The recent judgment by the U.S. District Court for the Eastern District of Texas has invalidated the U.S. Department of Labor’s (DOL) new rule mandating significant salary increases for exempt employees under the Fair Labor Standards Act (FLSA). Delivered on November 15, 2024, this ruling holds substantial implications for employers nationwide. The decision maintains the salary threshold at $35,568 per year for employees who meet the “white-collar” exemptions in terms of duties and payment requirements, thereby exempting them from the FLSA’s overtime stipulations. In detail, the DOL issued a final rule on April 23, 2024, termed “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees.” This rule required employers to increase the salary threshold to $43,888 per year starting July 1, 2024, and mandated a further increase to $58,656 per year effective January 1, 2025. Additional amendments included higher thresholds for the “highly compensated” exemption and the provision for employers to make year-end catch-up payments up to 10% if employee earnings fell short of the requisite threshold. The rule also called for automatic salary threshold increases every three years based on the consumer price index, eliminating the notice and comment period.
Court’s Decision
Following the DOL’s publication of the final rule, various lawsuits emerged, arguing against the sizable salary threshold increment, which would strip over 4 million employees of their exempt status despite their duties qualifying them as exempt. Within Texas, the court initially placed a limited injunction preventing the rule’s enforcement on public employers. Subsequently, on November 15, 2024, the court issued a comprehensive 62-page opinion declaring the 2024 rule as an unlawful exercise of agency power, resulting in a nationwide injunction against the final regulation. The court’s decision encompassed principles of statutory interpretation and administrative procedure. The ruling emphasized that the FLSA’s white-collar exemptions prioritize an employee’s duties over their salary. By considerably raising the salary threshold, the DOL effectively supplanted the statutory duties-based test articulated in the FLSA. The court highlighted the financial burden this rule would place on employers, especially small businesses and state governments, estimating first-year expenses at $2.7 billion nationwide. The court also deemed the provision for automatic salary threshold increases based on the consumer price index inconsistent with congressional intent, as it bypassed the regulatory process which requires the Secretary of Labor’s oversight in implementing such changes.
Implications for Employers
For employers, the court’s ruling provides temporary relief from escalating labor costs amidst a period of high inflation. However, the timing poses challenges as many employers have already invested considerable effort in preparing for the final rule’s implementation. Employers will need to reevaluate their strategies and budgets for 2025 to adapt to the ruling. Employers should continue using the 2019 salary threshold of $684 per week when determining whether an employee qualifies for white-collar exemptions. Employers who previously increased the salary threshold in July 2024 should reassess their current employee classifications to decide whether to reduce salaries while maintaining exempt status, uphold salaries as per the July 2024 increase, revert positions to exempt status that were reclassified as nonexempt, or contemplate salary adjustments for better recruitment and retention. Reducing pay after raising expectations in 2024 could potentially damage employee morale.
Strategic Review for Employers
The U.S. District Court for the Eastern District of Texas recently invalidated the U.S. Department of Labor’s (DOL) new rule mandating salary hikes for exempt employees under the Fair Labor Standards Act (FLSA). On November 15, 2024, the court’s ruling significantly impacts employers nationwide by reinstating the salary threshold at $35,568 per year for employees qualifying for “white-collar” exemptions, thus exempting them from the FLSA’s overtime requirements. The invalidated rule, issued on April 23, 2024, and named “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees,” aimed to raise the salary threshold to $43,888 starting July 1, 2024, with a subsequent increase to $58,656 on January 1, 2025. Additional changes included higher thresholds for the “highly compensated” exemption and permitted employers to make year-end catch-up payments up to 10%. The rule also suggested automatic salary increases every three years, based on the consumer price index, without a notice and comment period.