Employers are calling their lawyers as overtime rule revisions loom

A revision to overtime rules from the U.S. Department of Labor is posing strategic challenges to employers.

Beginning on July 1, the Department of Labor will enact the first in a series of increases in the salary threshold that must be met for employees to be exempt from overtime pay under the Fair Labor Standards Act  or FLSA.

The government estimates that the July increase, and another set to take effect in 2025, will make 4 million workers newly eligible for overtime. But businesses, industry groups and the state of Texas have filed suits seeking to stop the changes. The salary level for exemption from overtime, now at $35,568 per year, rises to $43,888 on July 1 and then to $58,656 on Jan. 1, 2025.

Workers who are paid a salary, whose earnings exceed the minimum salary threshold and who perform primarily executive, administrative and professional duties, are exempt from the minimum wage and overtime protections of the FLSA.

In announcing the change, acting U.S. Secretary of Labor Julie Su said, “This rule will restore the promise to workers that if you work more than 40 hours in a week, you should be paid more for that time. Too often, lower-paid salaried workers are doing the same job as their hourly counterparts but are spending more time away from their families for no additional pay. That is unacceptable.”

But at least three suits are pending in Texas federal courts that claim the Department of Labor overtime rules violate a 2017 court order stemming from a similar action undertaken during the Obama administration.

The State of Texas, a small software company and a series of industry groups, including the National Association of Convenience Stores and the National Retail Federation filed the suits.

“The costs of compliance will force many smaller employers and non-profits operating on fixed budgets to cut critical programming, staffing, and services to the public. Many employers will lose the ability to effectively and flexibly manage their workforces upon losing the exemption for frontline executives, administrators, and professionals,” the industry groups said in their suit.

The litigation, and the chances that an injunction will be issued makes planning for the changes difficult for employers, according to Mark S. Goldstein, a labor and employment lawyer at Reed Smith in New York. Whether an injunction is issued to halt implementation of the new overtime rules is hard to predict, he said.

In 2016, when the Department of Labor proposed an increase in the overtime threshold, a federal court struck it down on the eve of the rule’s implementation, said Goldstein. But under the Trump administration the salary threshold was increased, he said.

“So it’s unclear. I think employers should monitor the litigation but have a plan in the event that an injunction is not issued before July 1, but hold off on communicating and implementing, you know until we get closer to the end of the month,” Goldstein said.

Employers are calling their lawyers for advice, but they’ve had similar experiences before, he said. “This isn’t the first time the Department of Labor has tried to increase the threshold. I think a lot of employers are familiar with the playbook,” he said.

Goldstein advises identifying any salaried positions where the compensation falls between the current threshold for overtime exemption and the level slated for implementation on July 1.

Options for those positions include re-classifying them as non-exempt or increasing the weekly salary to the new threshold, he said. Employees should have a plan ready to implement, but should hold off on announcing it, to see if the new regulation goes into effect.

Goldstein, who advises clients on how to implement such a plan, says some employers will avoid making an employee non-exempt because they want to avoid the inconvenience of having to keep track of the hours they work.

Related: DOL releases final rule increasing ‘white collar’ overtime minimum salary levels

“A lot of employees view that as a kind of effective demotion. And you have to decide, will that hurt employee morale? Obviously [there is] the economic factor if we increase the person’s salary, but there are going to be other impacts on the employee and on the business, non-monetarily, that we need to account for and those are important,” Goldstein said.

Employers ought to keep close tabs on the Texas litigation, Goldstein said. Such uncertainty is challenging but is not uncommon in employment law, he said.

“Oftentimes, employers are left between a rock and a hard place. You need to stay up to the minute on developments,” he said. “We have to be able to be flexible and pivot quite quickly, with the patchwork of employment laws at the state and local level. Certainly you need to have dedicated folks who are monitoring these developments–otherwise, you could potentially get into legal trouble.”