Summary: On November 15, 2024, a federal district court in Texas struck down the U.S. Department of Labor’s (DOL) recent final rule (Final Rule) increasing the salary thresholds for certain “white collar” exempt employees under the Fair Labor Standards Act (FLSA).
The court ruled the DOL overstepped its authority with this recent Final Rule increasing the minimum salary for exempt employees. This ruling sets aside the Final Rule’s increases to the standard salary level nationwide, returning the salary threshold to the pre-July 2024 threshold.
Read on for more information and employer considerations in light of this recent court ruling.
FLSA White Collar Exemption Background
The Fair Labor Standards Act (FLSA) requires that most employees in the U.S. be paid at least the federal minimum wage for all hours worked and overtime pay at not less than time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek.
However, Section 13(a)(1) of the FLSA provides an exemption from both minimum wage and overtime pay requirements for certain employees. Employees are exempt if they are employed in a bona fide executive, administrative, or professional capacity, also sometimes referred to as the “white-collar” or “EAP” exemption.
The EAP exemption applies to employees who are:
- paid a predetermined and fixed salary, (the “salary basis test”);
- paid at least a specified weekly salary level set by the DOL (the “salary level test”); and
- primarily performing job duties involving executive, administrative, or professional duties, as provided in DOL regulations (the “duties test”).
Note that certain employees, such as doctors, lawyers, teachers, and outside sales employees, are not subject to either the salary basis or salary level tests. Employees in these occupations may fall within the EAP exemption regardless of how and what they are paid. Click here for a DOL webpage with more information.
DOL regulations also provide an alternative EAP exemption test for certain highly compensated employees (“HCEs”) who are paid a salary, earn at least a higher total annual compensation level, and satisfy a minimal duties test.
April 2024 Final Rule
On April 23, 2024, the DOL announced a Final Rule, increasing the salary thresholds at which employees are exempt from overtime requirements under the FLSA, in accordance with the EAP and HCE exemptions.
The Final Rule also required the DOL to update salary levels automatically every three years starting on July 1, 2027.
The table below outlines the scheduled salary/compensation increases under the Final Rule:
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Date
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Standard Salary Level
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Highly Compensated Employee (HCE) Total Annual Compensation Threshold
|
|
Before July 1, 2024
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$684 per week (equivalent to $35,568 per year)
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$107,432 per year, including at least $684 per week paid on a salary or fee basis.
|
|
July 1, 2024
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$844 per week (equivalent to $43,888 per year)
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$132,964 per year, including at least $844 per week paid on a salary or fee basis.
|
|
January 1, 2025
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$1,128 per week (equivalent to $58,656 per year)
|
$151,164 per year, including at least $1,128 per week paid on a salary or fee basis.
|
|
July 1, 2027, and every 3 years thereafter
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To be determined by applying to available data the methodology used to set the salary level in effect at the time of the update.
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To be determined by applying to available data the methodology used to set the salary level in effect at the time of the update.
|
Prior to this 2024 Final Rule, the DOL last updated the EAP exemption regulations in 2019, and these earning thresholds have been in effect since January 1, 2020.
Recent Litigation
The DOL Final Rule was challenged by the state of Texas in short order after its April 2024 publication. In late June 2024, a federal district court judge in Texas judge issued a preliminary injunction temporarily halting the implementation of the Final Rule, but only as it applied to the state of Texas as an employer. At that time, the first salary level increase went into effect on July 1, 2024 for all other employers on a nationwide basis.
Subsequently, several business groups joined the state of Texas in their challenge and asked the court to strike down the Final Rule completely for all employers, which led to this November 15, 2024 ruling vacating the Final Rule in its entirety.
With this recent decision, the court held that the DOL exceeded its statutory authority as delegated by Congress, citing the recent Supreme Court Loper Bright ruling.
Loper Bright Decision
The Loper Bright decision requires courts to exercise their independent judgment when determining whether a federal agency has overstepped its statutory authority in issuing regulations to an ambiguous law, rather than previously deferring to an agency’s reasonable interpretation of the law.
Specifically, the court ruled that the DOL exceeded its authority with the Final Rule by requiring an employee’s status for the EAP exemption to turn on duties, rather than salary, noting that it is an employee’s “duties and not their dollars that really matter” under the FLSA EAP exemption.
Moreover, the court held that the automatic salary increases every three years under the Final Rule also exceed the DOL’s statutory authority, stating that placing automatic salary increases under the EAP exemption on “autopilot” is unlawful as it “evades the procedural requirements” of the Administrative Procedures Act.
Administrative Procedure Act
The Administrative Procedure Act is a federal law governing the process by which federal agencies develop and issue regulations, and provides opportunities for public comments under required notice and comment rulemaking procedures.
Employer Considerations
Employers are advised to work with their employment counsel to assess the compliance and employee relations impact of this recent court decision striking down the Final Rule.
Key highlights for employers to consider include the following points:
- Employers may return to the previous salary thresholds under the 2019 regulations (the pre-July 1, 2024 standards referenced in the table above and outlined below):
- EAP exemption: These employees need to be paid at least $684 per week ($35,568 annually),
- HCE exemption: These employees need to be paid at least $107,432 annually.
Key Point: While technically allowed, employers are advised to consider the potential negative impact on employee morale when contemplating reducing employee salaries or changes to FLSA-exempt status.
- Employers are advised to determine any applicable state/local salary thresholds that exceed the FLSA standards, as well as applicable state notice requirements, and take steps to ensure compliance.
- Employers are no longer required to comply with the additional salary increases that would have become effective on January 1, 2025.
- The automatic increases that were scheduled to occur every three years, starting in 2027, are no longer required.
- Employers are advised to diligently monitor potential appeals and future rulemaking.
- The DOL recently appealed this decision in the Fifth Circuit Court of Appeals. Click here for more information.
- However, with the start of a new Presidential administration in January 2025, it is challenging to speculate if the new administration will even pursue this DOL appeal.
Risk Strategies is committed to keeping employers informed and up-to-date. Contact your Risk Strategies account team with any questions or contact us directly here.
