The U.S. District Court for the Eastern District of Texas recently vacated the U.S. Department of Labor’s (DOL) regulations issued in April 2024 that increase the salary threshold necessary to satisfy the Executive, Administrative and Professional (EAP) exemptions to overtime through its decision and order in Texas v. U.S. Department of Labor. The District Court determined on Nov. 15, 2024 that the proposed increases “cannot be reconciled with the Fair Labor Standards Act’s text [, the DOL’s] own longstanding policy” or the Administrative Procedure Act (APA). Accordingly, the District Court invalidated the regulations and vacated the increases to the salary thresholds nationwide.
Background
As detailed in our prior alert, in April 2024, the DOL issued its final regulation that increased the salary threshold level necessary to classify certain EAP employees as exempt from the Fair Labor Standards Act’s (FLSA) overtime requirements. To be classified as an EAP employee, who is exempt from overtime under the FLSA, in most cases, the employer must satisfy a three-part test: (1) the employee must be paid on a salary basis; (2) the salary must be at or above a certain threshold; and (3) the employee must perform specific job duties. The April 2024 regulations only addressed the salary threshold, the second part of that test.
The April 2024 regulations increased the salary threshold from the current level of $684 per week ($35,598 per year) to the following:
- On July 1, 2024 to $844 per week ($43,888 per year).
- On Jan. 1, 2025 to $1,128 per week ($58,656 per year).
- Starting on July 1, 2027, every three years the salary threshold “will be updated to reflect current earning data.” According to the DOL, the agency aims to set the salary threshold at the 35th percentile of weekly earning of full-time salaried workers in the lowest-wage Census region, which is current $1,128 per week in the South Census region (Alabama, Arkansas, Delaware, District of Columbia, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia and West Virginia).
The April 2024 regulations also increased the compensation levels necessary to satisfy the Highly Compensated Employee (HCE) exemption from $107,432 per year to the following:
- On July 1, 2024 to $132,964 per year.
- On Jan. 1, 2025 to $151,164 per year.
- To such higher amount “to reflect current earning data” effective July 1, 2027 and every three years thereafter.
The District Court’s Decision
Soon after the DOL issued the April 2024 regulations, the state of Texas and various business groups sued the DOL in the United States District Court for the Eastern District of Texas seeking to vacate the regulations and permanently enjoin the DOL from enforcing them. The parties cross-moved for summary judgment and on Nov. 15, the District Court granted summary judgment to Texas and the business groups, denied summary judgment to the DOL and vacated the April 2024 regulations nationwide.
The District Court vacated the April 2024 regulations for three reasons.
- First, the District Court determined that in significantly raising the salary threshold, the DOL created a de facto “salary only” test for the EAP exemptions, which was not consistent with the FLSA’s text. The District Court noted that the FLSA permits the FLSA to “define and delimit” the EAP exemptions. However, the FLSA focuses on the duties of EAP employees, not their salaries. Following the 5th Circuit’s recent decision in Mayfield v. U.S. Department of Labor, while the DOL has the authority to set a salary threshold for the EAP exemptions, that authority “is not unbounded.” By significantly increasing the salary threshold, the salary test “displaced” or “swallowed” the duties test for the EAP exemption, which is inconsistent with the FLSA’s text.
- Second, the District Court found that the increases to the salary threshold were inconsistent with the DOL’s longstanding policy. The District Court delved into the 80-year history of the salary threshold for the EAP exemptions. In discussing that history, the District Court noted three constants about the salary threshold: (1) it generally only increased when there was an increase to the minimum wage; (2) it was adjusted on average every nine years; and (3) it was generally set at approximately the 10th percentile of salaried employees in the lowest-paid Census region, and designed to screen out employees who were obviously nonexempt. Here, there was no corresponding increase to the minimum wage and the last adjustment occurred only five years ago. More problematic was the DOL’s admission that the salary threshold was set at the 35th percentile of the lowest-paid Census region. This was inconsistent with the DOL’s longstanding policy as it would leave a large swath of salaried employees suddenly nonexempt. Indeed, the District Court stated “[w]hen a third of otherwise exempt employees who the [DOL] acknowledges meet the duties test are nonetheless rendered nonexempt because of an atextual proxy characteristic — the increased salary level — something has gone seriously awry[.]” This was grounds to vacate the April 2024 regulations.
- Finally, the District Court held that the April 2024 regulations that required the salary threshold to be automatically adjusted every three years violated the APA. The District Court noted that by automatically indexing the salary threshold, the DOL “effectively abdicated its role of defining and delimiting the EAP exemptions by regulation.” Further, the automatic indexing mechanism prevents the public from commenting on any future change to the salary threshold. This violates the APA, which does not allow the DOL to dispense with such formalities. Accordingly, the District Court vacated the automatic increase mechanism of the April 2024 regulations.
In addition, in a footnote, the District Court also vacated the compensation increases to the HCE exemption.
Next Steps
The District Court has vacated the April 2024 regulations. Therefore, the decision reinstates the salary threshold of $684 per week ($35,568 per year) to satisfy the EAP exemptions under the FLSA. In addition, the compensation level for the HCE exemption reverts back to $107,432 per year. Nevertheless, employers are reminded that many states, including Alaska, California, Colorado, Maine, New York and Washington have higher salary thresholds to satisfy the EAP exemptions and some states do not recognize the HCE exemption.
The DOL will likely appeal the District Court’s ruling to the 5th Circuit. However, with the re-election of former President Trump, it is unclear whether Trump’s DOL will withdraw any such appeal or pursue it.
Those employers who were preparing in increase salary levels to comply with the April 2024 regulations can now reconsider such increases. While employers who increased salaries of EAP exempt employees to comply with the July 1, 2024 increases could theoretically rescind such increases, any such employer should consult with counsel to carefully consider the ramifications of any salary reductions.
Finally, employers should remember that paying an employee more than the DOL-mandated salary threshold does not automatically exempt them from FLSA requirements and other salary laws that vary by state. Meeting the relevant job duties test also is as necessary as satisfying the applicable salary levels in determining overtime exemptions.
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