On November 15, 2024, a federal judge in Texas struck down a rule by the U.S. Department of Labor (“DOL”) that would have expanded overtime pay to an additional four million employees nationwide. Texas employees and employers alike should understand the impact of this consequential decision.
by Baili Rhodes, Partner and Asher Gregg, Associate
What You Need to Know
- The DOL’s 2024 Rule would have raised the overtime salary threshold to $58,656, regardless of whether those employees perform executive, administrative, or professional duties, thus forcing employers to include over four million additional employees in overtime pay.
- A Texas federal judge ruled that the DOL exceeded its authority to pass the 2024 Rule, blocking its implementation nationwide.
- As a result of this ruling, employees remain exempt from overtime pay if they (1) perform executive, administrative, or professional duties and (2) earn more than $35,568.
How Did We Get Here?
The Fair Labor Standards Act (the “FLSA”) requires employers to, among other things, pay “overtime” to employees who work more than 40 hours per week, unless those employees perform executive, administrative, or professional duties (the “EAP Exemption”). In addition to this statutory “duty test,” the DOL, the federal agency responsible for implementing the FLSA, has historically imposed a “salary test,” setting out the salary threshold for the EAP Exemption to apply.
On April 23, 2024, the DOL announced a final rule (the “2024 Rule”), consisting of three key components: (1) raising the minimum salary threshold from $35,568 to $43,888 per year, effective July 1, 2024; (2) raising the minimum salary threshold from $43,888 to $58,656 per year, on January 1, 2025; and (3) requiring adjusted salary thresholds every three years based on applicable wage data.
Almost immediately after the announcement of the 2024 Rule, more than a dozen business groups filed suit in the U.S. District Court for the Eastern District of Texas, challenging the DOL’s authority under the Administrative Procedure Act (the “APA”) to override the FLSA’s “duty test” and impose the revised “salary test.” On June 28, 2024, Judge Sean Jordan of the U.S. District Court for the Eastern District of Texas granted the State of Texas’s request for a preliminary injunction to block the 2024 Rule, concluding that there was a substantial likelihood that the State of Texas could prove that the DOL exceeded its statutory authority by promulgating the 2024 Rule. Importantly, however, Judge Jordan’s order was limited to enjoining enforcement of the rule against the State of Texas as an employer.
Just a few months later, on September 11, 2024, the Fifth Circuit Court of Appeals, led by now-Chief Judge Jennifer Walker Elrod, held that the FLSA’s imposition of a “salary test” is within the DOL’s “explicitly delegated authority to define and delimit the terms of the [EAP exemption].”
The Ruling
On November 15, 2024, Judge Jordan struck down the entirety of the 2024 Rule, holding that the DOL exceeded its statutory authority by promulgating the 2024 Rule. Specifically, Judge Jordan 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 exceed the Department’s authority to define and delimit the relevant terms.” In other words, Judge Jordan viewed the 2024 Rule as a disguised attempt by the Biden Administration’s DOL to impose a “salary test” that overrides the FLSA’s “duty test.”
Judge Jordan examined the potential impact of the 2024 Rule and found that the increase in the EAP Exemption salary threshold would render at least a third of previously exempt employees nationwide nonexempt, requiring their employers to pay them “time and a half” despite the employees performing exempt-like work. Judge Jordan noted that “something has gone seriously awry” if an approximately four million employees previously exempt under the “duty test” would become entitled to overtime under the 2024 Rule’s amended “salary test.” However, unlike Judge Jordan’s previous limiting of his ruling to the State of Texas, he ruled that the nationwide impact of the 2024 Rule requires that it be struck down nationwide.
What Does This Mean?
Judge Jordan’s ruling vacates all three components of the 2024 Rule, including the increase that went into effect on July 1, 2024. As a result, the EAP Exemption salary threshold reverts back to the DOL’s 2019 rule, which set the minimum salary threshold at $35,568 annually. Only time will tell whether the Biden Administration’s DOL will appeal this decision to the Fifth Circuit Court of Appeals with president-elect Trump’s Administration set to take form in approximately two months. Regardless, it seems unlikely that a court will create additional headaches for employers since many employers nationwide already adjusted salaries to comply with the July 1, 2024, salary increase by the now-void 2024 Rule.
As for Texas employees, the blocking of the 2024 Rule means that employees with salaries exceeding $35,568 could remain exempt from overtime pay, so long as they are otherwise exempt under the FLSA. This reality is understandably difficult to come to terms with, especially if affected employees made consequential life decisions dependent on the salary increase.
As for Texas employers, the blocking of the 2024 Rule means that employers should rely heavily on the statutory “duty test” as the ultimate determinant of whether an employee falls within the EAP Exemption. Importantly, however, employers should be hesitant to rescind already-promised salary increases under the 2024 Rule. Such a move could create a Human Resources nightmare and have a detrimental impact on business operations.
If you have questions regarding the impact of the blocking of the 2024 Rule’s expansion of overtime pay on your particular situation, please reach out to our firm.
For further information, please contact Baili Rhodes at baili.rhodes@westwebblaw.com or Asher Gregg at asher.gregg@westwebblaw.com