U.S. employers have spent months adjusting employee schedules, job duties and pay ahead of a new overtime rule set to take effect next week. But an order from a federal judge on Tuesday puts the fate of the rule into question.
The preliminary injunction essentially halts the implementation of a rule that would have required employers to start paying overtime to workers earning salaries of less than $ 47,476 a year, making millions more workers eligible for time-and-a-half pay.
Employers that made big changes in their workforce ahead of the rule's Dec. 1 effective date—either by raising managers' salaries to the newly set threshold for overtime pay or eliminating job categories like assistant manager—say they aren't yet planning to reverse course, while others are taking a wait-and-see approach.
The vast expansion of overtime eligibility has been one of President Barack Obama's signature achievements, intended to meaningfully raise incomes for people in front-line roles in retail, food service and beyond. But the business community objected to some aspects of the rule, and said the new salary threshold is too big a jump from the current $ 23,660, which was last updated in 2004.
Nearly two dozen states and a coalition of business groups filed two separate lawsuits to overturn the regulation, alleging that the government had overstepped its authority, including by stipulating that the $ 47,476 salary threshold would automatically increase every three years. The complaints were consolidated into a single case.
On Tuesday, Judge Amos Mazzant in Texas ruled in favor of the challengers, writing in an order that in setting the automatic salary increases, "the department exceeds its delegated authority and ignores Congress's intent."
The Labor Department said Tuesday that it is considering "all of our legal options."
"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 agency said in a statement.
The U.S. Chamber of Commerce, which led one of the suits, said it is pleased with the outcome. "If the overtime rule had taken effect, it would have resulted in significant new costs," disrupted work and reduced workplace flexibility, said Randy Johnson, a senior vice president at the Chamber.
Even without court action, the fate of the rule was far from assured. It could face a strong challenge from President-Elect Donald Trump, who has vowed to roll back business regulations.
Business owners large and small have shuffled staff and raised pay for some employees—changes that may be difficult to walk back.
Wal-Mart Stores Inc. increased the salaries of its assistant managers and certain other managers to $ 48,500 from $ 45,000 recently, ensuring the retailer won't have to pay them time-and-a-half for working more than 40 hours a week. A company spokesman wasn't immediately available for comment.
Meanwhile, Evan Kelamis, chief executive of the Savoy Restaurant in Tulsa, Okla., had promoted one hourly employee to a salaried management job, giving him a raise of roughly $ 15,000 to avoid paying overtime under the new rule.
Had the threshold increase been smaller, "we might have been able to put two individuals on a management salary, which would have helped us grow our leadership team," he said. The manager at the roughly 25-employee restaurant will take on early shifts and extra hours to justify the raise.
Some businesses were still struggling over the rule's finer points this week. Kevin Rhodes, chief executive of FMI, an Allentown, Pa.-based contract manufacturer, had been sorting out which of his 81 workers would be affected by the rule, but that's on hold.
"We are just going to stay put and not make any of those changes until we figure out what the ruling is," Mr. Rhodes said on Tuesday. "In this case, waiting to do things until the last minute actually benefited us."
Fazoli's's Chief Executive Carl Howard said his restaurant chain had planned to make its 125 assistant general managers hourly employees, creating a six-figure bonus pool to reward them for keeping overtime costs in check.
Reached Tuesday, he said the company will leave assistant general managers as salaried employees and won't go forward with the bonus pool "because it's irrelevant now."
Accounting firm JLP CPAs in recent months moved its nine salaried staff accountants and bookkeepers to hourly pay and hired three part-timers to limit overtime costs when tax season starts Jan. 1.
For Darius Burnette, a JLP accountant who normally works a 45-hour week, the new arrangement has brought a fatter paycheck but less flexibility. "I like making more money for the same work I was doing," said Mr. Burnette, whose take-home pay is up about 20%. As an hourly worker, he isn't paid for days—or hours—he doesn't work.
Speaking before the judge issued his decision, JLP partner Paul Pahoresky said he would be reluctant to take any steps that might lower pay or morale should the rule disappear. "The challenge is you can't go back," he said.
Write to Melanie Trottman at melanie.trottman@wsj.com and Ruth Simon at ruth.simon@wsj.com
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