Overtime Rule’s Demise Has Employers Mulling Pay Raise Reversals

Businesses that took steps earlier this summer to comply with the Biden administration’s now-vacated overtime rule are left with a difficult choice: either cancel raises issued to keep employees overtime exempt or absorb the costs.

A Texas federal judge last week struck down a US Department of Labor rule that would have expanded overtime eligibility to four million new workers, finding that policy went beyond the agency’s authority. The ruling came just before its final implementation date of Jan. 1, but not before its initial phase on July 1.

Management-side attorneys say employers can legally lower salaries of workers who got pay bumps that made them ineligible for overtime, so long as they are mindful of state laws or individual contract provisions. They could also make scheduling changes to assign more hours without additional pay to workers who were made eligible for overtime under the defunct rule.

But such moves could harm morale and still invite lawsuits, they said.

“From an employee relations standpoint, you’d hate to pull that money back,” said Chuck McDonald, co-chair of Ogletree Deakins’ wage and hour practice group in Atlanta. “So that’s just the decision each employer will have to make.”

Biden Rule

Worker advocates and the Biden administration say the Nov. 15 decision will result in some of the lowest earners working longer hours while taking home smaller paychecks.

“Unless it’s reversed on appeal, the ruling means that 4 million workers earning between $35,000 and $58,000—people like assistant managers at fast food chains and dollar stores—will lose stronger overtime protections,” said Paul Sonn, state policy program director at National Employment Law Project said in a statement. “Many will be forced to work long hours, pulling them away from their families, and receive no extra pay for their hard work and dedication.”

The DOL’s rule, issued earlier this year, updated the test the agency uses to determine whether an employee should be subject to a carveout from overtime pay requirements for certain “bona fide executive, administrative, or professional” workers.

Under the Fair Labor Standards Act, workers with those job duties can be exempt from overtime pay if they are salaried and make more than a certain amount each year.

The Biden rule had sought to update the salary portion of the test to $58,656. It was set to take effect in two phases, first increasing the salary threshold for overtime eligibility to $43,888 in July then go all the way up to $58,656 in the new year prior to the Texas court ruling last week.

One million workers were estimated to have been impacted by the July 1 increase. And in its first year, the DOL estimated it would cost $1.4 billion for employers to adjust to the rule.

Salary Rollbacks

To comply with the rule, some employers either raised the salary of their staff above the salary level so they remained exempt, or made necessary staffing adjustments to ensure employees don’t work overtime.

Now that the Biden rule has been undone in court, the standard used by the DOL now reverts back to the $35,568 threshold set during the Trump administration in 2019, a level that covers significantly less workers than the Biden rule would have.

Employers legally have the green light to take back raises issued earlier this year to come into compliance with the now-defunct rule, although they do need to be aware of state law and contractual obligations, management-side attorneys say.

Employers who had determined their staff were eligible for overtime under the July 1 rule change can “now can go back in with proper notice under state law, and convert those employees back to exempt if they want,” McDonald said.

But Nisha Verma, a litigation partner at Dorsey & Whitney LLP, cautioned in a statement on the ruling that “employers should think carefully about both the market and cultural consequences of rolling back that salary amount, and also whether there may be potential contractual claims as a result.”

It would probably be a mistake for employers to try to retract raises that move people from $36,000 to $43,000, added Brett Coburn, a partner at the management-side firm Alston & Bird LLP.

“I would be very concerned about walking away from an already rolled out salary increase. You may push people into the hands of a plaintiffs’ attorney, and you may end up with a lawsuit on your hands,” he said.

Next Steps

The DOL still has the option to appeal the ruling, which leaves open the possibility of the rule being resurrected in court.

“The court’s decision to vacate this rule immediately reverses overtime protections for 1 million workers and stops a provision from going into effect in January that would have guaranteed another 3 million workers overtime when they worked it,” a DOL spokesperson said in a statement on the ruling.

The agency is “evaluating the decision in conjunction with the Department of Justice and will determine next steps in this litigation,” the spokesperson said.

Management-side attorneys note that the appeal would land before the US Court of Appeals for the Fifth Circuit, which has a conservative majority, but warned that employers shouldn’t abandon their payroll plans to stay in compliance with the rule just yet.

“Let’s breathe a sigh of relief, but it’s not over until it’s over,” said James Paretti Jr., a management-side attorney at Littler Mendelson P.C., who represented several business organizations in the litigation against the overtime rule in the Eastern District of Texas.

Regardless of what the Biden DOJ decides to do in the next few weeks, President-elect Donald Trump is expected to withdraw the government’s defense of the rule once taking office in January.

The case is Texas v. DOL, E.D. Tex., No. 24-00499.