On Friday, November 15, 2024, a federal district court struck down the U.S. Department of Labor’s (DOL’s) 2024 rule increasing the minimum salary required for the most common overtime exemptions under the Fair Labor Standards Act (FLSA). The same court had previously blocked enforcement of the rule against the State of Texas in its role as an employer. This decision, however, vacates the rule on a nationwide basis for all employers.
Background on the EAP Exemptions and the 2024 Rule
To qualify for exempt status under the administrative, executive, or professional exemptions (the EAP or white collar exemptions), an employee generally must meet three tests: (i) the employee must be paid a predetermined and fixed salary; (ii) the salary must meet or exceed a weekly amount set by the DOL; and (iii) the employee’s job duties must primarily involve executive, administrative, or professional duties. As we previously reported, in April 2024, the DOL released a final rule (the 2024 Rule) that affected the second part of this test — the minimum salary level.
The 2024 Rule increased the minimum salary required for the EAP exemptions in three stages: (i) an increase to $43,888 per year that went into effect on July 1, 2024; (ii) an increase to $58,656 per year that was set to go into effect on January 1, 2025; and (iii) automatic updates to the salary threshold every three years, beginning in July 2027. It also significantly raised the minimum salary required for the highly compensated employee (HCE) exemption, with the same three-year automatic update mechanism.
The Court’s Decision Striking Down the 2024 Rule
In a 62-page decision critical of perceived flip-flopping by the DOL in recent years, the U.S. District Court for the Eastern District of Texas found that the 2024 Rule exceeded the authority that Congress delegated to the DOL. Citing several dictionary definitions from the 1930s (when the FLSA was enacted), the court concluded that the EAP exemptions turn on job duties, but that the 2024 Rule “effectively eliminated” consideration of an employees’ duties in favor of what was essentially a salary-only test.
The court’s decision struck down all three stages of the 2024 Rule, including the increase that already went into effect on July 1, 2024. With respect to that increase, the court observed, “[w]hen a third of otherwise exempt employees who the [DOL] acknowledges meet the duties test are nonetheless rendered nonexempt because of … the increased salary level — something has gone seriously awry.” Regarding the January 1, 2025, update, the court found that the effects of that would be “staggering,” resulting in at least 40% of employees who meet the duties test to be rendered nonexempt even though their duties had not changed.
The court also found that the DOL exceeded its authority by including the automatic indexing mechanism that would have resulted in increases to the salary levels every three years. The court wrote, “[n]othing in the EAP Exemption authorizes the [DOL] to set its rulemaking on autopilot and evade the procedural requirements of the [Administrative Procedures Act],” including the notice-and-comment rulemaking requirements —” even when an agency finds them inconvenient.”
Granting summary judgment in favor of the plaintiffs, the court held that “because the EAP Exemption requires that an employee’s status turn on duties — not salary — and because the 2024 Rule’s changes make salary predominate over duties for millions of employees, the changes exceeded the [DOL]’s authority[.]”
What Does this Mean for Employers?
The court’s order vacated (canceled) the 2024 Rule on a nationwide basis, including the part that already went into effect on July 1, 2024. This means that the pre-July 1, 2024, salary threshold of $684 per week ($35,568 per year) is again the floor for the EAP exemptions.
While the DOL could appeal the court’s decision, it is unclear whether the incoming presidential administration would pursue such an appeal — although it seems unlikely. We might, however, see new rulemaking, as occurred in 2019 after the DOL’s 2016 salary level rule was struck down. What such rulemaking might look like is anyone’s guess at this point.
In the meantime, employers who were planning to raise salaries on January 1, 2025, to maintain employees’ exempt status under the 2024 Rule could reconsider those increases. Likewise, employers who were planning to reclassify employees as non-exempt prior to January 1 rather than increase salaries can maintain those employees’ exempt status (as long as the exemption tests are met, of course). If you had already communicated January 1st changes to employees, however, we recommend carefully considering how you will communicate a shift in course. And, of course, employers may choose to raise salaries regardless of the minimum required for the EAP exemptions, and may reclassify positions as nonexempt, since that is the default status under the FLSA.
Employers who raised salaries earlier this year to satisfy the July 1st increase, or who had already raised salaries to the January 1, 2025, level, could, in most circumstances, reduce those salaries to the pre-July 1 level going forward (though not retroactively). However, we recommend taking into consideration the potential ramifications to employee morale that could follow such a change, trying to temper any negative response — and it may be worth waiting until we see what happens with a potential appeal. Additionally, employers should be sure to comply with any applicable state and local laws requiring advance written notice of wage changes, although we recommend a carefully crafted communication regardless of such notification requirements. Finally, employers should bear in mind that several states still have higher salary thresholds for exempt employees.
If you have any questions about overtime exemptions or other wage-and-hour matters, please consult your Fredrikson Employment, Labor & Benefits attorney.
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