Federal Court Vacates DOL Rule Raising Salary Level for Exempt Employees

Late in the day on Friday, November 15, 2024, the U.S. District Court for the Eastern District of Texas granted summary judgment to the State of Texas and vacated and set aside the Department of Labor (DOL)’s recently-promulgated regulation raising the salary level threshold for the “white collar” exemptions (including the highly-compensated employee exemption) under the Fair Labor Standards Act (FLSA).  State of Texas v. U.S. Dept’ of Labor, Civil Action No. 4:24-CV-499, E.D. Tex. 11/15/2024. Consequently, the ruling prohibits the scheduled January 1, 2025 salary level increase from going into effect; retroactively struck down the July 1, 2024 salary level increase; and invalidated the regulation’s “escalator” provision, which provided for an automatic increase in salary level every three years. In doing so, the Court held that the DOL had exceeded its authority under the FLSA by increasing the salary level to such a degree that it created a de facto “salary only” requirement to qualify for the exemption. Finally, the Court declared the scope of its ruling was nationwide, even though its preliminary rulings had applied only to the parties immediately before the Court.  

The FLSA requires employers to pay employees one and one-half times their regular rate of pay for all hours worked over 40 in a workweek, but also provides exemptions to the overtime requirement for certain “white collar” employees. In order to qualify for the exemption, the employee must satisfy each of three criteria: (1) they must perform jobs that involve certain primary duties; (2) they must be paid on a salaried basis, meaning the amount of weekly compensation is predetermined and does not vary by quality or quantity of work; and (3) they must earn a certain level of salary.  In April, the DOL issued final regulations raising the white-collar exemption salary threshold for the first time since 2019. Before the issuance of the regulation, the salary level was $684 per week, or $35,558 per year. The new rule raised the minimum salary level in two increments. First, the rule raised the salary threshold to $844 per week ($43,888 annually), effective July 1, 2024. On January 1, 2025, the rule was scheduled to raise the salary threshold to $1,128 per week ($58,656 annually). These increases represented a 65% aggregate increase in the minimum salary level over six months. Thereafter, the rule would have automatically updated the salary threshold every three years. The rule also increased the “highly compensated employee” (HCE) threshold from the current $107,432 annual salary to $132,964 as of July 1, 2024, and again to $151,164 as of January 1, 2025, also with automatic updates every three years.

The Texas federal court had previously issued a preliminary injunction prohibiting the rule from going into effect, but that order was limited to the parties before it, and applied only to the State of Texas in its capacity as an employer and a group of trade associations and private employers who were the plainitffs. In analyzing the merits, the Court observed that the FLSA itself limited the applicability of the exemption to those with certain job duties, and made no mention of requirements about salaries or salary levels. The Court acknowledged that the FLSA regulations had always included salary basis and salary level tests, and that it was recognized that the DOL’s authority to “define and delimit” the scope of the exemption included the ability to impose these requirements. Mayfield v. DOL, 117 F.4th 611, 629 (5th Cir. 2024). However, the Court concluded that the DOL exceeded its authority because the size of the increase in effect made the primary duties test illusory and converted qualification for the FLSA exemptions into a “salary only” test. In other words, the salary level test no longer functioned to screen out from the exemption employees who obviously were non-exempt; rather it now acted in fact to screen out employees who were obviously exempt as a result of their duties, but rendered them non-exempt only as a result of the inflated (and not statutorily authorized) salary level. Furthermore, the escalator provision was struck down because the FLSA itself provides salary level increases can only be made  by administrative rule-making procedures and an automatic increase provision contradicted the statutory text. Given the wide-ranging impact the new regulation has, the Court concluded a nationwide application was warranted,

The practical effect for employers is immediate. First, the January 1, 2025 salary level increase will not go into effect as scheduled. Second, the Court Order retroactively nullified the salary level increase that went into effect last July 1, 2024, restoring the effective salary level for exempt status to $684 per week, or $35,558 per year. Employers will need to make certain decisions depending on what actions they took in advance of the July 1 increase deadline. If an employer did not provide an increase in annual salary level to $43,888 and simply reclassified the employee to non-exempt, it may be possible to reclassify the employee as exempt. On the other hand, if an employer has provided a salary level increase, we recommend that you consult with counsel before contemplating a rollback of those recent salary increases. Finally, employers should remember that the DOL may appeal to the U.S. Court of Appeals for the Fifth Circuit, but given the upcoming changes in the Administration as a result of the recent Presidential election, such an appeal appears problematic at best. Employers in certain other states should be cognizant whether their state law provides a higher salary level for the exemption than the FLSA.

Nyemaster Goode’s Labor & Employment Law attorneys have extensive experience advising employers on compliance and litigating issues under the Fair Labor Standards Act and state wage/hour laws. Please feel free to contact any member of the team with questions.