Hold Up, Wait a Minute: Judge Blocks Salary Threshold Increase and Rolls It Back to Pre-July 2024

On Friday, November 15, 2024, a federal judge blocked the U.S. Department of Labor’s Final Rule (29 CFR Part 541), which would have increased the salary threshold for the Fair Labor Standard Act’s (“FLSA”) “white-collar” overtime exemption, which was set to go into effect January 1, 2025.

What Is the White-Collar Overtime Exemption?

The FLSA generally requires employers to pay employees overtime at a rate of one-and-a-half the employee’s regular rate of pay for all hours worked over 40 in a workweek unless the employee is exempt pursuant to one of the FLSA’s various overtime exemptions.

The white-collar overtime exemption applies to employees classified as executives, administrative, and professionals. In addition to the types of duties that the employee must perform in order to be exempt, the employees also must be paid a certain amount in salary. Prior to the Final Rule, to be exempt, employees had to earn at least $684 per week, which amounted to $35,568 per year.

In April 2024, the DOL issued the Final Rule, raising that amount in two stages. The first stage, which went into effect on July 1, 2024, raised the salary threshold to $844 a week ($43,888 per year). As part of stage two, the salary threshold was set to rise again on January 1, 2024, to $1,128 a week ($58,656 a year).

The Final Rule also sought to raise the minimum salary for highly compensated employees, though this exemption is not recognized in all states, from $107,432 to $132,964 per year on July 1, 2024. It was set to rise again to $151,164 on January 1, 2025.

Texas Judge Took the Final Rule, Flipped It, and Reversed It.

The United States District Court for the Eastern District of Texas issued a 62-page decision striking down the slated January 1, 2025 increase and the July 1, 2024 increase, which already went into effect. State of Tex. and Plano Chamber of Commerce, et al., No. 4:24-CV-00499-SDJ (E.D. Tx. November 15, 2024).

The ruling is not surprising because we have seen this scenario play out in the past. Specifically, in 2016, that court halted an Obama Administration rule that sought to increase the salary minimum, saying the increase was too high. That court also stopped the DOL from setting automatic increases to the salary threshold without first following the Administrative Procedure Act’s requirement to provide notice and comment period, which the Final Rule also sought to do.

The arguments that unwound the 2016 rule are the same ones that led to the Final Rule’s undoing, with one exception. Since the 2016 decision, the United States Supreme Court overruled the decades-old Chevron doctrine, which required courts to defer to federal agencies on the law when a statute is open to interpretation. Loper Bright Enterprises et al. v. Raimondo, Secretary of Commerce, Case No. 22-451 (June 28, 2024). In Loper Bright Enterprises, the Supreme Court held that a court may not defer to an agency’s interpretation of the law because it is ambiguous and “must exercise their independent judgment when deciding whether an agency has acted within its statutory authority.” The court further noted that an “employee’s status [must] turn on duties—not salary[,]” and the Final Rule impermissibly “make[s] salary predominate over duties for millions of employees[.]” State of Tex. and Plano Chamber of Commerce, et al., No. 4:24-CV-00499-SDJ, at p. 39.

The Texas district court’s ability to rely on the Supreme Court’s decision regarding Chevron deference adds weight to its decision. As a result, even though the DOL may appeal to the Fifth Circuit, a reversal remains unlikely. This likelihood is further supported by the political landscape as a return to a Republican Administration will most likely oppose the Final Rule.

Employer Takeaways and Next Steps:

• While the chances that the decision gets reversed are slim, it is possible. Employers should continue to monitor the appellate courts on this issue.

• Employers waiting until January 1, 2025, to make salary changes may want to revisit them or put them on pause in light of the ruling.

• Employers who conducted audits and determined that some of their employees were not properly classified should reclassify them to ensure proper classification. This may include reclassifying employees to salaried non-exempt or hourly non-exempt.

• Employers who already took steps to reclassify and make changes to employees’ salary thresholds in order to comply with the July 1, 2024 raise or who notified employees that they would experience changes as of January 1, 2025, may choose to keep those changes in place or retract those notices and/or reduce salary levels back to their pre-July 1, 2024 range. Obviously, there are a number of potential issues with this strategy. First, it is almost certain that employees will not be happy with having their wages reduced or not increased in line with any notice and will likely push back. If an employer chooses to continue pressing forward with any wage change, a number of states require advance notice of wage changes. Even in states where notice is not required, employers should provide an advanced written notice to employees before any pay change goes into effect.

• Employers who conducted audits and determined that some of their employees were not properly classified should reclassify them to ensure proper classification. This may include reclassifying employees to salaried non-exempt or hourly non-exempt.