On November 14, 2024, a federal judge in the Eastern District of Texas issued an order vacating the recent U.S. Department of Labor (“DOL”) Final Rule, which raised the minimum salaries employers had to pay certain employees classified as exempt from overtime and minimum wage requirements. As we previously reported the DOL issued a Final Rule increasing the minimum salary thresholds for administrative, executive, and professional exemptions under the Fair Labor Standards Act (“FLSA”). This meant, starting on July 1, 2024, administrative, executive, or professional employees had to earn a salary of at least $844/week and, effective January 1, 2025, their salaries had to increase to at least $1,128/week. Employees whose salaries were below the applicable threshold would have now been eligible for overtime. With this ruling, these increases are no longer required.
What does this most recent ruling mean to employers?
This most recent ruling vacated both the July and January increases, returning the minimum exempt salary to $684/week for administrative, executive, or professional employees and reverting to a threshold of $107,432 “highly compensated employees.” The Court’s ruling, among other things, held that the DOL’s singular focus on the salary threshold without due consideration of the accompanying duties test was not justified, especially because a significant number of employees who meet the applicable duties tests would no longer be exempt because they earned less than the minimum salary amounts.
As a reminder, the FLSA permits employers to exempt certain employees from minimum wage and overtime requirements, including administrative, executive, and professional employees who meet the minimum requirements of the FLSA. The administrative, executive, and professional exemptions, often referred to as the “white collar exemptions,” are only available if an employee meets BOTH a duties test and a salary test. There is another exemption for workers classified as “highly compensated employees” and these workers must have a minimum total annual compensation and work in non-manual labor jobs that meet at least one prong of one of the white collar exemption duties tests.
In addition to the minimum salary threshold, the FLSA duties tests require employees meet all of the requirements for the applicable exemption, which are:
For the Executive Exemption
- The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;
- The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and
- The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion, or any other change of status of other employees must be given particular weight.
For the Administrative Exemption
- The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
- The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
For the Professional Exemption
- The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character, and which includes work requiring the consistent exercise of discretion and judgment;
- The advanced knowledge must be in a field of science or learning; and
- The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.
What now?
First, employers should diligently evaluate their exempt employees to ensure that they meet an applicable duties test and the salary threshold. A salary that meets the threshold does not in-and-of-itself make an employee exempt from overtime. Separate and apart from the Final Rule, there are specific tests for executive, administrative, professional, computer, outside sales and highly compensated employee exemptions that depend on the duties those employees perform. Those tests have evolved over time, and recent court rulings have refined and narrowed their application. Employers would be well-advised to take this opportunity to evaluate whether their employees are properly characterized under the current versions of the compliance tests and use this as an opportunity to roll out any needed reforms.
Second, separate from the legal requirements, employers also need to consider the organizational impact of any adjustments. Technically, employers can potentially reduce the salaries of employees whose salaries were increased to address the July increase and/or in anticipation of the January increase. Practically, any reduction in compensation, even if it is legally permissible, has the potential to wreak havoc on retention and foster a negative culture. Moreover, employers should conduct a market analysis before adjusting compensation because many employers already made adjustments in anticipation of the implementation of the Final Rule, meaning the market may have moved compensation upward even if the law does not require such a high level of compensation.
Third, employers should be careful not to forget about compliance with applicable state wage laws, which differ from the federal law and will not automatically change, even if the federal law does.
What is next?
The DOL may appeal this most recent ruling, however, with the change in administration, it is hard to imagine that the DOL will continue to support such an adjustment. As you may recall, in 2016, the administration abandoned the Obama-era efforts to increase salary thresholds and, eventually, set the more modest thresholds that are now in place again.
Employers who have questions or concerns about compliance should consult with their counsel and consider a wage and hour audit to determine if they are currently in compliance with applicable federal and state laws regarding overtime pay.
