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Employers, labor lawyers left hanging as judge blocks OT rule

December 28, 2016

Companies and the employment lawyers who advise them had, in many cases, worked for months planning to comply with new Department of Labor regulations affecting millions of salaried employees who are exempt from overtime pay. All they know after a judge blocked the rule is that they don’t know what’s next.

Barnes & Thornburg LLP partner Kathleen Anderson in Fort Wayne said she’s been advising clients who had been working since June to comply with new overtime rules that were set to take effect Dec. 1. She got a call from a client in November who was just getting started on the tasks of reviewing and reclassifying employees by wages and duties. “My reaction was, ‘You guys waited way too long,’” she said.

Anderson Anderson

But then two days before Thanksgiving, a Texas district court judge granted an injunction blocking the regulations that would have raised the annual income threshold for overtime-exempt salaried workers from $23,360 to $47,500.

“Joke’s on me,” Anderson quipped. “Sometimes, we end up stumbling into good fortune. … This was absolutely unexpected for me,” she said of the ruling. “I did not read those tea leaves.”

Companies that were proactive and implemented policies to comply with the regulations now may be in a worse position than those that delayed. If employers who raised salaries respond to the injunction by freezing or rolling back promised benefits, such a move could harm workplace morale.

Some lawyers said they had clients who had frozen planned changes after the judge’s ruling and others who suspended plans to enact changes. The regulation was expected to affect an estimated 87,000 Hoosier workers.

“I was scrambling and we had a number of calls before Thanksgiving from clients as this broke,” Faegre Baker Daniels LLP Indianapolis partner Ted Hollis said about news of the injunction. He said the firm put out a client alert about what the ruling meant.

Hollis Hollis

Some clients had implemented plans in response to the new regulations months ago. “We had others that were prepared to do it on Monday the 28th” of November, coinciding with the start of a payroll period.

“They were caught completely by surprise,” he said. “Others were prepared to implement on or about Dec. 1. They were also thrown for a loop. … It’s a very fluid situation. What we have seen is all over the board.”

For clients, “The frustration still exists that they put all this work into it, and now they’re dealing with all this uncertainty,” said Bingham Greenebaum Doll LLP Louisville associate Morgan Davenport. For lawyers advising them, “It’s always frustrating to not be able to say, ‘This is exactly what has to happen,’” she said.

Davenport said some Bingham clients chose to implement the regulations because they put the time and effort into becoming compliant and they feel for a number of reasons it’s too difficult to reverse course now. Although clients are waiting to see what the appellate court and the next administration does, they are leaving those changes in place until there is more certainty.

Davenport Davenport

For some, the frustration of uncertainty is compounded by the possibility of unnecessary higher costs because they tried to be proactive and implement in advance of the regulation’s Dec. 1 effective date. Davenport noted, though, that if the injunction is overturned, the rule will be retroactive to that date, and employers could be liable for private lawsuits seeking unpaid overtime for the period the regulation was blocked by the injunction.

The DOL has appealed the judge’s ruling, but even with expedited briefing that the agency requested from the 5th Circuit Court of Appeals, the matter won’t be briefed before the new administration of President-elect Donald Trump takes office.

“I think we have every reason to believe the Department of Labor may have different initiatives or may have a very different focus going forward,” said Lewis Wagner LLP partner Stephanie Cassman.

In her experience, Cassman said small and mid-sized companies were struggling with the regulation. “They couldn’t afford it,” she said. In extreme cases, she said the prospect of complying with the regulation led to layoffs.

Cassman Cassman

Rather than raising the salary threshold for exempt workers such as managers, she said employers were reclassifying them as hourly employees, shifting their job responsibilities, or requiring salaried workers to track their hours and work no overtime.

Hollis, too, doubted the regulation would take effect. In the meantime, he said companies should continue to analyze who in their organizations would be subject to a change in overtime regulation.

Cassman said that despite the uncertainty, she’s advising clients to continue tracking hours of salaried employees. Whether the new regulation ever goes into effect, she said the DOL is likely to audit in this area in the future.

Anderson suggested it’s too soon to write off the regulation. While the injunction essentially puts it in a coma, she said, the case remains alive and could come back to the district court. “Do I think there is a high chance this will go into effect in 2017 as it’s currently structured? No,” she said.

But she noted some Republicans who control Congress have suggested that there is a need to increase the OT-exempt threshold salary, but perhaps not as much as the current regulation would have.

If the Labor Department chooses to propose a new regulation, it would have to go through rulemaking again, which Anderson noted took two years for the current rule to get to this point.

For businesses, though, the uncertainty means struggling with questions based on assumptions they made that may not come to pass. “Will we assume it won’t go into effect? Do we remove it from our budget? Those are hard questions,” Anderson said.•

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