Another Rule Bites the Dust: Court Invalidates Rule Requiring Higher Salaries to be Exempt from Overtime

On Friday, November 15, 2024, the United States District Court for the Eastern District of Texas set aside the Department of Labor’s (DOL) rule increasing the minimum salary level for the executive, administrative, and professional (EAP) exemptions, along with the highly compensated employees (HCE) exemption, under the Fair Labor Standards Act (FLSA).

The rule had three planned phases: (1) The first phase, which already took place, increased the minimum salary level for the EAP exemption as of July 1, 2024 from $684 per week to $844 per week; (2) the second phase, planned to take effect January 1, 2025, increased the minimum salary level for the EAP exemption from $844 per week to $1,128 per week; and (3) the third phase implemented an automatic mechanism to increase the minimum salary level for the EAP exemption every three years beginning July 1, 2027. The HCE minimum salary went from $107,432 to $132,964 on July 1, 2024, and was scheduled to go to $151,164 on January 1, 2025. The rule was estimated to impact millions of American workers, resulting in a significant increase in the number of employees designated as nonexempt.

Previously, following a challenge from the State of Texas and a coalition of trade associations and employers arguing that the rule’s changes to the salary threshold for the EAP exemption exceeded the DOL’s authority, the court entered a preliminary injunction staying enforcement of the rule. But that preliminary injunction was limited to the State of Texas as an employer. As a result, despite the preliminary injunction, the first phase of the rule went into effect on July 1, 2024, for the rest of the nation.

In a 62-page memorandum opinion and order applying the Supreme Court’s recent June 2024 decision in Loper Bright Enterprises v. Raimondo (abolishing the long-standing Chevron doctrine affording deference to a federal agency’s reasonable interpretation of an ambiguous statute administered by that agency), the court struck down the rule on a nationwide basis. While the court recognized that the DOL had authority “within limits” to impose a salary threshold to qualify for the EAP exemption, it found that the rule, nevertheless, constituted an unlawful exercise of the DOL’s power. Harkening back to the court’s previous ruling striking down a similar rule in 2016, the court stated that the current rules’ changes to the EAP exemption were “designed on their face to effectively displace the FLSA’s duties test with a predominate — if not exclusive — salary-level test.” Consequently, the court found that all three phases of the rule exceeded the DOL’s authority.

So, what does that mean for employers going forward? While the decision is subject to appeal to the Fifth Circuit, for the present time the rule has been vacated and remanded back to the DOL. Therefore, any employers who were planning to implement changes as of January 1, 2025, to comply with the second phase of the rule are not required to do so. Although employers should still proceed with caution as several states, such as California and New York, have minimum salary threshold requirements higher than those of the FLSA. As for employers who have already made changes under the first phase of the rule, they should also proceed with caution and seek the advice of legal counsel if they are considering rolling back those changes.