A Texas federal court has struck down the 2024 Department of Labor overtime rule increasing the salary level applicable to the Federal Labor Standards Act's "white collar" exemptions both prospectively and retroactively. No aspect of the 2024 rule remains in effect, and the salary level test is now the same as it was under the prior 2019 overtime rule: $684 per week.
Introduction
On November 15, 2024, inTexas v. Department of Labor, 4:24-cv-00499-SDJ (E.D. Tex. Nov. 15, 2024), a federal court in Texas struck down the U.S. Department of Labor (DOL) 2024 rule that would have increased the standard minimum salary level applicable to the executive, administrative and professional (EAP) exemptions under the Fair Labor Standards Act (FLSA) to $1,128 per week effective January 1, 2025. The U.S. District Court for the Eastern District of Texas vacated the DOL's 2024 rule in its entirety nationwide, concluding that the DOL lacked the authority to implement any of the salary level changes. As a result of the court's ruling, the salary threshold has reverted to the lower level of $684 per week previously in effect under the DOL's 2019 overtime rule. The court's decision almost certainly spells the end for the 2024 rule, particularly given the recent election of Donald Trump as president of the United States, since new leadership at the DOL is unlikely to pursue any appeal filed by the current administration under President Joseph Biden.
Background
To classify an employee as exempt from the FLSA's minimum wage and overtime requirements pursuant to the EAP exemptions, an employer must generally show that the employee (1) is paid a minimum salary level, (2) is paid on a salary basis and (3) performs certain job duties.
The Prior Rules
To understand the court's ruling on the 2024 rule, it is important to understand the prior rules.
In May 2016, the DOL under the Obama administration issued a final rule that increased both the standard and highly compensated employee earnings thresholds and provided for their regular updating. The 2016 rule, among other things, increased the standard minimum salary level to $913 per week, the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage census region (which has been the South under all the overtime rules discussed herein) based on data collected by the Bureau of Labor Statistics.
However, in November 2016, the Eastern District of Texas granted an emergency motion for a preliminary injunction to block the 2016 rule from going into effect. The significant increase to the salary level, in the court's opinion, essentially created a "de facto salary-only test," and Congress "did not intend salary to categorically exclude an employee with [white collar] duties from the exemption." The Department of Justice appealed the ruling, but shortly after the presidential election and change in administration, the Trump administration dropped the appeal and rescinded the 2016 rule.
In September 2019, the DOL under the Trump administration published its own final rule regarding the "salary level" test. The 2019 rule, among other things, increased the standard minimum salary level to $684 per week, the 20th percentile of weekly earnings of full-time salaried workers in the lowest-wage census region. The 2019 rule abandoned the automatic updating mechanism, noting it would "deprive the department of flexibility to adapt to unanticipated circumstances." The 2019 rule went into effect on January 1, 2020.
The 2024 Rule
The 2024 rule went further than the 2019 rule but not as far as the 2016 rule. Among other changes, the 2024 rule implemented the following three major updates:
First, effective July 1, 2024, the 2024 rule raised the standard minimum salary level to the 20th percentile of weekly earnings of full-time salaried workers in the lowest-wage census region—from $684 per week to $844 per week (or from $35,568 annually to $43,888 annually). The DOL estimated that this change resulted in 1 million employees becoming eligible for overtime pay.
Second, effective January 1, 2025, the 2024 rule would have raised the standard salary level to the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage census region—from $844 per week to $1,128 per week (or from $43,888 annually to $58,656 annually). The DOL estimated that this second salary increase would have resulted in an additional 3 million workers becoming eligible for overtime pay.
Finally, the 2024 rule implemented a mechanism to automatically increase these salary levels every three years to maintain the standard minimum salary level at the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage census region. The first automatic increase would have occurred on July 1, 2027, without the need for the notice-and-comment process normally associated with agency rulemaking.
The Legal Challenge and Ruling
On June 3, 2024, the state of Texas and a coalition of business organizations filed a complaint in the Eastern District of Texas alleging that, like the changes in the 2016 rule, the changes in the 2024 rule exceeded the DOL's authority under the FLSA.
On June 28, 2024, the court granted the preliminary injunction, describing the substance of the 2024 rule as evoking "déjà vu" of the previously invalidated 2016 rule and stopping the DOL from implementing and enforcing this rule against Texas as an employer. As a result, the first salary level increase went into effect for all other employers nationwide.
Five months later, on November 15, 2024, the court granted summary judgment to the plaintiffs, vacating the 2024 rule nationwide.
The Eastern District of Texas reviewed the 2024 rule under the recent U.S. Supreme Court decision from Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024). For 40 years prior, courts followed Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), which held that when a "statute is silent or ambiguous with respect to the specific issue," courts "may not substitute [their] own construction of a statutory provision for a reasonable interpretation made by" the agency. However, the Loper Bright decision, issued on June 28, 2024, eliminated this concept of "Chevron deference" to an agency, holding that courts must now exercise independent judgment to decide whether an agency has acted within its statutory authority.
Reviewing under this new principle, the Eastern District of Texas found that the 2024 rule's salary level increases exceeded the DOL's authority under the FLSA. The court also found that the DOL lacked the power to implement automatic increases to the salary level.
The court began by examining the statutory text of the FLSA, which exempts from minimum wage and overtime requirements "any employee employed in a bona fide executive, administrative, or professional capacity." The court reasoned that the plain and ordinary meanings of words like "capacity," "executive," "administrative" and "professional" focus on the nature of an employee's duties within their workplace and industry, rather than on their salary or compensation.
Accordingly, the court found that the minimum salary levels imposed by the 2024 rule effectively eliminated consideration of whether an employee performs "bona fide executive, administrative, or professional capacity duties" and focused the exempt status inquiry only on salary. As a result, millions of employees who would otherwise qualify as exempt based on their job duties would be rendered nonexempt based solely on their salary level. The court therefore found that both salary level increases of the 2024 rule — i.e., the increase effective July 1, 2024, and the increase effective January 1, 2025—exceeded the DOL's authority under the FLSA.
Even though the methodology used for the July 1, 2024, increase was the same as that used for the 2004 and 2019 rules, the court reasoned that those rules had appropriately addressed significant salary shifts. By contrast, the 2024 rule increased the salary level for the EAP exemptions despite the lack of any corresponding shift in the federal minimum wage since the implementation of the 2019 rule.
The court also found that the DOL lacks authority to implement automatic changes to the rules for the EAP exemptions. The court emphasized that the FLSA specifies that the terms be "defined and delimited from time to time by regulations of the Secretary, subject to the provisions of [the APA]" and the term "by regulations" restricts the DOL to the notice-and-comment rulemaking process.
What This Means for Employers
The Eastern District of Texas decision vacates the 2024 rule in its entirety nationwide, including the increases that went into effect earlier this year on July 1, 2024. As a result, the salary levels revert to the DOL's 2019 rule, which set the standard minimum salary at $684 per week (or $35,568 annually) and the annual salary threshold for highly compensated employees at $107,432 per year. While it is possible that the DOL may appeal this decision to the Fifth Circuit, it is likely that the new administration under President-elect Trump will drop any appeal filed.
Employers who implemented changes to employees' salary levels or exempt statuses in response to the July 2024 increases should caution against immediately reverting to the salary levels and exempt statuses from before the 2024 rule. First, employers should consider that such frequent changes to compensation level and structure may have a negative impact on employee morale. Second, multiple states, including Pennsylvania, New York and Massachusetts, among others, require employers to provide advance notice of changes in compensation, sometimes in writing. Employers should seek the assistance of counsel to determine strategic responses to this decision.
Employers should also consider evaluating their employees' compensation and job duties for compliance with the other aspects of the FLSA's tests for overtime exemption — i.e., the salary basis test and the applicable job duties test—to minimize the risk of misclassification.
Furthermore, employers should also take the opportunity to review and confirm compliance with applicable state or local law regarding overtime exemptions, which may differ from federal law. Some jurisdictions have higher salary thresholds for EAP employees than the FLSA. For example, California requires $1,280 per week, increasing to $1,320 per week on January 1, 2025. New York currently requires $1,200 per week for New York City, Westchester and Long Island, increasing to $1,237.50 per week on January 1, 2025, and $1,275 per week on January 1, 2026. The remainder of New York state currently requires $1,124.20 per week, increasing to $1,162.50 per week on January 1, 2025, and $1,200 per week on January 1, 2026.
For More Information
If you have any questions about this Alert, please contact Natalie F. (Hrubos) Bare, Jonathan A. Segal, Anshul S. Agrawal, any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group or the attorney in the firm with whom you are regularly in contact.
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