Federal Court Strikes Down Overtime Rule: What Employers Need to Know

On November 15, 2024, a federal district court in Texas struck down the U.S. Department of Labor ("DOL") Final Rule that would have made over four million additional workers eligible for overtime pay. The Final Rule significantly increased the salary threshold for white-collar workers to be exempt from overtime under the Fair Labor Standards Act ("FLSA").

Judge Sean D. Jordan granted the plaintiffs' motion for summary judgment and enjoined enforcement of the Final Rule, finding it exceeded the agency's authority.

What Did the 2024 DOL Final Rule Impose?

In April of this year, the Biden Administration published its Final Rule, increasing the minimum salary level required for exempt workers. The Final Rule also included a mechanism to automatically increase the minimum salary threshold every three years.

Sections 13(a)(1) and (a)(17) of the Fair Labor Standards Act provide exemptions from the law's minimum wage and overtime requirements for employees employed as bona fide executive, administrative, professional, and outside sales employees, as well as certain computer-related occupations. Congress did not define these terms and instead delegated the authority to the DOL to define and delimit the statutory exemptions.

Pursuant to that authority, the DOL created a three-part requirement that considers the position's duties, method of payment, and salary level. Under its authority to define and delimit the exemptions, the 2024 DOL Final Rule increased the salary level, the third component of the three-part requirement.

Specifically, under the 2024 Final Rule, the minimum salary level for an executive, administrative, or professional employee to qualify for the exemption as of July 1, 2024, was increased from $35,568.00 ($684 per week) to $43,888 per year ($844 per week).

The minimum salary level required to meet the highly compensated employee exemption was increased from $107,432.00 to $132,964. Each of these minimum salary levels would also increase on January 1, 2025. On January 1, 2025, the minimum salary level for the executive, administrative, and professional exemptions (the "EAP Exemptions") would increase to $58,656 per year or $1,128 per week.

What is the Practical Impact of the Ruling?

The 2024 Final Rule has been vacated on a national basis in its entirety. That means neither the July 1, 2024, increase nor the January 1, 2025, will take effect. The minimum salary level will revert back to the DOL's 2019 rule, which is an annual salary of $35,568.00 ($684 per week) for the executive, administrative, and professional (EAP) exemptions and $107,432.00 for the highly compensated employee exemption. There is no mechanism for automatic increases under the current standard.

Why Was the 2024 DOL Final Rule Blocked?

The ruling came in what ultimately was two consolidated cases: State of Texas v. United States Department of Labor et al. and Plano Chamber of Commerce et al. v. United States Department of Labor. Prior to these cases being consolidated, the District Court Judge granted the State of Texas' request for a preliminary injunction, finding that the State of Texas was likely to prevail on the merits of its claim that the DOL has exceeded its statutory authority. That ruling, however, only applied to the State of Texas as an employer.

The Plano case was the claim relevant to private employers, and once the cases were consolidated, the court asked the parties to brief the merits of the claim in a summary judgment motion. The ruling on that summary judgment motion and its requested relief of a permanent injunction on a national basis barring the implementation of the 2024 Final Rule was granted on November 15, 2024.

In agreeing with a recent decision from the Fifth Circuit Court of Appeals, the District Court noted that Congress did delegate authority to the DOL to define and delimit the EAP exemptions.[1] However, as confirmed by both courts, there are limits to the DOL authority. The District Court held that when the DOL exercises its authority to define and delimit the exemptions to such an extent that it displaces the duties test, it has exceeded its authority. The language of the FLSA requires the exemptions apply only to employees employed as bona fide executive, administrative, professional, and outside sales employees, necessitating a duties requirement to satisfy the exemption.

In a similar analysis used to strike down the 2016 DOL Final Rule, the court traced the history of the DOL's exercise of its authority in the context of white-collar exemptions. The DOL's own rulemaking history, as stated in its 2019 Final Rule, confirmed that the purpose of the salary threshold test was to weed out employees who were "obviously nonexempt employees," setting the threshold at an appropriate level to ensure those who would not meet the duties test would fall below the threshold.

For decades, the DOL has emphasized setting the minimum salary level at the lower end of the salary range for EAP employees and considering regional, size, and industry differentials in wage levels. Despite this historic approach, the 2024 Rule was estimated to change the exempt status of nearly four million workers, a result unprecedented in the history of DOL rulemaking.

Setting the threshold at such a high level, as was done in the 2024 Rule, deviated from the stated purpose of the threshold and historic exercise of authority. The 2024 Rule would result in one-third of otherwise exempt employees (who the DOL acknowledged would meet the duties test) being rendered non-exempt because of "a proxy characteristic" – the increased salary level. The court noted that previous salary threshold changes typically affected about one million employees and occurred 15-30 years apart. By contrast, the 2024 Rule was proposed only five years after the last salary level increase and was issued despite no increase in the federal minimum wage. 

The court also took issue with the 2024 Final Rule's automatic increase of the salary minimum triennially, which was set to begin in 2027, holding that such a mechanism would circumvent the DOL's notice and comment requirements: "What the Department cannot lawfully do is put the minimum salary level on autopilot, effectively immunizing itself from the APA's procedural obligations and judicial review."[2]

The DOL can appeal the decision to the Fifth Circuit Court of Appeals. However, the incoming administration can choose to abandon any appeal and allow the lower court's decision to stand.

Implications for Employers

• Currently, the 2024 Final Rule is vacated nationwide, reinstating the previous salary thresholds established in the DOL's 2019 Final Rule.
• The increase in the overtime threshold scheduled to become effective on January 1, 2025, will not go into effect. 
• Employers that adjusted salaries for employees earning below the now-invalidated July 1 salary threshold should consult with counsel before making any employment decisions.

[1] State Plano Chamber of Commerce v. United States DOL, No. 4:24-CV-499-SDJ, 2024 U.S. Dist. LEXIS 207864, at *6 (E.D. Tex. Nov. 15, 2024) (citing to Mayfield v. DOL, 117 F.4th 611, 619 (5th Cir. 2024)).

[2] Id. at *71.