality of all aspects of the rule.” Other backers expressed dismay as well. Ross Eisenbrey, vice president of the Washington, D.C.-based Economic Policy Institute and a key influence on the regulation, termed the ruling “a disappointment to millions of workers who are forced to work long hours with no extra compensation.” The AFL-CIO termed the ruling “shocking and wrongly decided,” one that “ignores 78 years of precedent.”

Employer groups, by contrast, see the ruling as common sense. “The restrictive nature of the final rule ignores the diverse business models across industries in terms of how employees are compensated,” remarked Karen Kerrigan, president of the Small Business & Entrepreneurship Council. “We are glad the court will give this rule the fair hearing it never received from DOL regulators.” Similarly, argues Juanita Duggan, head of the National Federation of Independent Business: “This is a victory for small business owners and should give them some breathing room until this case can be properly adjudicated.” And Randy Johnson, senior vice president for labor policy at the U.S. Chamber of Commerce, was “very pleased” with the court ruling. If implemented, he said, the overtime rule would have “caused many disruptions in how work gets done” and “reduced workplace flexibility, remote electronic access to work, and opportunities for career advancement.”

So where do things go from here? The Labor Department very likely will appeal the case on merit. Yet a win will not be easy. The U.S. Fifth Circuit leans conservative. And Judge Mazzant indicated in his ruling that the decision to institute the mandate ultimately lies in the hands of lawmakers. “If Congress intended the salary requirement to supplant the duties test,” he wrote, “then Congress and not the Department, should make that change.” The substantive issues, moreover, aren’t going to change. Affected employees will lose scheduling flexibility. Many will see cuts in base pay and/or scheduled work hours. And they will have an extra incentive to challenge their job classification. Legal actions also will increase, especially as they relate to defining employee “primary duties.” Richard Alfred, lead attorney for the wage and hour practice group at Chicago-based Seyfarth Shaw, sees “a perfect storm for new lawsuits.” Employers in turn will have more reason than ever to outsource job classification to consultants in order to protect themselves from aggressive overtime-related lawsuits. The Obama administration may see the new rule as giving the middle class a raise, but the results might leave a lot of workplaces feeling low.