Section 13(a)(1) of the Fair Labor Standards Act provides an exemption from both minimum wage and overtime pay for employees employed as bona fide executive, administrative, professional, computer, and outside sales employees. This means that these employees are not entitled to minimum wage and overtime pay requirements. Currently, to fall within the EAP exemption, an employee generally must (a) be paid a salary, meaning that they are paid a predetermined and fixed amount that is not subject to reduction because of variations in the quality or quantity of work (the “salary basis test”), (b) be paid at least a specified weekly salary level (the “salary level test”), and (c) primarily perform executive, administrative, or professional duties, as provided in the Department’s regulations (the “duties” test).
Salary Threshold Evolution
The salary threshold has been a point of contention for over a decade now. In 2004, President George W. Bush adopted a single standard for employees performing EAP roles and set the threshold at $23,660 per year. That rule sat untouched for roughly twelve years before President Obama entered the White House. In line with his more pro-employee approach, President Obama sought to increase the salary threshold so more lower paid, salaried employees would be eligible for overtime. His Department of Labor proposed to more than double the minimum salary threshold from $23,660 to $47,476. This number was intended to exclude the salaried workers in the lower 40th percentile of the lowest wage census region or the workers earning lower salaries than 60% of the workforce in the poorest area of the country, from overtime exemption.
Obama’s DOL intended for the increase to take effect over the course of three years following issuance of the final rule. However, just before the rule was due to take effect, a nationwide preliminary injunction was issued by a district court in the Eastern District of Texas. Twenty-one states and more than fifty-five business groups had filed cases in that federal district court to try and enjoin enforcement of the rule. That same month, Donald Trump was elected president, and when he assumed power, he chose not to defend the Obama-era Rule. Instead, President Trump proposed his own salary threshold of $684 per week annualized to $35,568. That salary threshold went unchallenged and it remains today, the minimum salary threshold to qualify for the EAP exemption.
But the Democratic Party’s return to power on the heels of Joe Biden’s 2020 victory returned the DOL’s focus to the salary threshold with the goal of increasing it to bring more Americans into the overtime fold. Knowing President Obama’s ambitious attempt to raise the threshold to $47,476 seemed destined to fail, President Biden and his DOL softened their position slightly, opting for an increase to $844 per week ($43,888 annually) on July 1, 2024. This would be followed by an increase to $1,128 per week ($58,656 annually), with the threshold to be revisited and automatically updated beginning July 1, 2027 and every three years thereafter using earnings data in the United States available at the time of the increase. The first increase, alone, is set to bring an additional four million employees within the protections of the FLSA’s overtime requirements.
Legal Challenges and Court Battles
President Biden’s increase, though numerically a compromise between the positions of his two predecessors, was always expected to face swift challenges in the courts. On May 21, 2024, that is exactly what happened when business groups sued the DOL in the same district court that struck down President Obama’s increase less than a decade earlier. In addition to traditional arguments that will likely allege the rulemaking process did not satisfy the mandates of the Administrative Procedure Act, it is likely the rule will be challenged as exceeding the statutory authority of the DOL.
In February 2023, two U.S. Supreme Court justices strongly hinted that they doubted the FLSA authorizes a salary basis test at all. In Helix Energy Solutions Group, Inc. v. Hewitt, 143 S. Ct. 677 (2023), the Court considered whether paying an employee a “day rate” could satisfy the salary basis component of the DOL regulations governing the highly compensated executive exemption. A majority of the Court concluded that it did not, but the dissenting opinions might provide more insight than the ruling. Justice Kavanaugh, joined by Justice Alito, wrote: “Although the Court holds that [the employee] is entitled to overtime pay under the regulations, the regulations themselves may be inconsistent with the Fair Labor Standards Act…The Act focuses on whether the employee performs executive duties, not how much an employee is paid or how an employee is paid. So it is questionable whether the Department’s regulations — which look not only at an employee’s duties but also at how much an employee is paid and how an employee is paid — will survive if and when the regulations are challenged as inconsistent with the Act.” Similarly, Justice Gorsuch appeared disappointed the employer had “forfeited” the “foundational argument” of whether the FLSA authorizes a salary basis test in the first place. Ultimately, this question of whether the FLSA authorizes a salary basis test at all may come before the Court in the coming months.
Implications for Employers
Unfortunately for employers, this means a good bit of uncertainty down the road. While some might feel the courts are certain to strike down Biden’s increase, barring a nationwide injunction, the first increase will become the law of the land on July 1st. Employers should carefully consider whether they are appropriately classifying employees as exempt to avoid heavy penalties under the FLSA and equivalent state laws, but they must also consider carefully their options as it relates to employees about to lose their exempt status with the first salary threshold increase.
