WASHINGTON – Employers across America are in limbo as they try to figure out how deal with the immense legal uncertainty surrounding an attempt by the outgoing Obama administration to make millions of more workers eligible for overtime pay, while placing an expensive and substantial new regulatory burden on an untold number of small businesses.

The Department of Labor’s Final Rule (Overtime), scheduled to go into effect on Dec. 1, would make more than 4 million workers eligible for overtime pay.

The new regulation would raise the threshold so that those making up to $47,476 a year would receive overtime pay, more than doubling the current cutoff of $23,660 a year.

Twenty-one states filed suit to stop what would amount to a massive new financial charge on employers, primarily small-business owners.

U.S. District Judge Amos L. Mazzant Amos issued a temporary injunction from his bench in Texas on Tuesday to keep the new rule from being enforced, but the final outcome is anything but certain.

Here’s the problem for employers:

  • The judge could overrule the administration and declare the rule invalid.
  • A federal appeals court could overrule the judge.
  • Congress could overrule the appeals court by passing a bill.
  • Soon-to-be President Trump could trump them all by having his own Labor Dept. rescind the regulation, if it does go into effect.

Raise or pay cut? 

What will happen is a big guessing game that has employers scratching their heads as they try to figure out how to deal with the new rule. The uncertainty is just as great for many employees, too.

Employers could shift some hourly paid workers to salary in order to avoid taking a big payroll hit.

Employers have also considered merely raising some employees’ wages above the $47,000 cap in order to avoid ballooning overtime payments.

Or, employers could simply cut workers’ hours so they don’t make more than the cap. In effect, that would be a pay cut.

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President Obama requested the increase in the overtime pay threshold in 2014. It would be the first update to the regulation in more than a decade.

According to the Washington Post, “When the Labor Department finalized the overtime rule in May, consumer advocates and union groups hailed the move as a major victory for low- to middle- income workers.”

Small business would be hit hardest by the overtime increase

Small business would be hit hardest by the overtime increase

However, “the rule faced stiff opposition from small businesses, states, universities and other groups who said the higher threshold would raise costs.”

The implication being, that could cause layoffs, and the intended “raise” could actually end up costing some workers their jobs.

One pie, many fingers 

The uncertainty for employers and employees all stems from the number of government entities that could determine the rule’s fate.

Mazzant was actually appointed to the bench by President Obama in June of 2014, but the judge has already ruled against the administration once before. Last month, he dismissed fraud charges brought by the Securities and Exchange Commission against Texas Attorney General Ken Paxton.

And the New York Times reported that, although Mazzant’s ruling is temporary, “the judge’s language indicated he was likely to strike down the regulation.”

The Labor Department issued a statement indicating it would strongly consider filing an appeal if Mazzant makes his temporary injunction against the administration final.

Giving the administration a glimmer of hope if it does appeal, according to Daniel Fisher, writing in Forbes, is that judge Mazzant “included conflicting statements in his ruling that the government might exploit to gain the rule a reprieve.”

He said the odds are the GOP-controlled Congress will suspend the rule regardless, but some see a flaw in the judge’s ruling that actually could encourage the Obama administration to file an appeal.

The judge decided the Labor Department exceeded its authority by raising the salary level for overtime. That was his interpretation of the 1938 Fair Labor Standards Act, or FLSA, which both established a minimum wage and made overtime pay mandatory for more than 40 hours of work in a week.

U.S. District Judge Amos L. Mazzant Amos

U.S. District Judge Amos L. Mazzant Amos

Mazzant decided the doubling of the overtime cap was likely illegal because it disregarded other tests in the law. And, he suggested the law does not give the department to establish a salary cap at all.

But, the judge also declared that even though FLSA didn’t permit a cap, he was not disputing the Labor Department’s authority to do so.

Citing a 1966 decision by the Fifth Circuit Court of Appeals that upheld Labor Dept. salary caps, Forbes quoted Gerald Hathaway, a partner at Drinker Biddle & Reath in New York, as observing that the judge ruled “his holding does not apply to historic salary level tests – just this new one.”

“And this is the fundamental flaw of the decision,” Hathaway added.

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He also observed this contradiction in Mazzant’s reasoning could prompt the appeals court to overturn the judge’s decision, should the Obama administration choose to appeal.

However, Fisher noted, the administration may be wary of taking the judge’s ruing to Fifth Circuit, “since that is the same court that upheld an injunction blocking President Obama’s plan to grant quasi-legal status to millions of illegal immigrants.”

But, in yet another twist, because the judge’s “ruling turns 65 plus years of how the law has been interpreted on its head,” Fisher suspects, “For that reason alone, I think that the decision will get the interest of the Fifth Circuit Court of Appeals, which has jurisdiction to hear an immediate appeal of the preliminary injunction issued by Judge Mazzant, and since the issues have been so thoroughly briefed, the appeals court could rely on the papers already submitted.”

Then again, it may not matter what the courts do at all.

The incoming Republican-dominated Congress could simply use the Congressional Review Act to eliminate the overtime rule. That act allows Congress to strike down any executive branch regulation enacted within 60 “session days,” which Fisher is certain “Congress is watching closely as the year comes to a close.”

And then again, it might not matter what either the courts or Congress do.

The incoming Trump administration could simply strike down the regulation or issue a new one repealing it. However, that could be politically tricky, because it could be seen as an attempt rescind a pay raise for millions of workers. It could also take months to enact the process to undo the new regulation.

A compromise might even emerge.

The Times reported, “Some business lobbyists had anticipated a legislative compromise that phased in the new limit over a longer period of time and eliminated an automatic increase in the limit every three years.”

So, for President-elect Trump, the likeliest near-term strategy would seem to be to simply wait and see how the rule fares in the courts, and, perhaps, Congress.

The bottom line?

Fisher says “employers are free to ignore it (the rule) for now.”

But stay tuned.

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