On November 15, 2024, in State of Texas v. Department of Labor, CIVIL NO. 4:24-CV-499-SDJ (E.D. Tex. Nov. 15, 2024), the United States District Court for the Eastern District of Texas struck down the Final Rule promulgated on April 26, 2024 by the Wage and Hour Division of the Department of Labor (DOL) (“2024 Final Rule”). Acting pursuant to its broad powers under the Fair Labor Standards Act (FLSA), the DOL increased the minimum salary and compensation thresholds for the white-collar overtime exemption and highly compensated employees (HCE) exemption in its 2024 Final Rule. Several lawsuits against the DOL ensued, including one by the State of Texas, which argued that by raising the minimum salary at which white-collar employees are exempt from minimum wage and overtime pay under the FLSA, the 2024 Final Rule changed the exemption status of millions of previously exempt employees. The Texas court agreed, holding that the DOL had exceeded its statutory authority under the FSLA and vacated the 2024 Final Rule nationwide.
Under Section 13(a)(1) of the FSLA, executive, administrative, or professional (EAP) employees – commonly known as “white-collar” employees – are “exempt” from the FLSA protections afforded to “nonexempt” workers, who must be paid at least minimum wage as well as overtime pay for hours exceeding 40 hours per week. The EAP or white-collar exemption “provides that the minimum wage and overtime requirements in FLSA Sections 206 and 207 shall not apply to ‘any employee employed in a bona fide executive, administrative, or professional capacity,’ as those terms are ‘defined and delimited’ by agency regulations.”
Although the FSLA is silent on the minimum salary or compensation level to qualify an employee as exempt, the DOL has promulgated several regulations defining and delimiting the EAP exemption, and such regulations have always included a minimum salary level for EAP employees. In the 2024 Final Rule, the DOL increased salary and total compensation thresholds to qualify for the EAP exemption and the HCE exemption, respectively. It reasoned that such adjustments are periodically needed to account for rising wages “to ensure that [earnings thresholds] remain effective in helping differentiate between exempt and nonexempt employees”; “to help identify bona fide EAP employees,”; and to “guard against the unintended exemption of workers who are not bona fide EAP employees,” but who may work in high-income regions or industries.
The DOL structured the changes to the EAP exemption to occur in three stages. At each stage, the minimum salary to qualify a white-collar employee as exempt from the FLSA’s minimum wage and overtime requirements would increase:
- On July 1, 2024, when the 2024 Final Rule took effect, a previously exempt white-collar employee earning $684 per week (or $35,568 annualized) would now need to earn a minimum of $844 per week (or $43,888 annualized) to continue to qualify as exempt. In addition, the minimum total compensation to qualify for the HCE exemption increased from $107,432 to $132,964. Per the DOL, “this change rendered about one million employees nonexempt who were previously exempt, with no change in their duties.”
- Second, the 2024 Final Rule provided that on January 1, 2025, additional minimum salary and compensation increases would take effect with the threshold for white-collar exemptions set to increase from $844 per week to $1,128 per week, or from $43,888 to $58,656 per year. The total compensation for the HCE exemption threshold would similarly increase from $132,964 to $151,164 per year. The DOL forecasted that this change would render an additional three million employees nonexempt who were previously exempt, with no change in their duties.
- Third, and finally, the 2024 Final Rule provided for the implementation of a mechanism to automatically increase the salary level every three years based on contemporary earnings data. The first automatic change—which would not require notice and comment— was scheduled to occur on July 1, 2027, and the DOL estimated that these automatic updates would result in millions more employees becoming nonexempt.
The Texas district court determined that all three components of the 2024 Final Rule exceeded the DOL’s statutory authority. While the Texas court had previously enjoined the 2024 Final Rule only against the State of Texas as an employer, the court’s decision vacated the 2024 Final Rule for all employers nationwide.
In invalidating the 2024 Final Rule, the court stated that it was an “unlawful exercise” of the DOL’s agency powers. While the DOL has the authority to increase the minimum salary threshold as a tool to determine whether certain positions qualify as exempt, the court stated that the DOL “does not have the authority to effectively displace the duties test with such a predominant salary-level test.” For the past 84 years, the DOL has employed a three-part test to determine whether an EAP employee qualifies as exempt from overtime pay requirements if:
(1) his job duties primarily involve executive, administrative, or professional duties (“duties test”);
(2) he is paid a predetermined and fixed salary (“salary-basis test”); and
(3) his salary exceeds the minimum weekly amount set by the Department (“salary-level test”).
The court noted, “This test remains in effect today.”
In promulgating the 2024 Final Rule, the DOL seemed to abandon the duties test, instead focusing on the salary-level test. The court pointed out that the July 2024 salary increase was so large that approximately 1/3 of the employees, who would otherwise be exempt, would become nonexempt because of the higher salary threshold, contrary to Congressional intent to exempt certain employees from overtime in the first place. Per the court, the EAP overtime exemption must be primarily focused on the duties test, and not the salary-level test, to determine if an employee qualifies for an exemption.
By mandating additional salary increases in January 2025, and automatically every three years thereafter, the DOL had exceeded its authority. Nothing in the EAP exemption or HCE exemption authorizes the DOL “to set its rulemaking on autopilot and evade the procedural requirements” of the Administrative Procedure Act (APA). The court determined that the triennial automatic increase “violated the notice-and-comment rulemaking requirements of the APA” as “agency rules having the force and effect of law must go through the notice-and-comment process.”
Takeaways
In light of the fact that the 2024 Final Rule has now been vacated nationwide, employers should tread carefully. It is important to be aware of the risk an employer would be taking, and the potential negative impact on employee morale that would occur, if there was now an attempt to reduce an employee’s salary that had been previously raised to meet the overtime exemption that took effect on July 1, 2024. It may be, however, that an employee may prefer to be classified as nonexempt in order to be paid overtime. Regardless, employers should ensure that all those who are classified as exempt not only meet the salary threshold, but also the job duties test for the exemption. Lastly, employers should anticipate future changes with respect to wage and hour laws and the FLSA when President Trump takes office in January 2025.
This summary is for informational purposes only and is not intended to constitute legal advice. This information should not be reused without permission.
