In a significant legal decision on Friday, November 15, a Texas federal court vacated the U.S. Department of Labor's (DOL) 2024 Rule, which aimed to increase the salary threshold for overtime exemptions under the Fair Labor Standards Act (FLSA). The court found that the rule exceeded the DOL's authority and was therefore unlawful. The court emphasized that future adjustments to the salary threshold must not displace the duties test with a predominant salary-level test. This ruling is reminiscent of a 2016 court injunction prohibiting implementation of a salary increase approved under the Obama administration.
Key Changes in the 2024 Rule
The 2024 Rule proposed several significant changes:
- July 2024 Salary Threshold Increase: The minimum salary was raised from $684 per week to $844 per week.
- January 2025 Salary Threshold Increase: A further increase was set to raise the threshold to $1,128 per week beginning January 1, 2025.
- Automatic Indexing Mechanism: The rule introduced a mechanism to automatically adjust the salary threshold every three years.
At this point, all of these changes have been stayed, including the increase that was implemented in July 2024.
Legal Issues
Historically, the DOL has set salary thresholds to help distinguish between exempt and nonexempt employees, ensuring that only those performing bona fide executive, administrative, or professional duties are exempt from overtime pay. In overturning the rule, the court held that the DOL improperly prioritized salary levels over job duties, effectively replacing the duties test with a salary-only test. The salary increases proposed were significantly higher than historical adjustments, which typically set thresholds at the 20th percentile of earnings in the lowest-wage regions and industries. Finally, the court ruled that the automatic indexing mechanism exceeded the DOL's authority, as it bypassed the procedural requirements of the Administrative Procedure Act and was not supported by legislative history.
Reversion to Prior Rule
Employers must adhere to the previous salary thresholds ($684/week or $35,568 annually) and ensure compliance with the duties test for overtime exemptions. The decision also underscores the importance of balancing salary levels with job duties in determining exemption status. The DOL could appeal the decision, but it’s unclear whether that will happen at this time. Past policy inclinations of President-Elect Donald Trump would indicate an appeal is unlikely, but the incoming administration also campaigned on promises to help workers. So, this remains an issue to be watched.
Employer Takeaways:
Whether to proceed with any changes an employer announced to comply with the vacated rule, to put those plans on hold, or to rescind previously implemented salary increases is something each employer should evaluate given their individual business situation.
Salaries: Employers are going to have to decide whether to leave in effect past salary increases that were given in order to maintain an employee’s status as an exempt employee not eligible for overtime. Other employers may have to consider whether employees should be returned to a salaried status after having been moved to an hourly wage to avoid the mandated salary increase. Clearly, these are difficult questions from an HR perspective. Legally, it will be important that proper notice is given prior to making any change to an employee’s pay. Likewise, documentation for why the change is being made will also be important in the event of a wage and hour dispute or audit.
Job Descriptions and Duties: Employers should review the job description and duties for each employee designated as exempt to ensure the employee is likely to meet the DOL’s definition of exempt. Carefully consider the work actually performed by the employee and the significance to the business. While job descriptions are helpful, they’re likely not determinative. Use objective criteria and apply them in a consistent manner.
Consider Employee Impact: When making employment decisions, consider the impact not only on your budget, but also how changes will be communicated and received by those completing the work. Some workers will have liked the ability to earn overtime payments and be upset about a return to a salary, but others will have been uncomfortable with a variable paycheck. Some may have even viewed being moved to hourly from a salary basis as a demotion and welcome a return to a salaried status. In any case, clear and empathetic communication is critical when addressing these sorts of issues.
Seek Legal Counsel: If you would like help in evaluating your company’s options, have any questions about compliance, or need assistance navigating these changes, please contact our Labor & Employment Law Practice Group. We encourage you to subscribe to our Labor & Employment E-Briefs to get the latest HR news, tips, and updates.