11/21/2024 | News release | Distributed by Public on 11/21/2024 18:59
As discussed in our prior post, the U.S. Department of Labor (DOL) issued a final rule earlier this year that increased the salary thresholds required to classify certain employees as exempt from overtime pay requirements under the Fair Labor Standards Act (FLSA). On November 15, 2024, the federal district court for the Eastern District of Texas blocked the rule nationwide just weeks before the second phase of the salary threshold increases were scheduled to take effect. The decision reinstates the salary thresholds in effect prior to the DOL's 2024 rule, which represent a nearly 65% decrease from the thresholds set in the 2024 rule.
Background
The final rule increased the minimum salary thresholds for the "white-collar" (bona fide executive, administrative, and professional) and "highly compensated" exemptions in two phases-the first on July 1, 2024 (which already took effect), and the second on January 1, 2025. The final rule also provided for automatic increases in the salary thresholds every three years to align with Census salary data. The rule did not make any changes to the "duties test"-or the duties an employee must perform to be considered exempt as described in the relevant regulations. The 2024 rule was estimated to expand overtime eligibility to approximately four million employees.
The Eastern District of Texas Decision
In May and June 2024, a coalition of business groups and the State of Texas filed lawsuits against the DOL in the Eastern District of Texas-the same federal court that invalidated the Obama Administration's 2016 overtime regulations. The challengers argued that the 2024 rule was unlawful because the DOL exceeded its authority under the FLSA and Administrative Procedure Act (APA). On June 28, 2024, U.S. District Judge Sean Jordan of the Eastern District of Texas initially enjoined the enforcement of the 2024 rule against only the State of Texas in its capacity as an employer of state employees.
After consolidating the lawsuits and hearing oral argument, Judge Jordan has now agreed with the challengers to block the rule nationwide given the rule's impact on "millions of employees in every facet of the economy." Relying on the 2016 decision to overturn the Obama overtime rule, Judge Jordan stated that the DOL "exceeded the authority delegated by Congress" by "effectively displac[ing] the FLSA's duties test with a predominate-if not exclusive-salary-level test" and "install[ing] a mechanism that automatically updates the minimum salary requirements to even higher levels every three years."
Judge Jordan's decision voids the July 1, 2024 increase and stops the January 1, 2025 increase from going into effect. The DOL could appeal Judge Jordan's decision to the Fifth Circuit, although this seems unlikely given the upcoming change in administration.
Next Steps for Employers
As a result of the new decision, the salary thresholds for exemption immediately revert to the levels in effect before July 1, 2024, which were set in 2019 by the Trump Administration: the white collar exemption threshold reverts to $35,568 per year ($684 per week) and the highly compensated exemption threshold reverts to $107,432 per year. However, before taking any action based on the decision, employers are cautioned to wait and see whether the DOL will appeal.
Employers that already reclassified employees or implemented pay adjustments in reliance on the DOL rule could ultimately decide to revert to their pre-July 1, 2024 compensation models, but should consider the significant impact that reversing course may have on employee morale. Employers would also need to ensure compliance with any state or local notice requirements that may apply before implementing changes to an employee's exempt or non-exempt classification or pay. Also, some states-including California and New York-continue to have higher exempt salary thresholds than the FLSA, and those thresholds are unchanged by the court's decision. Finally, all employers should continue to carefully apply the existing FLSA duties test (and any applicable state tests) when deciding whether to classify an employee as exempt.
Going forward, it's possible that the new administration will reissue a rule to increase FLSA exempt salary thresholds, but it is unlikely that any such increases would be as significant as the 2024 rule. We will continue to monitor developments and keep you updated.