Federal Court Vacates Increased Salary Standards for Exemptions from Overtime

On November 15, 2024, in the case of State of Texas v. United States Department of Labor, the United States District Court for the Eastern District of Texas vacated and set aside the rule issued by the U.S. Department of Labor (DOL) raising the minimum salary thresholds for most employees covered by the so-called white collar exemptions under the Fair Labor Standards Act (FLSA). The order, which has nationwide effect, returns the minimum salary thresholds to the levels set by the DOL in 2019 (the “2019 Rule”).

The same court had previously enjoined enforcement of the rule with respect to the State of Texas in its capacity as an employer. The latest decision vacates the rule for all employers nationwide.

Background of the 2024 Rule

Under the FLSA, employees who are employed in a “bona fide executive, administrative, or professional capacity” are exempt from entitlement to overtime pay if they satisfy the “duties test” for one of the exemptions and are paid a minimum weekly salary. As we reported earlier this year, on April 22, 2024, the DOL issued a final rule that increased the minimum salary level to qualify for one of those exemptions (the “2024 Rule”). Specifically, the 2024 Rule raised the minimum salary level for covered employees from $684 per week to $844 per week (or from $35,568 per year to $43,888 per year) on July 1, 2024, and was set to raise the threshold to $1,128 per week ($58,665 per year) on January 1, 2025.

The 2024 Rule also raised the total annual income threshold for “highly compensated employees” – a category of workers for whom the duties tests for exemption are more relaxed due to their higher pay levels. The annual income threshold for application of the highly compensated employee standard increased from $107,432 to $132,964 on July 1, 2024, and was due to increase to $151,164 on January 1, 2025.

The 2024 Rule further adopted an automatic updating mechanism. Beginning July 1, 2027, the salary threshold was to be updated every three years.

These changes were estimated to affect over four million workers nationwide. By raising the minimum salary threshold to qualify for one of these FLSA exemptions, the 2024 Rule presented employers with two options: either raise salaries or reclassify impacted employees as non-exempt with entitlement to overtime.

The Court’s Decision

The court held that the DOL exceeded its statutory authority under the FLSA by issuing the 2024 Rule because it effectively replaced the FLSA’s duties tests with a salary-level test with respect to many employees. The court stated that while the DOL may use salary as part of its authority to “define and delineate” the terms of the FLSA’s executive, administrative, and professional exemptions, the DOL may not redefine an exemption by prioritizing salary over job duties, as doing so would be contrary to congressional intent in enacting the FLSA. The 2024 Rule, the court concluded, prioritized salary over job duties by rendering a third of the workforce who meet the duties test ineligible for the exemption solely due to their salary level.

The court also determined that the FLSA explicitly mandates that any changes to the salary threshold must be implemented through formal rulemaking under the Administrative Procedure Act. Accordingly, the court concluded that the DOL did not have the authority to establish automatic future increases without engaging in the formal rulemaking process, which, among other things, allows for public comment prior to each increase. Additionally, the court concluded that the 2024 Rule's broad impact on millions of employees and hundreds of thousands of employers justified its invalidation on a nationwide scale.

It is anticipated that the DOL will appeal the lower court’s decision to the U.S. Court of Appeals Fifth Circuit. However, with the anticipated change in presidential administration, the DOL, under new leadership, may choose not to pursue the appeal and instead follow the 2019 Rule, which was issued under the previous Trump administration and is now once again in effect.

Next Steps

This ruling effectively reverts the minimum salary threshold for employees covered by the white collar exemptions to $684 per week ($35,568 per year) and reverts the total annual income threshold for application of the relaxed duties test for highly compensated employees to $107,432 per year. Employers that made adjustments to employees’ salaries or exemption statuses based on the now-invalidated July 1, 2024 increase should consult with legal counsel before deciding whether to reverse those changes moving forward. Additionally, employers should be aware that some states, including Alaska, California, Colorado, Maine, New York, and Washington, have salary thresholds that exceed the FLSA’s threshold.

For additional guidance on how this ruling impacts your workforce, please contact a member of Goodwin’s Employment Practice.

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee similar outcomes.