In a “it's déjà vu all over again” moment, on Nov. 15, 2024, the U.S. District Court for the Eastern District of Texas in Texas and Plano Chamber of Commerce v. United States Department of Labor set aside and vacated the U.S. Department of Labor's 2024 Final Rule increasing the salary level for employees to remain exempt from minimum wage and overtime under the Fair Labor Standards Act's (FLSA) executive, administrative and professional (EAP) exemptions, and automatically updating the salary level every three years. This is, of course, the same fate that met the 2016 Final Rule that both increased the salary level for EAP employees and automatically updated that level, which was enjoined in the waning days of the Obama administration. While the U.S. Department of Justice, which represents the U.S. Department of Labor (DOL), filed an appeal of this decision to the U.S. Court of Appeals for the Fifth Circuit, it is anticipated that the incoming administration likely will withdraw this appeal.
The 2024 Final Rule increased the exempt salary level on July 1, 2024 and January 1, 2025. The first increase for EAP employees was from $684 per week (which equates to $35,568 annually and went into effect in 2019) to $844 per week (which equates to $43,888 annually) effective July 1, 2024. While the State of Texas sought a preliminary injunction of the Final Rule prior to its effective date and was successful, that relief applied to the State of Texas only. Accordingly, many employers increased the salary levels of employees or reclassified employees as non-exempt in advance of the July 1, 2024 deadline.
Under the Final Rule, on Jan. 1, 2025, the salary level for EAP employees was slated to increase from $844 per week (which equates to $43,888 annually) to $1,128 per week (which equates to $58,656 annually). The salary levels then were set to “automatically” update every three years thereafter.
While the FLSA's statutory text does not provide for any specific minimum salary to be exempt from minimum wage and overtime, the DOL was authorized to “define and delimit,” among other things, the EAP exemptions. And since the FLSA's enactment in 1938, the DOL has issued regulations providing for a minimum salary level to be exempt from minimum wage and overtime under the EAP exemptions.
Recently, in litigation that challenged the 2019 DOL regulations that had increased the salary level from $455 per week (which equates to $23,660 annually and had been in effect since 2004) to $684 per week (which equates to $35,568 annually), in Mayfield v. DOL, 117 F.4th 611 (5th Cir. 2024), the U.S. Court of Appeals for the Fifth Circuit found that the DOL's authority to “define and delimit” the EAP exemptions allowed it to include a minimum salary requirement, reasoning that “adding an additional characteristic is consistent with the power to define and delimit, but that power is not unbounded.” The Mayfield court further found that the DOL cannot issue regulations that “replace or swallow the meaning those terms have.”
In a lengthy opinion which provides detailed background on each time the DOL issued EAP salary regulations, Judge Sean Jordan of the United States District Court for the Eastern District of Texas quoted from DOL reports as to how it envisioned what role the minimum salary requirement would play. The court also surveyed the data methodologies relied on to set the salary level over the years, stating that in its rulemakings through 1975, the DOL's focus “was to set the minimum salary level so that only a small percentage of bona fide EAP employees would be denied the exemption, while also ensuring that an adequate differentiation existed between the salaries of nonexempt workers and supervising exempt workers.” Under the FLSA, in order to be exempt under the EAP exemptions, employees need to be paid a certain minimum salary, the payment must be made on a salaried basis that is not subject to deduction due to the quality or quantity of work, and the employees must perform the required duties to be exempt under any of the three EAP exemptions. Relying on the reports of the DOL, the court reasoned that the DOL “recognized three fundamental, interrelated aspects of the salary level test” which “helped ensure that the test did not displace the duties-based test required by the FLSA.”
The DOL “understood that the minimum salary level should be set deliberately low, as it was designed to ‘screen out the obviously nonexempt employees.'” Specifically, the DOL “understood that, while the salary-level test, set at a sufficiently low level, could serve as a proxy for identifying workers who also would not meet the duties test, the Department could not adopt a test ‘based on salary alone.'”
The DOL “understood that setting the salary-level test ‘at a low level' meant that it had to look at wages in the lowest-wage region, the smallest-size business establishment group, the smallest-size city group, and the lowest-wage industry.”
The DOL “was cognizant of the limited purpose of the salary-level test,” quoting from a 1949 DOL report that the salary level must have “as its primary objective the drawing of a line separating exempt from nonexempt employees rather than the improvement of the status of such employees.”
The court recognized that when EAP salary level regulations were issued in 2004, the DOL departed from its prior methodology and set the salary level to exclude approximately 20% of full-time salaried workers in the South (the lowest-wage region) from exemption and 20% of full-time salaried workers in the retail industry. The 2004 regulations also created a standard duties test (previously there were two different tests, one more rigorous with a lower salary level and another less rigorous with a higher salary level). In 2016 the DOL sought to increase that percentage from 20% to 40% of the lowest-wage Census region (which was the South). The 2016 regulations were enjoined in Nevada v. U.S. Department of Labor, 218 F.Supp.3d 520 (E.D. Tex. 2016) and summary judgment ultimately was granted to those challenging the rule, 275 F.Supp.3d 795 (E.D. Tex. 2017). In Nevada, the court found that the substantial increase in the salary level “made overtime status depend predominantly on a minimum salary level, thereby supplanting an analysis of an employee's job duties.” The Nevada court also invalidated the “automatic” updating of the salary level every three years.
In 2019 when the DOL issued its regulations increasing the salary level from $455 per week to $684 per week (which was 20% of weekly earnings of full-time salaried workers in the South), the court noted the DOL “candidly admitted its errors in the 2016 Rule” quoting the DOL from the Federal Register, that “by excluding from exemption, without regard to their duties, 4.2 million workers who would have otherwise been exempt because they passed the salary basis and duties test established under the 2004 final rule, the 2016 final rule was in tension with the [FLSA] and with the department's longstanding policy of setting a salary level that does not ‘disqualify any substantial number of bona fide executive, administrative, and professional employees from exemption.” In issuing the 2019 final rule, the DOL stated that “the salary level test's primary and modest purpose is to identify potentially exempt employees by screening out obviously nonexempt employees.”
In evaluating the challenge to the 2024 Final Rule, Jordan cited to the U.S. Supreme Court's opinion in Loper Bright Enterprises v. Raimondo, 144 S.Ct. 2444 (2024), which provides that “the role of the reviewing court under the Administrative Procedure Act is, as always, to independently interpret the statute and effectuate the will of Congress subject to constitutional limits.” The court concluded that the 2024 Final Rule was an unlawful exercise of the DOL's power, finding that it was “designed” on its “face to effectively displace the FLSA's duties test with a predominant—if not exclusive—salary-level test.”
While the July 1, 2024, increase was to the 20% percentile, which is the same level as the 2019 regulations, the court reasoned that “the DOL's decision to increase the minimum salary level in the 2024 rule comes after only five years have passed since the last such increase. And for the first time in 85 years that increase comes when there has been no change to the federal minimum wage.” The court further found that “ehen a third of otherwise exempt employees who the DOL acknowledges meet the duties text are nonetheless rendered nonexempt because of an atextual proxy characteristic—the increased salary levels—something has gone seriously awry.”
In addition to wiping away the July 1, 2024, salary level increase, the court likewise found that the DOL lacked authority to increase the salary level that was set to take effect on Jan. 1, 2025, which would have been to the 35% of full-time salaried workers in the South. Relying on the statement of the DOL in 2019 in the Federal Register, the court stated, “[i]f this sounds like something the DOL has already admitted cannot be reconciled with the FLSA's text or the department's own ‘longstanding policy,' that's because it is.”
Finally, the court set aside the “automatic” three-year increase in the 2024 Final Rule (which also was enjoined in 2016), finding that the provision was “untethered to the operative terms” of the EAP exemptions and would “evade the procedural requirements of the APA.” The court also noted that in 2004 the DOL, “recognized that it does not have authority to use indexing when setting the salary level under the FLSA's overtime provisions,” citing to a statement in the Federal Register that the DOL found “nothing in the legislative or regulatory history of the FLSA that would support indexing or automatic increases.”
So what is an employer to do following this decision? Employers that were furiously planning for the Jan. 1, 2025, increase can now stand down and wait to see what happens with the appeal following Jan. 20. How employers address the invalidating of the July 1, 2024 salary level increase is more complex. Employers that changed the exempt status of workers or increased salary levels for employees to remain exempt on July 1 now must assess whether they would like to make prospective modifications following this decision. And of course while the salary level was the focus of the 2024 Final Rule, employers always should be mindful of the duties and salary basis requirements of the EAP exemptions.
Originally published by The Legal Intelligencer.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
