In April of this year, the United States Department of Labor the (“DOL”) announced a final rule (the “2024 Rule”) that had a dramatic effect on whether employers can legally exempt employees from overtime pay under the Fair Labor Standards Act (the “FLSA”). In short, the 2024 Rule significantly raised the minimum salary required for employees who otherwise qualify for exemptions from overtime under the executive, administrative, and/or professional exemptions (the “EAP” Exemptions). In a landmark decision that applies nationwide, the U.S. District Court for the Eastern District of Texas vacated the 2024 Rule, after finding it to be unlawful.[1]
The 2024 Rule
As mentioned in Butler Snow’s article titled “Hurry Up and Wait – DOL Final Rule Increasing Salary Threshold on July 1, 2024 Faces Legal Challenges,”[2] the 2024 Rule:
- Increased the minimum salary threshold from $684 per week ($35,568 annualized) to $844 per week ($43,888 annualized), effective July 1, 2024.
- Imposed a second increase to go into effect on January 1, 2025, raising the minimum salary to $1,128 per week ($58,656 annualized).
- Set automatic increases to go into effect on July 1, 2027, and every three years thereafter.
- Increased the threshold for the highly compensated employee (“HCE”) exemption from $107,432 to $132,964 on July 1, 2024, and to $151,164 on January 1, 2025.
Summary Judgment Granted in Favor of the Parties Challenging the 2024 Rule
The State of Texas and different business organizations (the “Business Organizations”) filed suit in Texas federal court challenging the legality of the sweeping changes to the salary thresholds. On November 15, 2024, the Judge in the case found that the DOL exceeded its statutory authority when enacting the 2024 Rule. The Court found that the DOL strayed too far from the language of the FLSA – which focuses the analysis of the EAP Exemptions on the duties of the employees.
- The DOL Overstepped its Statutory Authority
The FLSA exempts from minimum wage and overtime requirements “any employee employed in a bona fide executive, administrative, or professional capacity.”[3] The terms “bona fide,” “executive,” “administrative,” “professional,” and “capacity” were terms that Congress delegated to the DOL to define. Although the DOL can define and delimit the executive, administrative, and professional exemptions (“EAP”), its power comes with limitations.
- The DOL cannot enact rules that replace the meaning of the terms capacity, executive, administrative, and professional.
- The DOL can only set a minimum salary level if that salary serves as a reasonable proxy for an exemption.
- To define and delimit the EAP exemptions, the DOL must pass regulations that comply with the Administrative Procedure Act (“APA”).
On November 15, 2024, the Court in Plano found that the 2024 Rule essentially “displac[ed] the FLSA’s duties test with a predominate—if not exclusive—salary-level test.”[4] In its decision, the Court stated that the 2024 Rule was similar to the 2016 Rule, which the Eastern District of Texas enjoined because the minimum salary threshold “essentially ma[de] an employee’s duties, functions, or tasks irrelevant if the employee’s salary f[ell] below the new minimum salary level.”[5] The terms “executive,” “administrative,” and “professional” are each consistent with a duties-based inquiry.
Texas and the Business Organizations in Plano contended that, just like the 2016 rule, the DOL exceeded its statutory authority with the 2024 Rule because it effectively displaced the duties test. Although the DOL can impose some limitations on certain terms in EAP exemptions, it cannot “enact rules that replace or swallow the meaning those terms have.”[6] In the 2024 Rule, the DOL did just that. The Court ultimately found that, because the 2024 rule turned on salary, rather than duties, the DOL exceeded its statutory authority to define and delimit relevant terms. In other words, the 2024 rule rendered the terms capacity, executive, administrative, and professional irrelevant—leaving salary as the only determining factor for EAP exemptions. Thus, the Court in Plano granted summary judgment in favor of Texas and the Business Organizations.
Next Steps
One thing is clear at this time: Unless something changes on appeal or otherwise, the 2024 Rule is no longer in effect. This means that employers must comply with the requirements of the DOL’s 2019 Final Rule – which sets the minimum salary at $684/week ($35,568 annualized).[7] In addition, the HCE threshold is now back to $107,432.
The DOL has thirty (30) days to appeal the Eastern District of Texas’ decision. If the DOL appeals, the incoming Administration could withdraw the appeal. The Trump Administration could also take other steps to modify or revoke the 2024 Rule. Regardless, we find it likely that the 2024 Rule will never be resurrected, meaning the law returns to the 2019 Rule’s requirements.
Questions for Employers
Although “good news”, the Court’s decision inadvertently puts many employers in an uncomfortable situation. Many took action – increasing salaries or reclassifying employees as hourly (non-exempt) to comply with the July 1 increase. Other employers are planning action to comply with the upcoming January 1 increase. These employers have some interesting decisions to make in light of the Court’s ruling.
Can they legally take away raises from those who received them to comply with the July 1 increase? If employers reclassified workers as non-exempt because their pay fell under the July 1 minimum, can they “re-reclassify” them now?
The answers to these and related questions depend, of course, on the specifics of each situation. Thus, employers should consult with legal counsel to come up with the best approach.
Regardless of the actions that employers have taken up to this point, now is a good time to re-evaluate your company’s FLSA compliance. With all the news concerning the 2024 Rule this year, FLSA compliance has a higher visibility among employees and their lawyers.
[1] Plano Chamber of Commerce, et al. v. United States Dep’t of Lab., No. 4:24-CV-499-SDJ (E.D. Tex., filed May 22, 2024).
[2] https://www.butlersnow.com/news-and-events/hurry-up-and-wait-dol-final-rule-increasing-salary-threshold-on-july-1-2024-faces-legal-challenges
[3] 29 U.S.C. § 213(a)(1).
[4] Plano, No. 4:24-CV-499-SDJ, p. 38.
[5] Nevada v. United States Dep’t of Lab., 275 F.Supp.3d 795, 806-07 (E.D. Tex. 2017) (Mazzant, J.) (“Nevada II”).
[6] Plano, No. 4:24-CV-499-SDJ, pp. 36-37 (quoting Mayfield v. United States Dep’t of Lab., 117 F.4th 611, 621 (5th Cir. 2024)).
[7] Recently, the United States Court of Appeals for the 5th Circuit upheld the 2019 Rule by finding that (1) the DOL maintained statutory authority under the FLSA to promulgate the rule, and (2) the DOL’s exercise of their statutory authority did not violate the nondelegation doctrine. See Mayfield, 117 F.4th 611.
