Federal Court Holds DOL’s New Overtime Regulations Invalid

The US Department of Labor’s (DOL’s) regulations setting a new salary threshold to be exempt under the Fair Labor Standards Act (FLSA) were scheduled to go into effect on January 1, 2025. On November 15, 2024, a judge from the US District Court for the Eastern District of Texas issued a decision invalidating the entirety of the DOL’s overtime final rule. The final rule, part of which went into effect on July 1, 2024, created regulations that would increase the minimum salary required to be exempt from overtime pay under the FLSA.

Specifically, the rule updated the salary portion of the exemption test so that on January 1, 2025, employees making less than $58,656 a year would be automatically eligible for overtime pay any time they worked more than 40 hours a week. With the court’s decision invalidating the rule in its entirety, the minimum annual salary threshold is once again set at $35,568, and the minimum annual compensation required to qualify for the highly compensated exemption is $107,432.

In invalidating the rule, the court stated that although the DOL has the authority to define and delimit the terms of the overtime exemption, “that authority ‘is not unbounded.’” The heart of the decision is the court’s finding that the DOL was not authorized “to make salary rather than an employee duties determinative of whether” a bona fide executive, administrative, or professional (EAP) employee is exempt from the obligation to provide overtime pay. The court found that given the nationwide effect of the rule on hundreds of thousands of employers and millions of employees, striking down the rule on a nationwide basis was warranted.

WHAT THE DECISION MEANS AND WHAT IS LIKELY TO COME NEXT

In invalidating the final rule, the old salary threshold for EAP exemptions remains in effect (i.e., a minimum of $684 per week or $35,568 annually). Likewise, the decision means that the minimum annual compensation required to qualify for the FLSA’s highly compensated exemption is $107,432, including at least $684 per week paid on a salary or fee basis. The court did not opine on the validity of the salary basis or duties requirements of the exemption test. As such, employees who are classified as exempt should continue to satisfy the preexisting regulations for all EAP exemptions (i.e., being paid a salary level of at least $455 per week and meeting the “duties” test).

The DOL has the right to appeal of the decision; however, the upcoming change in administration at the DOL adds uncertainty as to whether there will be a legal challenge. It is possible that President-Elect Donald Trump’s transition team may seek to delay any immediate appeal, pending an opportunity to review what the Trump-Vance administration’s decision will be on this issue. If an appeal is filed by the current administration at the DOL, the DOL’s leadership under the new administration could ask for a stay while it seeks to implement new regulations that undo or change the regulations that had been slated to go into effect on January 1. This would be similar to what happened in November 2016, when the DOL’s proposed changes to the overtime rules were invalidated and the new leadership at the DOL under the Trump administration withdrew the appeal and issued a revised rule that later went into effect in 2019.

Regardless of whether there is an appeal, this decision has no effect on state and local law overtime exemptions, so employers will need to continue complying with all requirements under those laws, some of which have salary levels higher than the existing federal level (e.g., California, New York State, and Washington State).

STEPS FOR EMPLOYERS TO TAKE NOW

What steps employers should take in light of the court decision will depend on what actions were taken in anticipation of the January 1 salary increase.

• If an employer has not yet communicated changes in salary or exemption status to its employees, it now has a basis to hold off on making those changes. If the employer has communicated that changes will go into effect in the future, there is an opportunity to revise the message and inform employees that the planned changes will not occur. How best to craft and communicate the message, taking into account employee relations, should be based on the specifics of the prior communication and the reasoning articulated for the anticipated change.
• If an employer already made salary increases or reclassified employees as nonexempt, it is legally permissible to reverse course on a prospective basis. Reversing course, however, can create significant employee morale issues and cause employees to question whether they are correctly classified. Reversing course also has risk if there is a successful appeal of the district court’s decision. To the extent that an employee’s compensation will change, employers should be mindful that certain states require advance notice of wage changes.
• Employers may decide to proceed with planned reclassifications or compensation changes. Reclassifying employees may still make sense, particularly if there is concern that the employees would not satisfy the duties requirement to be exempt. Additionally, higher salary requirements under state law may justify reclassifying employees or increasing salaries.

Regardless of what business decisions they decide to make, employers should remain mindful that to be classified as exempt, employees still need to pass the duties requirement under both the FLSA and state law and that certain states have different duties tests or require higher salaries than the FLSA.