As we previously reported, the Department of Labor (DOL) published its final rule, “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees,” on April 23, 2024, which raised the salary thresholds for “white-collar” and highly compensated employees, rendering millions of employees eligible for overtime. The final rule phased in the new thresholds beginning July 1, 2024. As we predicted, the final rule has faced legal challenges and scrutiny, with the focus of those challenges in Texas federal court. However, with only one exception, the final rule remains in effect for all employers.
Recap of the Final Rule
The Fair Labor Standards Act (FLSA) requires employers to pay workers overtime at a rate of 1.5 times the employee’s regular rate of pay for all hours worked in excess of 40 per week. Section 13(a)(1) of the FLSA carves out an exemption to overtime pay for employees who are “in a bona fide executive, administrative, or professional capacity” (EAP), which generally applies to “white-collar” employees. However, in order to qualify for the EAP exemption: (1) the employee must be paid a predetermined and fixed salary not subject to reduction (the salary basis test); (2) the amount of salary paid must meet a minimum specified amount (the salary level test); and (3) the employee’s job duties must primarily involve executive, administrative, or professional duties defined by the regulations (the duties test).
The new rule significantly increases the annual salary threshold (previously $35,568) in a phased approach:
- Effective July 1, 2024, the salary threshold increased to $43,888 annually/$844 per week.
- Effective January 1, 2025, the salary threshold will increase to $58,656 annually/$1,128 per week.
The final rule also increases the annual earnings threshold for the highly compensated employee (HCE) exemption (previously $107,432) to $151,164 for full-time salaried workers. The HCE exemption does not require a duties test analysis because the high compensation serves as a strong indicator of exempt status. The DOL will increase the HCE threshold in two phases:
- Effective July 1, 2024, the HCE threshold increased to $132,964 annually.
- Effective January 1, 2025, the HCE threshold will increase to $151,164 annually.
Legal Challenges in Texas Federal Court
On June 3, 2024, the state of Texas filed a lawsuit, State of Texas v. Dep’t of Labor, No. 4:24-cv-00499 (E.D. Tex.), seeking nationwide injunctive relief to block the final rule from taking effect on July 1, 2024. The court consolidated the lawsuit with another challenge filed by Texas business groups, Plano v. Chamber of Commerce, et al. v. Su, et al., No. 4:24-cv-468 (E.D. Tex.), and granted a limited injunction blocking the rule only as applied to the State of Texas in its capacity as an employer.
The court held that because “the EAP exemption requires that exemption status turn on duties – not salary – and the 2024 Rule’s changes make salary predominate over duties for millions of employees, the changes exceed the authority delegated by Congress to define and delimit the relevant terms. Therefore these changes to the minimum salary level are likely in excess of statutory jurisdiction.” Notably, this decision does not affect any other employer, and does not permit noncompliance with the final rule.
Interestingly, the Northern District of Texas also addressed a request for a nationwide injunction to block the rule from taking effect on July 1, 2024. In Flint Avenue, LLC v. Su, et al., No. 5:24-cv-00130 (N.D. Tex), the court denied a private employer’s request for an injunction because it did not making a showing of irreparable harm (the July 1 salary threshold increase would only affect one employee).
Chevron Deference
On June 28, 2024, days after the Texas court issued the preliminary injunction in State of Texas v. DOL, the U.S. Supreme Court issued its opinion in Loper Bright Enterprises v. Raimondo, upending the 40-year old precedent of “Chevron deference” under which courts deferred to agency interpretations of ambiguous statutory language. The Loper Bright decision expands the courts’ authority to independently interpret statutes without deference to the administrative agencies that enforce them. Given that the Texas federal court’s decision questioned the DOL’s statutory authority with respect to its final rule, it is likely that we will see further challenges to the final rule, and that Loper Bright may support a permanent injunction with broader implications.
Moving Forward
The July 1, 2024 threshold increases are currently in effect. While the state of Texas, as an employer, has secured a decision blocking implementation of the final rule as to it, the final rule is still in effect for all other employers. Employers should review current employee classifications to identify the impact on their workforce, adjust or redefine work duties, and reclassify employees as necessary. Employers should also make sure they are compliant with the July 1, 2024 increases, and prepare for the upcoming January 1, 2025 increases to take effect.
We continue to monitor the litigation on the overtime rule and will report on further developments.
[View source.]
