On November 15, 2024, a federal district court in Texas struck down a U.S. Department of Labor (“DOL”) rule that would have significantly increased the minimum salary threshold for overtime exemption as an administrative, executive, or professional employee (otherwise known as “white collar” exemptions). The Court found that the DOL exceeded its rulemaking authority by attempting to enact such a drastic increase in the minimum salary threshold for overtime exemption. The Court’s ruling vacates the entire rule on a nationwide basis, including salary threshold increases required by the rule that had already taken effect in July 2024.
Background on Overtime Exemptions
Generally, the Fair Labor Standards Act (“FLSA”), the federal wage and hour law, requires employers to pay employees a premium rate of pay for overtime, i.e., time-and-a-half their regular rate of pay for hours worked over forty in a week. But, the FLSA also exempts some executive, administrative and professional employees from this overtime pay requirement. Relevant here, these “white collar” employees may be exempt if they satisfy three criteria:
- The employee is paid on a salary basis, i.e., a fixed, predetermined salary, regardless to the amount of work performed during the week;
- The employee primarily performs duties that qualify as administrative, executive, or professional as defined by the DOL; and
- The employee earns the minimum salary determined by the DOL.
The DOL’s 2024 final rule, explained in more detail below, intended to increase the salary amount established by the third criteria—the minimum salary an employee must earn to be classified as exempt from overtime. The rule would not have affected the first two criteria, i.e., the salary basis and duties requirements.
The DOL’s Final Rule
The DOL’s final rule, which was published in April 2024, intended to increase the “white-collar” exemption salary threshold in two steps. First, the rule raised the salary threshold from $684 per week ($35,568 annually) to $844 per week ($43,888 annually), effective July 1, 2024. A second increase, which was scheduled to occur on January 1, 2025, would have raised the salary threshold to $1,128 per week ($58,656 annually).
The rule also increased the “highly compensated employee” salary threshold from $107,432 annually to $132,964, effective July 1, 2024. Another increase to $151,164 would have taken effect on January 1, 2025.
Under the rule, the minimum salary thresholds for both the “white collar” and “highly compensated employee” exemptions would have also increased automatically every three years to keep pace with current earnings data beginning on July 1, 2027.
The Court’s Decision
The Court found that an employee’s job duties, rather than an employee’s salary, are the most important determinant of whether the employee qualifies as a “white collar” employee exempt from overtime pay. According to the Court, such a drastic increase in the minimum salary threshold effectively elevated the salary threshold test above the duties test. The Court found this was impermissible because the text of the FLSA focuses on the duties an employee earns, rather than salary. While the amount of salary may be considered in determining whether an employee qualifies as an administrative, executive, or professional (i.e., “white collar”) employee, the Court found that this salary test should not predominate over the duties test.
In reaching its decision, the Court noted that the January 1, 2025 increase would have been 65% higher than the salary level in place before the 2024 final rule. Further, approximately 4 million workers considered exempt before the final rule was issued would have been rendered non-exempt, and, therefore, eligible for overtime pay under the January 1, 2025 increase. The Court found that such a “sweeping change” borne from a focus on salary, rather than employee duties, exceeded the DOL’s authority under the FLSA. Likewise, the Court found that its analysis applied equally to the rule’s salary threshold increases for “highly compensated” employees.
Additionally, the Court struck down the rule’s provision for automatic triennial increases to the salary threshold. The Court found that federal law required future increases to the salary threshold to proceed through a formal rulemaking process, and not automatically by operation of a prior regulation.
Due to the broad impact of the rule on employers and millions of employees, the Court held that the rule must be overturned on a nationwide basis.
Looking Ahead
The DOL has the right to appeal the district court’s decision to the Fifth Circuit Court of Appeals. But, there is little reason to believe an appeal would be successful. To begin with, the Fifth Circuit is regarded as the most conservative appellate court, meaning it is likely to agree with the district court’s decision here overturning an ambitious regulation implemented by the Biden DOL. Further, the pending change in Presidential administrations all but ensures that the DOL will not continue to pursue an appeal of a Biden-era rule after January 20, 2025.
It is possible the next Trump administration might consider a less drastic salary increase on its own terms. But, that is a question for the future. For now, the rule has been completely nullified, and the minimum salary threshold for overtime exemption has reverted to the pre-July 2024 amount of $684 per week ($35,568 annually).
Concerns for Employers
Employers who adjusted salaries in response to the July 1 increase may consider whether or not to reverse course. Many employers may choose to maintain the increased salary levels to avoid employee morale issues.
Most employers have not yet enacted the January 1, 2025 salary increase and are now under no obligation to do so. Whether employers have communicated with their employees or not regarding the now nullified January 1 increase, all employers should be prepared to answer questions on this topic.
Employers should consult with legal counsel to ensure compliance and effective communications with their employees. This is especially true if the employer is considering reversing salary increases that were previously implemented or communicated to employees. Stoll Keenon Ogden’s Labor, Employment & Employee Benefits practice can provide counsel regarding wage and hour issues and assist in crafting an appropriate response.
