STOP THE PRESSES: DOL’s Overtime Expansion Faces Judicial Freeze

A federal judge in Texas has hit pause on the hotly contested salary increase for the executive, administrative, and professional (EAP) overtime exemption under the Fair Labor Standards Act (FLSA). Earlier this year, the Department of Labor (the DOL) issued a final rule (the 2024 Rule) which would have negated the exemption statuses of millions of employees classified as exempt under the EAP and highly compensated employee (HCE) exemptions by significantly increasing their compensation threshold. The court set aside the DOL’s 2024 Rule, effectively returning the EAP and HCE exemption requirements to their pre-July 1, 2024 levels, back to a minimum salary threshold of $684 per week to meet the EAP exemption and an annual salary of $107,432 for the HCE exemption. The ruling applies nationwide and relieves employers of the obligation to increase employee salaries in January 2025 to maintain their EAP-exemption status.

Background

The DOL’s 2024 Rule implemented a three-part process that required employers to initiate the first phase, increasing the minimum salary threshold for EAP employees from $684 per week to $844 per week, by July 1, 2024. The second phase of the 2024 Rule further increased the salary level on January 1, 2025, and would have had the effect of reclassifying nearly three million EAP exempt employees as nonexempt at the start of the new year—even though their EAP duties would not change. Finally, the third phase of the 2024 Rule featured an automatic indexing mechanism that would have increased the minimum salary level on July 1, 2027, and again every three years thereafter.

The state of Texas, along with a coalition of trade associations and employers (the Plaintiffs), moved to have the DOL’s 2024 Rule invalidated for exceeding the DOL’s authority under the FLSA.

Key Findings

In its 62-page opinion, the court offered an in-depth analysis into the DOL’s historical approach to the EAP exemption and criticized the three-part process outlined in the DOL’s 2024 Rule. In its opinion, the court agreed with the Plaintiffs about the DOL exceeding its authority under the FLSA, reasoning that “a salary test cannot displace the duties test.” See State of Texas, et al. v. United States Dep’t of Labor, et al., Case No. 4:24-CV-00499, _______, at 43 (E.D. Tex. Nov. 15, 2024). [1] It elaborated that “[w]hen a third of otherwise exempt employees who the [DOL] acknowledges meet the duties test are nonetheless rendered nonexempt because of an atextual proxy characteristic—the increased salary level—something has gone seriously awry.” Id. at 44. The court highlighted inconsistences in the DOL’s rationale, pointing to the DOL’s past admissions from a previous attempt to increase salary levels in 2016 where the DOL conceded “[a] salary level set that high does not further the purpose of the [FLSA], and is inconsistent with the salary level test’s useful, but limited, role in defining the EAP exemption.” Id. at 46. This acknowledgment undermined the DOL’s current defense of the 2024 Rule and reinforced the court’s view that the salary level increase was improperly designed. Further, the court criticized the 2024 Rule’s automatic salary increases because “there is no basis to conclude that the automatic revision to the minimum salary level…will have anything to do with changes in EAP-exempt employees’ duties.” Id. at 52. The DOL also previously acknowledged during its implementation of the 2004 salary increase that “adopting automatic increases would be contrary to Congress’s intent and otherwise improper,” further noting that “nothing in the legislative or regulatory history that would support indexing or automatic increases.” Id. at 53. The court added that the automatic increases would violate the notice-and-comment rulemaking requirements of the Administrative Procedure Act. The court’s decision emphasized that the EAP exemption applies to “any employee employed in a bona fide executive, administrative, or professional capacity.” Id. at 58 (citing 29 U.S.C. § 213(a)(1)) (emphasis added).

The decision highlights that while the DOL has limited authority to use salary as an objective measure in defining the EAP exemption, this metric cannot supersede or distort the fundamental meaning of the exemption’s operative terms.

Next Steps

It is unknown whether the DOL will appeal this decision, revise its 2024 Rule, or pursue alternate measures. In the meantime, employers should reassess the measures they took to comply with the July 1, 2024 or January 1, 2025 salary increases.

If employers have already raised EAP employee salaries, they should evaluate whether the increases are sustainable and align with the company’s future compensation strategy before taking further action. Changing or revoking an increase that has been in place for a number of months should be very carefully considered from a human resources perspective. We strongly encourage you to discuss these changes with counsel before taking action.

For employers who could not afford a salary increase and opted to offer overtime instead, it is important to revisit those decisions to ensure employees in those positions are meeting the duties requirements for the EAP exemption and are informed about any changes to their overtime exemption status. In both scenarios, employers should consult an attorney in the Woods Rogers Labor & Employment group to determine the best course of action.

[1] The salary increases for the HCE test mirror those for the EAP exemption test. While the court did not focus its analysis on the HCE exemption test, the court noted that “[its] analysis regarding the legality of the changes to the standard salary level applies equally to the Department’s changes to the HCE level.” Id. at 24 n. 19.