On Friday, a Texas federal court vacated the 2024 Department of Labor (“DOL”) Overtime Final Rule, which had set new salary thresholds for white collar exempt employees, as exceeding the DOL’s rule-making authority.
On July 1, 2024, the salary threshold of exempt executive, administrative and professional (“EAP”) employees increased to $844 per week ($43,888 annually) under the Final Rule, and was set to increase to $1,128 per week ($58,656 annually) on January 1, 2025. “The 2024 Rule is an unlawful exercise of agency power,” which the U.S. District Court for the Eastern District of Texas “nullified and revoked” in State of Texas v. United States Dep’t of Labor. The court’s ruling means that both the salary threshold increase that went into effect on July 1, 2024, and the increase slated to go into effect on January 1, 2025 are off the table nationwide for now.
The Texas court noted that “salary” is not included in the regulatory definitions of executive, administrative or professional employees, and that “what matters is the functions or duties of the employee.” The new salary threshold would have made millions of employees – at least 30% of exempt employees – who would have otherwise met the EAP’s duties tests suddenly non-exempt. A salary threshold set so high does not serve as a reasonable proxy of who is an EAP employee, and instead unlawfully displaces the original statutory terms.
Employers and attorneys were awaiting this ruling, because in September, the Fifth Circuit Court of Appeals sided with the DOL in a similar challenge to the 2019 overtime salary threshold. In 2019, the DOL raised the minimum salary required to qualify for an EAP exemption from $455 per week to $684 per week, an increase of 50.3%. In Mayfield v. U.S. Department of Labor, the Fifth Circuit ruled that the DOL does have the statutory authority under the Fair Labor Standards Act (“FLSA”) to use a salary threshold to “define and delimit the terms of exemption,” and upheld the 2019 increase. However, the appeals court noted there is a limit to this authority: the agency may only use the minimum salary threshold to the extent that it is a reasonable proxy for who meets the EAP’s duties.
The Texas court cited this Mayfield limitation and concluded the 2024 overtime salary threshold went too far, vacating the 2024 Final Rule nationwide.
The three-year automatic increase to the salary threshold, called the Automatic Indexing Mechanism, was similarly struck down by the court as exceeding the DOL’s authority.
Business and industry plaintiffs in the case cited the 2024 Final Rule’s potential disruption to their industries, harm to small businesses and non-profits, and increased labor costs that would have limited employers’ flexibility to offer other employee benefits. Many companies had been reviewing their options heading into 2025, including increasing exempt employee salaries, evaluating overtime and moving employees to non-exempt status, reassigning exempt and non-exempt duties, or reducing employee hours, to comply with the new salary threshold. With this ruling, these plans are now on hold.
It is unclear if the DOL will appeal the decision, and if so, whether the incoming administration under President-elect Trump will simply withdraw any appeal taken, or revise or withdraw the Final Rule in its entirety in 2025. It is unlikely, however, that an appeal if taken would be decided before January 1, 2025 or the new administration is sworn in.
We will continue to monitor the situation and provide updates as developments occur. In the meantime, if you have any questions about the Fair Labor Standards Act, overtime regulations, or wage and hour compliance in general, please contact partner Jill Sebest Welch or any attorney in the Barley Snyder Employment Practice Group.
