On April 23, 2024, the United States Department of Labor (“DOL”) announced a final rule which will raise the salary threshold required to classify employees as exempt from overtime pay requirements under federal law.[1] Effective July 1, 2024, the salary threshold will increase from the current level of $684 per week ($35,568 annualized) to $844 per week ($43,888 annualized). Then, on January 1, 2025, the salary threshold will increase to $1,128 per week ($58,656 annualized). These changes will result in a 65% overall increase in the FLSA salary threshold for overtime exemptions. Multiple lawsuits have been filed seeking to stop the changes from going into effect. Employers should monitor the legal challenges and be prepared to implement these changes on July 1, 2024.
Background
The federal Fair Labor Standards Act (“FLSA”) requires covered employers to keep accurate records of employee work time, pay employees at least minimum wage at the current rate of $7.25 per hour, and pay overtime pay of at least 1.5 times the employee’s regular hourly rate if the employee works more than 40 hours in a 7-day workweek.[2] However, there are exceptions to these requirements called “exemptions.” For instance, under Section 13(a)(1) of the FLSA, “any employee employed in a bona fide executive, administrative, or professional capacity” is exempted from the timekeeping, minimum wage and overtime pay requirements of the statute.[3] To qualify for one of these so-called “white collar” exemptions, employees must meet two requirements: (1) they must have job duties meeting the requirements of the exemption being relied on; and (2) they must be paid on a “salaried” or fee basis.[4] Being paid on a “salaried” basis means being paid a guaranteed weekly amount which does not fluctuate based on the quality or quantity of work. In addition, federal rules set a minimum salary threshold to qualify for exempt status. The DOL’s “2024 Final Rule” is all about that last part.
In addition to raising the minimum salary threshold for the white-collar exemptions, the 2024 Final Rule increases the annualized salary threshold for “highly compensated employees” to $151,164, up from $107,432. (The “highly compensated employee” or “HCE” exemption allows for less stringent duties requirements for high-earning employees.) The Final Rule also provides that these minimum thresholds will update every three years based on the current wage data. The Final Rule only addresses salary level and does not impact the duties requirements for these exemptions.
According to DOL estimates, the rule is expected to result in an income transfer of about $1.5 billion from employers to workers in the first year, mainly from additional overtime pay or from pay raises to maintain the exempt status employees.
Legal Challenges to the 2024 Final Rule
It is possible that part or all of the 2024 Final Rule may never go into effect. As anticipated, the DOL’s 2024 Final Rule is facing multiple legal challenges. Three lawsuits have been filed to enjoin the 2024 Final Rule from taking effect. The first lawsuit was brought by a group of business organizations in the Eastern District of Texas and is assigned to Judge Sean Jordan.[5] The second and third lawsuits were both filed on June 3, 2024-one in the Eastern District of Texas brought by the State of Texas and reassigned to Judge Sean Jordan[6] and the other in the Northern District of Texas brought by a software company[7] and assigned to Judge Hendrix. In the case brought by the state of Texas, Judge Jordan has scheduled a hearing on the motion for a temporary restraining on June 24, 2024 — just one week prior to the July 1, 2024, effective date of the rule.
Another District Judge in the Eastern District of Texas, Judge Amos Mazzant, previously issued a nationwide preliminary injunction preventing a similarly large salary threshold increase (2016 final rule) from going into effect approximately a week before the rule was scheduled to take effect.[8] Judge Mazzant ordered a permanent injunction in August 2017.[9] The Court found that the DOL exceeded its authority by doubling the existing salary threshold and effectively eliminating the duties test for the white collar exemptions. The judge also concluded the DOL’s rule providing for automatic adjustments to the minimum salary level every three years is unlawful.
Not surprisingly, the plaintiffs challenging the 2024 Final Rule rely heavily on Judge Mazzant’s prior opinions and the plaintiffs’ arguments mirror those used to enjoin the DOL from implementing salary thresholds in the 2016 Final Rule.
The fate of the 2024 Final Rule is not certain. The DOL issued a final rule in 2019 to increase the salary level for the white collar exemptions from $455 a week (equivalent to $23,660 annually) to $684 a week (equivalent to $35,568 annually)[10] effective January 1, 2020.[11] The 2019 final rule was challenged, and the Western District of Texas concluded that that 2019 final rule was within the authority conferred by Congress in Section 213(a).[12] The appeal regarding the 2019 final rule is pending before the Fifth Circuit and oral argument is tentatively scheduled for the week of August 5, 2024.
It is possible, but by no means certain, that all or part of the 2024 Final Rule could be enjoined. There is a two-stage increase with a smaller increase on July 1, 2024 compared to the significant increase effective on January 1, 2025. It is possible that a court could allow the July 1, 2024 increase to go into effect and enjoin the January 1, 2025 increase.
Next Steps for Employers
In light of the relative uncertainty of pending litigation, employers must closely monitor legal developments and be prepared to pivot once a court weighs in. Given the impending July 1, 2024, deadline for enforcement, employers should immediately take steps to comply with the new rule. As a first step, employers should identify current exempt salaried employees who earn less than $844 per week (while employers can use the $43,888 annualized amount as a point of reference, the threshold amount is a weekly requirement).
Employers should be mindful of the organizational impact, including employee morale and overall budgetary considerations, of enacting salary increases to meet the new threshold versus reclassification to non-exempt status for impacted individuals. Employers should compare the expense of a salary increase for the employee to remain exempt with the expense of overtime based on the amount of weekly overtime actually worked by impacted employees.
This is a good time for employers to review their overall FLSA compliance. Although the impact of the Final Rule is limited to salary levels, a self-audit to ensure that wage and hour practices are compliant is prudent. Take the opportunity to review exempt employees’ job duties to ensure that employees are properly classified as exempt based on their job duties as well as their pay. Also, review pay practices to confirm that the company is not making improper deductions from exempt employees’ pay, which could destroy the “salaried basis” of payment and result in loss of exempt status.
Employers should monitor the pending legal challenges in the weeks ahead and be prepared. Employers should continue planning, but be mindful of communication with impacted employees in the event that a court prevents the rule from being implemented. Consider delaying notifying impacted employees of any potential changes until courts weigh in on what salary threshold will be in place on July 1, 2024. Finally, it is important to have a plan on how to notify and train impacted workers. Any employees reclassified as non-exempt should be trained on timekeeping procedures, to avoid “off the clock” FLSA violations.
And, as always, if in doubt, consider seeking the advice of an experienced employment attorney.
[1] Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees, 89 FR 32842-01.
[2] 29 U.S.C. §§206(a)(1), 207(a)(1).
[3] 29 U.S.C. § 213(a)(1).
[4] 29 C.F.R. §§ 541.100–541.304, 541.600, 541.602.
[5] Plano Chamber of Commerce, et al. v. Su, 4:24-CV-468 (E.D. Tex., filed May 22, 2024).
[6] State of Texas v. DOL, et al., 4:24-CV-499 (E.D. Tex., filed June 3, 2024). Of note, the case was initially assigned to Judge Amos Mazzant, and was then transferred to Judge Jordan because the Plano case was filed first. Judge Mazzant previously enjoined the 2016 final rule increasing salary levels for white collar exemptions.
[7] Flint Avenue, LLC v. United States Department of Labor, Civil Action NO. 5:24-cv-00130-H (N. D. Tex., filed June 3, 2024). Judge Hendrix has ordered the parties the plaintiff to file any motions for preliminary injunction by June 12, 2024, with briefing on the motion closing on June 24, 2024.
[8] Nevada v. United States Department of Labor, 218 F.Supp.3d 520, 524 (E.D.Tex., 2016).
[9] Nevada v. United States Department of Labor, 275 F.Supp.3d 795, 798 (E.D.Tex., 2017).
[10] 84 Fed. Reg. at 51230–31.
[11] 29 C.F.R.§ 541.600.
[12] Mayfield v. U.S. Department of Labor, 2023 WL 6168251, at *7 (W.D.Tex., 2023).
