District Court Vacates New Overtime Rule, Making It Null and Void Nationwide

On November 15, 2024, a federal judge in Texas ruled that the U.S. Department of Labor (“DOL”) exceeded its authority when it issued a final regulation significantly raising salary thresholds for the executive, administrative, and professional exemption, and it vacated the regulation nationwide.  That means employers will no longer be required to ensure their white-collar salaried employees earn more than the new salary thresholds announced by the DOL, and they will only be required to meet the prior salary threshold of $684 per week (or $35,568 annually) – at least for now.

Background

The Fair Labor Standards Act (“FLSA”) requires that most employees receive a federal minimum wage and overtime for hours worked in excess of forty hours in one workweek.  Certain employees are exempt from minimum wage and overtime requirements, including those who work in a bona fide executive, administrative, or professional (“EAP”) capacity.  While the FLSA itself does not specify any minimum salary requirements, for decades, the DOL has used its authority to “define and delimit” the EAP exemption to set minimum salary requirements.  Indeed, to qualify for these exemptions, it has long been required that employees perform certain duties, be paid on a salary basis, and be paid at least a minimum salary level.

Last spring, the DOL issued a final regulation increasing the minimum salary level (then set at $684 per week) in three stages: (1) to $844 per week on July 1, 2024; (2) then to $1,128 on January 1, 2025; and (3) starting July 1, 2027, via automatic increases based on contemporary earnings data (the “2024 Rule”). The increased salary levels, by all accounts, would affect millions of workers nationwide.

Recently, when addressing a 2019 regulatory change, the Fifth Circuit confirmed in Mayfield v. DOL that the DOL’s authority to “define and delimit” the EAP exemption includes the authority to impose a salary test but noted that such power “is not unbounded.” The question before the district court now, therefore, was whether the 2024 changes to the salary threshold exceeded the bounds of the DOL’s authority.

The Ruling and Its Nationwide Effect

After a lengthy review of the history of DOL regulation-setting in this area, the district court stated that prior salary level tests have set “low minimum salary levels designed to exclude only obviously nonexempt employees” with the purpose of distinguishing exempt from nonexempt employees, “not improving the status of such employees.”  The court acknowledged that the 2024 Rule continued to demarcate exemption status based on a specific point on a wage distribution, but it took issue with various ways in which the DOL’s 2024 methodology diverged from prior rulemaking. 

The district court also emphasized that, while salary can be one indicator of the capacity in which an employee is employed, there must also be a meaningful functional inquiry into the nature of an employee’s duties in order to determine eligibility for the EAP exemption.  Otherwise, the salary test would “swallow the meaning” of the EAP’s operative terms by serving as a “proxy characteristic” and rendering the duties test largely irrelevant. 

Finally, the court took issue with the 2024 Rule’s provisions allowing for automatic escalation of salary thresholds, beginning July 1, 2027 and triennially thereafter, based on contemporary earnings data. The district court rejected the DOL’s argument that the automatic escalation was appropriate because rulemaking is “difficult” and found that the automatic escalation would bypass active engagement by the DOL in regulation setting and circumvent the notice and comment process.

In short, the district court found that the DOL exceeded its authority to define and delimit the exemption because “the minimum salary level imposed by the 2024 Rule ‘effectively eliminates’ consideration of whether an employee performs ‘bona fide executive, administrative, or professional capacity’ duties in favor of what amounts to a salary only-test.”

Takeaways

The district court vacated the 2024 Rule on a nationwide basis and remanded the issue to the DOL for further consideration in light of the court’s opinion.  As such, none of the increased salary thresholds set forth in the 2024 Rule (including those that previously went into effect July 1, 2024) remain in effect.  With a new administration coming into office in January 2025, it is unclear whether the DOL will appeal this ruling to the Fifth Circuit, or whether it will address this issue with additional rulemaking.  For now, though, employers are no longer required, by federal regulation, to meet the salary thresholds that went into effect July 1, 2024, and they are relieved from having to implement any changes they may have been planning to comply with the January 1, 2025 deadline. However, employers should consult legal counsel before revoking any changes that may have already been communicated or made to ensure compliance with relevant legal authority.  Employers are also cautioned to continue monitoring developments in this area and to continue evaluating their employees’ exemption status in light of their duties, method of pay, and salary levels to ensure legal compliance.