On November 15 2024, the U.S. District Court for the Eastern District of Texas vacated and set aside the U.S. Department of Labor (DOL)’s final regulation increasing the salary threshold for the “white collar” overtime exemption under the Fair Labor Standards Act (FLSA) on a nationwide basis.

The court held that each of the three components of the rule exceeded the DOL’s statutory authority under the FLSA. And given the nationwide scope of the rule, it concluded that the rule is struck down on a nationwide basis. The court had previously enjoined enforcement of the rule against the State of Texas in its capacity as an employer of state employees; its final decision now vacates the rule for all employers nationwide.¹

This means, most notably, that the increase in the overtime threshold scheduled to become effective on January 1, 2025, will not go into effect. The court also struck down the July 1, 2024, increase that previously went into effect, although this may have limited practical effect for many employers that may have already adjusted their payroll to comply with that increase. Finally, the court held that the final rule’s automatic “escalator” provision, which would have increased the threshold every three years going forward, was also unlawful.

Background

The FLSA generally requires an employer to pay an employee time-and-a-half (“overtime”) if the employee works more than 40 hours in a week. But the law exempts some employees from that requirement, notably, certain executive, administrative, and professional (EAP) workers under the white-collar exemption. To qualify for the white-collar exemption, an employee must generally satisfy a three-prong test: the employee must be paid on a salary basis, i.e., be paid a fixed and predetermined sum per week irrespective of the quantity or quality of the work performed (the “salary basis” test); the employee’s primary work must be the performance of exempt EAP duties (the “duties test”); and the employee must earn a minimum salary (the “salary threshold test”).

The 2024 Final Rule

In April of this year the DOL issued final regulations raising the white-collar exemption salary threshold (which, prior to the regulations, was last updated to $684 per week, or $35,558 per year, in 2019). The final rule raised the minimum salary in two steps. First, using the same methodology the DOL used in 2019, the rule raised the salary threshold to $844 per week ($43,888 annually). This increase became generally effective on July 1, 2024. In January 2025, the rule was scheduled to raise the salary threshold to $1,128 per week ($58,656 annually). That increase relied on a new, dramatically higher methodology and would have marked a 64.9% increase over the 2019 threshold. Thereafter, the rule would have automatically updated the salary threshold every three years. The rule also increased the “highly compensated employee” (HCE) threshold from the current $107,432 annual salary to $132,964 as of July 1, 2024, and again to $151,164 as of January 1, 2025, again with automatic updates every three years.

The Court’s Decision

In a 62-page decision, the court held with respect to both the July 1, 2024 and January 1, 2025 increases that by setting the salary threshold as high as it did, the DOL created a de facto “salary only” test for the EAP exemption. This, the court held, was in excess of the Department’s authority under the statute insofar as the explicit text of the FLSA speaks in terms of the duties an employee performs, not the salary that they earn (the court expressly noted that its analysis of the EAP standard exemption applied in equal force to the HCE exemption). The court likewise found that given that the text of the FLSA expressly requires that increases to the salary threshold must be made via regulations in accordance with the Administrative Procedure Act, the DOL lacked the authority to put future increases on autopilot. Finally, 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 Comes Next?

It is clear now that the January 1, 2025 increase will not go into effect as scheduled, and as a matter of law, the July 1, 2024 increase is nullified. Employers that previously adjusted the salaries or exemption status of employees who earned less than the salary threshold set by the now-invalidated July 1 increase are advised to consult with counsel before considering whether to rescind those changes on a going-forward basis. Employers should also remain aware that some states have salary thresholds that exceed the FLSA threshold, including Alaska, California, Colorado, Maine, New York, and Washington. 

The DOL may seek to appeal the lower court’s decision to the Fifth Circuit Court of Appeals. That said, with the upcoming change in presidential administration, we predict that under new leadership the DOL would likely abandon any appeal and allow the lower court’s decision to stand. Going forward, it is less clear whether the Trump administration will revisit some or all of the rule, repealing it entirely, or perhaps adopting a different formulation. In any event, Littler’s Workplace Policy Institute will keep readers apprised of current developments.