As we previously reported, the U.S. Department of Labor (“DOL”) published a final rule in April 2024 (the “2024 Rule”), raising the salary threshold for the Fair Labor Standards Act’s (“FLSA”) exemptions for executive, administrative, professional, and computer employees and the total annual compensation level for the highly compensated employee exemption. The 2024 Rule also provides for periodic, automatic increases going forward. The 2024 Rule went into effect in July 2024.

On November 15, 2024, however, a Texas federal court struck down the 2024 Rule on a nationwide basis.

Here is what employers need to know about this important development.

Background

Generally speaking, the FLSA requires that employees be paid at least the federal minimum wage for all hours worked, plus overtime pay of at least one-and-one-half times their regular rate for all hours worked over 40 hours in a single workweek.

However, there are several exemptions from the FLSA’s minimum wage and overtime requirements. The 2024 Rule affected two of those exemptions: (i) the exemption for any employee employed in a bona fide executive, administrative, or professional capacity—commonly referred to as the “white-collar” or executive, administrative, or professional (“EAP”) exemption—and (ii) the exemption for “highly compensated” employees (the “HCE” exemption).

1. to qualify for the EAP exemption, DOL regulations require that each of the following three tests must be met:
   the employee must be paid a predetermined, fixed salary (the salary basis test);
2. the amount of the fixed salary paid must meet a minimum salary level (the salary level test); and
3. the employee’s primary job duties must involve executive, administrative, or professional duties as defined by the regulations (the duties test).

The 2024 Rule raised the minimum salary under #2 from $684 per week ($35,568 annually) to $844 per week (or $43,888 annually) effective July 1, 2024, which would have again increased to $1,128 (or $58,656 annually) effective January 1, 2025. Thereafter, the 2024 Rule provided for automatic updates every three years, tied to the 35^th percentile (rather than the 20^th percentile, as used previously) of the weekly earnings of full-time salaried workers in the lowest-wage U.S. Census region at that time.

Similar to the EAP exemption, the 2024 Rule increased the minimum compensation for the HCE exemption from $107,432 per year to $132,964 per year starting July 1, 2024, which also would have automatically increased on January 1, 2025, to $151,164 per year. After January 1, 2025, the minimum compensation level for the HCE exemption was scheduled to automatically increase every three years, tied to the annualized weekly earnings of the 85^th percentile of full-time salaried workers nationally.

According to the DOL, in the first year the 2024 Rule was to be effective, more than four million employees who were previously exempt would be rendered nonexempt, with no change in their duties.

Legal Challenges

Prior to the 2024 Rule, the last increase to the salary levels for the EAP and HCE exemptions occurred in 2019, when the DOL increased the salary level for the EAP exemption to from $455 per week to $684 per week and increased the salary level for the HCE exemption from $100,000 to $107,432 per year. In Mayfield v. U.S. Dept. of Labor, the plaintiff sued to have the 2019 salary level increase declared unlawful on the grounds the DOL lacked authority under the FLSA to implement any salary thresholds for the EAP exemptions. But a federal district court in Texas, and later the Fifth Circuit Court of Appeals, sided with the DOL.

In its September 11, 2024 decision, the Fifth Circuit found that Congress had explicitly delegated authority to the DOL to “define[ ] and delimit[ ]” the terms of the EAP exemption, and setting minimum salary thresholds was within the scope of that authority. The Court noted, however, that the power to add an additional characteristic, i.e., adding a salary requirement to determine whether an employee’s job duties qualify for an exemption to the FLSA’s minimum wage and overtime requirements, is not “unbounded.” Instead, adding “a characteristic with no rational relationship to the text and structure of the [FLSA]” would raise “serious” constitutional questions, as would “a characteristic that differs so broadly in scope from the original that it effectively replaces it.”

Meanwhile, the State of Texas and a coalition of trade associations and employers filed a separate lawsuit in the Eastern District of Texas—State of Texas Plano Chamber of Commerce, et al. v. U.S. Dept. of Labor, et al.—contending that the 2024 Rule’s salary level increases exceeded the DOL’s authority under the FLSA. The issue was very familiar to that Court, which had permanently enjoined a prior similar DOL regulation (the “2016 Rule”) in 2017, concluding the 2016 Rule increased the minimum salary for the EAP exemption to a level that “essentially ma[de] an employee’s duties, functions, or tasks irrelevant if the employee’s salary f[ell] below the new minimum salary level,” and unlawfully “ma[de] salary rather than an employee’s duties” the determinative factor for the EAP exemption.

For the same reasons, and relying upon the Fifth Circuit’s opinion in Mayfield, U.S. District Judge Sean D. Jordan ruled that, in issuing the 2024 Rule, the DOL exceeded the authority delegated by Congress because the 2024 Rule “effectively displace[d] the FLSA’s duties test with a predominate—if not exclusive—salary-level test.” Judge Jordan also observed that the last two DOL rules that effectively increased the minimum salary requirements occurred after 30 and 15 years, respectively, since the prior minimum salary was set, and the federal minimum wage had increased significantly over each period. The 2024 Rule, however, came only 5 years after the prior increase, and there had been no change to the federal minimum wage in the interim. Judge Jordan found it telling that the prior two increases both affected approximately 1.2 million workers each, whereas the 2024 Rule was expected to impact over 4 million workers in its first year alone.

Because the EAP exemption requires that an employee’s status turn on duties rather than salary, and because the 2024 Rule’s changes “make salary predominate over duties for millions of employees,” Judge Jordan ruled that the 2024 Rule exceeded the DOL’s authority to “define and delimit” Section 13(a)(1). As a result, Judge Jordan vacated the 2024 Rule and remanded the issue to the DOL for “further consideration” in light of the Court’s opinion.

What Now?

With the vacatur, the 2024 Rule is no longer in effect, and the minimum salary levels under the EAP and HCE exemptions automatically reverted to their prior 2019 levels: $684 per week for the EAP exemption, and total annual compensation of at least $107,432 (which includes at least $684 per week paid on a salary or fee basis) for the HCE exemption.

The DOL very well may try again by amending the 2024 Rule to address Judge Jordan’s holdings and vacatur of the 2024 Rule. But the forthcoming change in presidential administrations could impact the DOL’s appetite to continue dedicating resources in pursuit of this issue. Only time will tell, so please watch this space for further developments.