Court Vacates White-Collar Overtime Exemption Salary Increase

In a significant ruling that will apply nationwide to all employers, a federal judge in Texas returned the salary minimum for certain overtime exemptions to $684 per week ($35,568 annually). The court held on Nov. 15, 2024, that the U.S. Department of Labor (DOL) exceeded its statutory authority when it raised the minimum weekly salary for certain employees to maintain their overtime pay exemption.

The first in a series of increases to the salary minimum in the DOL’s April 2024 final rule already took effect July 1, 2024. But another, more substantial increase was slated to take effect on Jan. 1, 2025. The Texas Court ruled that both increases were an unlawful exercise of the DOL’s authority.

Background on Overtime Exemptions and Salary Basis

Unless covered by an exemption, employers are required by the federal Fair Labor Standards Act (FLSA) to pay their employees overtime pay—generally at the rate of one and one-half the employee’s regular pay rate—for any hours worked over 40 in a workweek. To qualify for an executive, administrative or professional (EAP) exemption, the most common so-called white-collar exemptions, an employee must satisfy the job duties test of the applicable exemption and be paid at least the minimum weekly salary (the “salary basis” test).

The FLSA does not define the exemptions, and the salary basis test is not found in the statute. Instead, Congress directed the DOL to “defin[e] and delimit[]” the scope of the EAP exemptions and to modify their criteria “from time to time by regulations.” When originally enacted in 1938, the DOL required that a minimum salary be paid to employees to qualify for certain exemptions. The DOL has increased the minimum salary multiple times since 1938, among other revisions to the exemptions.

Recent DOL Increases to the Salary Basis and Legal Challenges   

In 2016, the DOL issued a rule that more than doubled the salary minimum of $455 per week ($23,660 annually) to $913 per week ($47,476 annually). That rule also provided for regular updating of the minimum salary. This rule was the subject of multiple legal challenges. A federal court in Texas eventually enjoined the 2016 DOL rule, finding that more than doubling the minimum salary created a “de facto salary-only test” exceeded the DOL’s authority under FLSA by effectively eliminating the duties test for the EAP exemptions.

In 2019, the DOL issued another rule that increased the minimum salary from $455 per week ($23,660 annually) to $684 per week ($35,568 annually), one-half of the amount of the increase in the 2016 rule. The 2019 rule also was challenged in court, but a Texas federal court concluded that it was within the DOL’s authority under Section 213(a) of the FLSA. In September 2024, the Fifth Circuit Court of Appeals affirmed the ruling and held that the DOL has the authority to impose a minimum salary test for the EAP exemptions, with certain limits. 

The DOL’s 2024 Rule and Legal Challenges

In April 2024, the DOL published a final rule to again significantly increase the minimum weekly salary required to satisfy the EAP exemptions. The 2024 rule imposed a three-tier increase to the minimum salary:

• Effective July 1, 2024, the required minimum salary was to rise from $684 per week ($35,568 annually) to $844 per week ($43,888 annually).
• A second increase to $1,128 per week ($58,656 annually) was to take effect Jan. 1, 2025.
• The minimum salary was scheduled to increase thereafter every three years.

By Jan. 1, 2025, the salary basis would have risen by 65% in only six months.

The DOL’s 2024 rule immediately faced legal challenges. The State of Texas and a coalition of trade associations and employers filed lawsuits in federal court in Texas that were eventually consolidated into one case. 

On June 28, 2024, Judge Sean D. Jordan of the U.S. District Court for the Eastern District of Texas granted an injunction, blocking enforcement of the DOL’s rule in the consolidated case. That ruling only applied to the State of Texas as an employer. Judge Jordan reasoned that the EAP “[e]xemption turns on an employee’s functions and duties, requiring only that they fit one of the three listed, i.e., ‘executive,’ ‘administrative,’ or ‘professional capacity.’” But, he observed, “[t]he exemption does not turn on compensation.” Judge Jordan’s reasoning centered on similar grounds used to enjoin the DOL’s 2016 rule, and it foreshadowed his Nov. 15 ruling.

The Nov. 15 Decision Vacating the DOL’s 2024 Rule

The Texas court’s Nov. 15 decision addressed cross-motions for summary judgment filed by the parties. Judge Jordan began his decision with a lengthy summary and analysis of the DOL’s previous increases to the salary basis test since it was first promulgated in 1938. He observed the DOL had long recognized, until recently, that implementing incremental increases and setting the salary minimum at a low level would screen out only the obviously nonexempt employees and not displace the duties test.

The court also explained that while the DOL had the power to define and delimit the EAP exemptions, the agency’s authority was not “unbounded” and there were three main limitations on that power: 

• The DOL had the power to enact rules that “clarify the meaning” of the EAP exemptions or impose some limitations on their scope, but “it cannot enact rules that ‘replace or swallow the meaning those terms have.’”
• The use of a salary test is only permissible if it serves as a reasonable proxy of an employee’s exempt status.
• The DOL must exercise its power through rulemaking that complies with the federal Administrative Procedure Act (APA), i.e., notice to the public and opportunity to comment before a rule change is implemented.

Applying these limitations to the 2024 rule, Judge Jordan concluded first that by enacting it, the DOL had effectively displaced the duties test with the salary basis test. He held that the two increases to the salary minimum, effective July 1, 2024, and Jan. 1, 2025, would result in immediately screening out—making nonexempt—51% of employees who otherwise satisfied the duties test. Referencing specifically the July 1 increase, Judge Jordan observed, “When a third of otherwise exempt employees who the Department acknowledges meet the duties test are nonetheless rendered nonexempt because of an atextual proxy characteristic—the increased salary level—something has gone seriously awry.” Next, Judge Jordan explained that the third component of the 2024 rule—the automatic increases to the salary minimum every three years—violated the APA because the DOL was not authorized to set its rulemaking on “autopilot” and evade the procedural requirements of the APA. 

For these reasons, the court concluded that the DOL’s 2024 rule exceeded the agency’s rulemaking authority: “In sum, because the EAP Exemption requires that an employee’s status turn on duties—not salary—and because the 2024 Rule’s changes make salary predominate over duties for millions of employees, the changes exceed the Department’s authority to define and delimit the relevant terms.” Judge Jordan granted summary judgment in favor of the plaintiffs and further decided that the appropriate remedy was to vacate the rule, to “nullify and revoke” the illegal agency action.

What Might Come Next for the Salary Basis Test and Employer Takeaways

The Texas court’s ruling returns the salary minimum to its status quo before the DOL’s 2024 rule was published. This means that the minimum salary required to be eligible for the EAP exemptions returns to $684 per week ($35,568 annually).

However, because the court’s ruling comes months after the July 1, 2024, increase became effective—to $844 per week ($43,888 annually)—many employers may have already implemented salary increases to employees making less than this amount to maintain their overtime exemption. When that deadline approached, employers were faced with the choice of raising the salaries of these employees to maintain their exemption or converting them to nonexempt and tracking their hours and paying them overtime if worked. The DOL estimated in its 2024 rule that this first increase to the salary basis would render approximately one million employees nonexempt, even though their job duties did not change. Thus, some employees in this category may have received a windfall raise to comply with the DOL’s now-vacated rule. But for those employees who did not receive a raise and whose job still satisfies the duties test, their employers now face another choice—leave these employees as nonexempt or return them to exempt status based on the previous salary basis test. 

The DOL may appeal this ruling to the Fifth Circuit. However, it remains to be seen whether President-elect Donald Trump’s administration would pursue such an appeal. The 2016 rule was published by the DOL under former President Barack Obama’s administration and, after it was ruled unlawful, the first Trump administration published the 2019 rule with a substantially smaller increase to the salary basis test. We could see a similar decision made by the new administration in 2025 or later.  

Please contact Michael E. Turner or any member of Phelps' labor and employment team if you have questions or need advice or guidance.