For the past year, we have been following the legal challenges to the Department of Labor’s (DOL) new overtime rule, which expanded the minimum salary threshold for the white-collar exemptions by sixty-five percent (65%). That singular focus by the DOL on increasing the salary threshold was its downfall, as the Eastern District of Texas has dealt the rule a nationwide blow.
FLSA Rule Background
The Fair Labor Standards Act (FLSA) mandates that employers pay eligible employees overtime—calculated as one-and-a-half times their regular pay rate—for hours worked beyond 40 in a workweek. However, certain employees are exempt from this requirement, including specific highly compensated employees (HCEs). To qualify for the HCE exemption, an employee must meet three criteria:
- Earn at least a specified total annual compensation, including a guaranteed minimum amount paid on a salary basis.
- Regularly perform at least one of the duties of an exempt executive, administrative, or professional (EAP) employee.
- Have primary duties that align with those expected of high-level employees.
Impact of DOL’s 2024 Overtime Rule
The 2024 Overtime Rule raised the minimum salary threshold in a two-step process:
- Step One: Effective July 1, 2024, exempt executive, administrative, and professional employees are required to be paid a minimum salary of $844 per week ($43,888 per year).
- Step Two: Effective January 1, 2025, exempt executive, administrative, and professional employees are required to be paid a minimum salary of $1,128 per week ($58,656 per year).
Similarly, the minimum salary for highly compensated employees will increase to $132,964 annually as of July 1, 2024, and to $151,164 annually as of January 1, 2025.
Additionally, as of January 1, 2027, and every three years thereafter, the minimum thresholds will be adjusted to reflect current earnings data using the methodology in effect under the 2024 Overtime Rule at that time.
The DOL, in adopting the rule, said that lower-paid salaried workers often do the same jobs as hourly employees, but work more hours for no additional pay. It is estimated that these changes would eliminate over three million positions that are currently exempt from overtime unless employers respond by increasing salaries by over 65%.
Court Ruling: 2024 Overtime Rule as an Unlawful Exercise of Authority
History of the DOL’s Rulemaking
The Court began its analysis by tracing the DOL’s history of rulemaking regarding the white collar exemptions from the inception of the FLSA and its divergence in 2004. Although the FLSA provides for these overtime exemptions, notably absent is any mention of a salary threshold. In accordance with its rulemaking authority the DOL implemented a regulation to use salary as a proxy in its attempt to provide a reasonable means to distinguish those employees that would be exempt or non-exempt. At that time, the DOL assured that the salary test was interrelated with the duties-based test required by the FLSA. The salary threshold was set at a deliberately low level based on data gleaned from a survey of wages for non-exempt employees. The DOL and reviewing courts recognized that salary alone should not exclude someone from the exemption if they performed the requisite duties for the position.
The DOL’s Shift in Approach in 2004
Beginning in 2004, the DOL changed its approach. It not only created a new standard duties test, but the DOL began using a different data set to determine the salary threshold that included wage levels for both exempt and non-exempt employees. It set the 2004 salary level at a point in the earnings to exclude approximately 20% of all full-time salaried employees. That changed the exempt status of about 1.3 million workers.
The 2016 Rule and Its Demise
In 2016 the DOL implemented a new rule increasing the salary which jumped to the 40th percentile of weekly earnings of full-time salaried workers. It also created an automatic indexing system that would systematically raise the minimum threshold if and when wages increased. The 2016 rule died a quick death as well when the same Texas Court ruled it was invalid as it “made overtime status predominantly dependent on a minimum salary level, thereby supplanting an analysis of an employee’s job duties.”
The Court’s 2024 Ruling on Salary Thresholds
Similarly, the Court has again determined that the DOL exceeded the authority delegated to it by Congress under the FLSA by using salary as the predominant consideration in the exemption analysis instead of the employee’s duties. The Court took issue with the DOL’s focus on the salary level when the plain meaning of the terms written into the FLSA white-collar exemptions commanded that the focus be on the functions or duties of the employee, not their compensation.
The Court does not oppose a minimum salary level that would assist in the DOL’s task to “define and delimit” the terms of the exemptions but recognized it is not an unbounded right. Using salary as a proxy to define the exemption must be done on a reasonable basis. In this case, the Court found that the DOL’s use of the higher salary threshold overshadowed the importance of the duties test and effectively eliminated any consideration of the duties. The effect was that an employee who in fact meets the duties test – thus performing the function of the exempt position – is excluded simply due to the salary.
Automatic Indexing Violates the Administrative Procedures Act (APA)
The Court further found that by automatically increasing the minimum salary thresholds every three years, the 2024 Overtime Rule violates the notice-and-comment rulemaking requirements of the APA. Under the APA, agency rules having the force and effect of law must first be subjected to a federal notice and period for public comments. This indexing system avoids it altogether.
Nationwide Impact of the Court’s Decision
The APA further provides in section 706 that upon finding that an agency rule is unlawful, the court “shall” set aside the agency action. In compliance with the APA, and the precedent of the Fifth Circuit that a set aside under section 706 is not party-restricted and has nationwide effect, the Court has done just that. Finding that the 2024 Overtime Rule impacts millions of employees nationwide and all state and local governments, the Court has vacated and remanded the 2024 Rule back to the DOL for “further consideration in light of this opinion.”
Next Steps for Employers
For now, employers are governed by the overtime regulation enacted in 2019 which set a minimum threshold of $35,568.00 per year. Employers are not required to raise the threshold as of January 1, 2025. A more complicated issue exists for employers who met the first step of the 2024 Overtime Rule and increased salaries to maintain exempt employees.
If you have any questions, need assistance in responding to this development, or wish to conduct a compliance audit please call Maribeth Meluch (MM@kjk.com; 614.427.5747) or any of our partners in the Labor and Employment Practice Group.