Federal court strikes down DOL overtime rule: What employers need to know

With the attention of many employers focused elsewhere, on November 15, 2024, the federal district court in Texas quietly, but completely, set aside the Department of Labor’s final rule raising the minimum salary level thresholds for exempt employees. Texas v. U.S. Dept. of Lab., No. 4:24-CV-468-SDJ (E.D. Tex. Nov. 15, 2024). The court’s decision, that has nationwide effect, invalidates the DOL’s final rule that put in place a salary level increase on July 1, 2024 and another increase that was set for January 1, 2025 to qualify as exempt under the Fair Labor Standards Act (FLSA) white-collar exemptions and the highly compensated employee exemption. As a result, the salary level increases issued by the DOL are immediately invalidated, and for now, the salary level for exempt status remains at $684 per week ($35,568 annually).

Background of the DOL's Final Rule

The FLSA generally requires employers to pay overtime at time and one-half an employee's regular rate when they work more than 40 hours per week unless they qualify for an exemption. To meet the "white-collar exemptions" (executive, administrative, and professional employees), employees must satisfy three tests:

1. Salary Basis Test: Employees must be paid a fixed salary, no matter how few or many hours they work in a workweek.
2. Salary Level Test: The salary must meet or exceed a minimum threshold.
3. Duties Test: The employee must perform specific executive, administrative, or professional job duties.

In April 2024, the DOL issued a final rule increasing the minimum salary level for exempt employees in two phases:

• From $684 per week ($35,568 annually) to $844 per week ($43,888 annually), effective July 1, 2024.
• To $1,128 per week ($58,656 annually), effective January 1, 2025.

The rule also raised the salary threshold for highly compensated employees (HCEs) and included an automatic update mechanism for salary levels every three years.

The Legal Challenge

The state of Texas and business groups filed lawsuits, arguing that the DOL exceeded its statutory authority granted it by Congress under the FLSA when it enacted the rule.

The Court's Decision

The court sided with Texas, striking down the rule nationwide. Key findings include:

• Exceeding Authority: The court ruled that the DOL's salary increases went beyond the authority granted to the DOL by making salary the predominant factor for exemption and not the duties test as Congress envisioned.
• Automatic Adjustments: The court also invalidated the automatic triennial updates, finding that they bypassed the rulemaking process required by the Administrative Procedure Act (APA).

Implications for Employers

The salary threshold reverts to the pre-rule threshold of $684 per week ($35,568 annually) for exempt employees and $107,432 annually for highly compensated employees.

Employers who implemented raises in anticipation of the new rule must now consider their next steps. Decreasing salaries or withholding planned increases could have legal and employee-relations implications. Employers should:

• Consult Counsel: Before making changes, seek legal advice to evaluate risks, especially for multi-state employers where state laws may have stricter standards than the FLSA.
• Review Compensation Policies and ensure compliance with current federal and state regulations.
• Communicate Changes: Notify employees of any pay adjustments in a well thought out and sensitive manner. 

The DOL may appeal to the 5th Circuit Court of Appeals. However, it is anticipated that the incoming administration will withdraw any appeal. McDonald Hopkins will continue to provide updates on the latest developments on this topic and other need to know legal developments.