On November 15, 2024, a federal judge vacated and set aside the final rule issued by the Department of Labor (“DOL” or the “Department”), which increased the salary threshold required to classify certain positions as exempt under the white-collar exemptions of the Fair Labor Standards Act (“FLSA”). As a result of the ruling, the $58,656 salary threshold increase set for Jan. 1 will no longer take effect and the prior increase (from $35,568 per year to $43,888 per year) which took effect on July 1 has been nullified.
The Backdrop
The FLSA generally requires that employees must be paid at a rate of time and one half their regular rate of pay for hours worked over 40 in a workweek, unless they are employed in a bona fide executive, administrative, or professional capacity – commonly referred to as the “white-collar exemptions” or “EAP exemptions.” In enacting the FLSA, Congress delegated authority to the DOL, to “define and delimit” what it means to be employed in an executive, administrative, or professional capacity.
Over time, the Department has promulgated regulations providing that in order to qualify as exempt under the white-collar exemptions, employees must not only perform certain enumerated job functions but must also be paid on a salary basis that meets the minimum income threshold set by the Department.
The current salary threshold has now reverted back to $35,568 per year ($684 per week). However, as discussed earlier this year, the DOL issued regulations increasing the salary threshold to $43,888 per year ($844 per week) effective July 1, 2024, with an additional increase to $58,656 per year ($1,128 per week) to take effect on Jan. 1, 2025. The rule also increased thresholds for the highly compensated employee exemption, an offshoot of the EAP exemptions, from $107,432 to $132,964 per year effective July 1, and $151,164 per year effective Jan. 1, 2025. The new regulations included further provisions for automatic salary increases to begin on July 1, 2027.
The Ruling
In addressing a motion for summary judgment brought by the State of Texas and a coalition of trade associations and employers, the United States District Court for the Eastern District of Texas found that DOL’s final rule was an unlawful exercise of agency power, holding that in promulgating the rule, the Department exceeded the authority granted to it by Congress to implement the FLSA.
Specifically, the court found that the Department’s approach would effectively “displace” the statute’s intent by prioritizing an employee’s salary level over their job duties. By doing so, the court found that the Department would create a regulatory framework under which millions of employees who satisfy the duties component of the EAP exemptions would nevertheless be rendered non-exempt, which would lead to an incongruous result.
While the court acknowledged that including a low salary threshold in the EAP exemptions has historically had some utility in helping to identify and screen out “obviously nonexempt employees,” it noted that it should not supplant the overarching duties analysis which lies as the core of the exemption. The court also took particular issue with the automatic indexing mechanism included in the regulations, finding that with this approach the Department would effectively place its rulemaking authority on “auto pilot” in contravention of the plain language of the FLSA and the Administrative Procedure Act.
For these reasons, the court found that the only appropriate remedy was to strike down the regulations nationwide.
Moving Forward
While the DOL may seek to appeal the court’s ruling to the United States Court of Appeals for the Fifth Circuit, it remains to be seen whether any appeals initiated by the Biden administration will continue to be pursued by a Trump administration. It is likewise unclear how the new administration will approach implementation and enforcement of the FLSA – and more specifically, the EAP exemptions – as a whole.
In any event, as the law currently stands, the $58,656 salary increase set for Jan. 1 will no longer take effect. Similarly, while many employers have already increased employee salaries to at least $43,888 consistent with the portion of the regulation that took effect on July 1, that requirement has also been abrogated. Employers should consult with counsel prior to further adjusting employee salaries based in part on the court’s ruling and/or the vacatur of the regulations.
However, notwithstanding the practical rollback of the federal exemption threshold, employers with employees in jurisdictions like Alaska, California, Colorado, Maine, New York, and Washington should continue to be mindful of their obligation to comply with state laws setting increased salary requirements above the federal standard.
Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.
[View source.]
