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Smart Summary

• Court Decision: The U.S. District Court for the Eastern District of Texas vacated the DOL's April 2024 Final Rule on November 15, 2024.
• Rule Details: The rule aimed to increase the salary threshold for exempt employees in two phases: $43,888 annually starting July 1, 2024, and $58,656 annually starting January 1, 2025.
• Highly Compensated Employees (HCEs): The rule also included increases for HCEs and automatic updates every three years starting in 2027.
• Court's Findings: The court found the DOL exceeded its authority, replacing the duties test with a salary-level test, and struck down the automatic update provision.
• Implications for Employers: The salary threshold reverts to $35,568 annually, and the threshold for HCEs returns to $107,432 annually.
• Employer Recommendations: Employers should avoid lowering salaries to prevent morale issues and consider revisiting salary amounts for open positions and bonus potentials.
• Next Steps: The DOL may appeal, but it is unlikely the new administration will pursue it. Employers should review their salary structures and prepare for potential future changes.
• Conclusion: The ruling highlights ongoing tensions between government agencies and the courts, urging employers to review compliance strategies.

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In a significant legal development, the U.S. District Court for the Eastern District of Texas has vacated the Department of Labor’s (DOL) April 2024 Final Rule, which raised the salary threshold for employees to be classified as exempt from overtime under the Fair Labor Standards Act (FLSA). This decision, issued on November 15, 2024, has immediate implications for employers nationwide.

Background + Court Decision

As many of you know, in April 2024, the DOL issued a Final Rule aimed at increasing the salary threshold for executive, administrative, and professional (EAP) employees in two phases. The first phase, effective July 1, 2024, raised the threshold to $43,888 annually. The second phase, set for January 1, 2025, would have further increased the threshold to $58,656 annually. The rule also included increases to the salary threshold for Highly Compensated Employees (HCEs). Additionally, the rule included automatic updates every three years, starting in 2027. The rule’s issuance forced employers to choose between two undesirable options, either raising the pay of all exempt employees to the threshold or allowing those employees, who many times did not track their hours, to be eligible for overtime. That is, until Friday.

In State of Texas v. U.S. Dept. of Labor, et al., Civil No. 4:42-CV-468-SDJ (E.D. Tex. Nov. 15, 2024), the court found that the DOL exceeded its statutory authority by implementing the changes. The court held that the rule effectively replaced the duties test with a salary-level test, which was not the intent of the FLSA. The decision also struck down the automatic update provision, citing it as a violation of the Administrative Procedure Act.

Implications for Employers

With the court’s ruling, the salary threshold reverts to the pre-July 2024 level of $35,568 annually. This means that employers who had adjusted their payrolls to comply with the new rule may need to reassess their compensation strategies. The threshold for highly compensated employees also returns to its previous level of $107,432 annually.

Many employers already adjusted salaries to comply with the phase 1 increase in July. In those instances, we do not recommend lowering salaries as that is likely to create morale problems for impacted employees. We do suggest potentially revisiting salary amounts for open exempt positions, and potentially revisiting bonus potentials due to the lower salary obligations.

Next Steps

The DOL may appeal the court’s decision, but with the upcoming change in administration, it is unlikely that the new administration will pursue an appeal to its completion. In the meantime, employers should review their current salary structures and consider the impact of reverting to the previous thresholds.

Conclusion

This ruling underscores the ongoing tension between government agencies and the courts, which is expected to continue in the coming months. Employers should take this opportunity to review their compliance strategies and ensure they are prepared for any future changes in the regulatory landscape.