Federal Court Vacates DOL Overtime Rule

A federal court has vacated the U.S. Department of Labor’s (DOL) 2024 final overtime rule, which increased the minimum salary threshold at which employees could be classified as exempt from overtime pursuant to the white collar exemptions available under the Fair Labor Standards Act (FLSA) for executive, administrative and professional (EAP) employees as well as the higher threshold applicable to highly compensated employees (HCE).

The DOL’s 2024 Final Rule, which went into effect in part on July 1, 2024 and was scheduled to effect further increases on Jan. 1, 2025, has been invalidated on a nationwide basis by the U.S. District Court for the Eastern District of Texas. Accordingly, the 2024 Rule is no longer effective, and the 2019 Rule remains the law of the land.

FLSA Background

Under the FLSA, employers are required to pay employees overtime wages for all hours worked each week in excess of 40, unless an exception applies. The FLSA exempts “white collar” employees (i.e., employees who qualify as bona fide “executive, administrative, or professional” employees or as highly compensated employees) from the law’s overtime requirements. The FLSA and corresponding regulations set forth a two-part test to determine whether an employee may be properly classified as exempt pursuant to the EAP exemptions: (1) the “job duties” test and (2) the “salary basis” test. The “job duties” test focuses on a particular employee’s primary tasks and responsibilities to determine whether they qualify for the exemption. The salary basis test focuses on the amount and method of compensation. If both of these prongs of the test are met, an employee may be properly classified as exempt from overtime.

The HCE test combines a higher compensation requirement with a less-stringent duties test. To meet the HCE test, an employee must earn annually at least the amount specified in the regulation and must customarily and regularly perform any one or more of the exempt duties or responsibilities of an EAP employee, but such exempt duties need not be their primary duties.

The 2024 Overtime Rule

On April 23, 2024, the DOL announced a Final Rule to update and revise regulations issued under the FLSA to increase the minimum salary threshold at which employees could be classified as exempt under the EAP and HCE exemptions. The increase of the salary threshold as part of the 2024 Final Rule would have been the second such increase in five years; the 2019 Final Rule increased the minimum salary threshold for the EAP exemption from $455 per week to $684 per week.

The 2024 Final Rule provided for three, staged changes to the EAP and HCE exemptions. With respect to the EAP exemption:

1. The 2024 Rule raised the minimum salary threshold from $684 per week to $844 per week on July 1, 2024. According to the DOL, this change rendered nonexempt approximately 1 million employees who previously were classified as exempt, with no change in their duties.
2. The 2024 Rule would have raised the salary threshold from $844 per week to $1,128 per week on Jan. 1, 2025. The DOL estimated that this change would render nonexempt approximately 3 million additional employees who previously were classified as exempt, with no change in their duties.
3. The 2024 Rule provided a mechanism to automatically increase the salary threshold triennially based on contemporary earnings data. The first automatic change was scheduled to occur on July 1, 2027. The DOL estimated that these automatic updates would result in millions more employees becoming nonexempt.

The 2024 Rule made similar changes to the HCE test. On July 1, the salary threshold increased from $107,732 per year to $132,964 per year. On Jan. 1, 2025, the threshold was scheduled to jump to $151,164 per year. And, as with the EAP exemption, the HCE test was to be updated every three years starting on July 1, 2027, to reflect current earnings data.

Notably, the 2024 Final Rule did not modify the duties prong of the test for the EAP or HCE exemption.

The Court Decision

On Nov. 15, 2024, Judge Jordan of the U.S. District Court for the Eastern District of Texas invalidated the 2024 Final Rule in State of Texas v. U.S. Department of Labor on the ground that the Rule was an unlawful exercise of the DOL’s agency powers.

As a preliminary matter, the court found that the DOL has the authority to increase the minimum salary threshold as a tool to gauge whether certain positions qualify as exempt under the EAP or HCE exemption. However, the court articulated that the DOL may not dramatically increase the minimum salary threshold so much that the salary threshold effectively displaces the FLSA’s duties test. According to the court, the overtime exemptions must primarily focus on the “duties” prong of the test — not salary levels — when determining whether an employee qualifies for an applicable exemption. By increasing the minimum salary threshold from $684 per week to $1,128 per week on Jan. 1, 2025, and then automatically increasing this threshold every three years thereafter, the court found that the salary basis test essentially made an employee’s duties, functions or tasks irrelevant. In essence, the court found that the salary increases improperly made salary rather than an employee’s duties the determinative factor for the EAP and HCE exemptions under the FLSA.

Similarly, the court found invalid the 2024 Final Rule’s installation of a mechanism that automatically updates the minimum salary requirements to even higher thresholds every three years. To the court, in addition to improperly increasing the salary threshold, nothing in the EAP or HCE exemption authorizes the DOL “to set its rulemaking on autopilot and evade the procedural requirements” of the Administrative Procedure Act.

Next Steps

Employers can breathe a sigh of relief, although the ruling will have limited impact in some states. Had the 2024 Final Rule remained in effect, employers would have been required to pay employees throughout the country a minimum salary of $58,656 per year starting Jan. 1, 2025, or start paying overtime to all employees earning less than that minimum salary regardless of their job duties. With the district court’s decision, the 2024 Final Rule is invalidated. As a result, all increases of the minimum salary threshold — including the July 1, 2024 salary threshold increase from $684 per week to $844 per week to qualify for the EAP exemption — are no longer in effect. However, some states and local jurisdictions have enacted their own, higher minimum salary thresholds than the FLSA thresholds — some of which (including in New York and California) are even higher than those the 2024 Final Rule would have ushered in — and in these states, the impact of the decision is muted.

An appeal by the DOL appears unlikely given the incoming Trump administration’s presumed position on the matter. For all intents and purposes, it seems the 2024 Final Rule is dead.

Some employers, though, have already increased the salaries of employees because of the 2024 Final Rule. These employers now face the difficult decision of whether to roll back such increases, which presents practical and legal challenges.

Please contact a member of Kramer Levin’s Employment Law department with any questions or concerns about the topics raised in this alert.