A Texas federal court overturned a U.S. Department of Labor (DOL) rule that raised the minimum salary required to be paid to most employees classified as exempt from overtime and minimum wage requirements. The court’s decision, that has a nationwide effect, invalidates the DOL’s final rule that put in place a salary level increase on July 1, 2024, and another increase set for Jan. 1, 2025, to qualify as exempt under the Fair Labor Standards Act (FLSA) white-collar exemptions and the highly compensated employee exemption. As a result, the salary level increases issued by the DOL are immediately invalidated, and for now, the salary level for exempt status remains at $684 per week ($35,568 annually).

Background

For an employee to be exempt from the FLSA minimum wage and overtime requirements, the employee must generally meet the following three tests:

• Salary basis test: Employee is paid a predetermined and fixed amount that is not subject to reduction because of variations in the quality of quantity of worked performed.
• Salary level test: The amount of salary paid to the employee must meet a minimum specified amount.
• Duties test: The employee must perform executive, administrative or professional duties.

In April 2024, the DOL issued a final rule aimed at increasing the minimum salary required for most employees classified as exempt from the FLSA overtime and minimum wage requirements under the salary level test. This rule specifically affected employees classified under the executive, administrative and professional exemptions. The rule proposed raising the minimum salary in two phases: from $684 per week ($35,568 annually) to $844 per week ($43,888 annually) effective July 1, 2024, and further to $1,128 per week ($58,656 annually) on Jan. 1, 2025.

In addition, the rule raised the salary threshold for highly compensated employees (HCEs), who must meet a minimal duties test to qualify for exemption. The annual compensation requirement for HCEs was set to increase from $107,432 (including at least $684 per week paid on a salary or fee basis) to $132,964 (including at least $844 per week on a salary or fee basis) effective July 1, 2024, with a subsequent increase to $151,164 (including at least $1,128 per week) on Jan. 1, 2025. The rule also introduced automatic updates to these salary thresholds every three years to ensure they remained aligned with economic conditions.

The Challenge

The state of Texas and business groups filed lawsuits, arguing the DOL exceeded its statutory authority granted it by Congress under the FLSA when it enacted the rule. The court sided with Texas, striking down the rule nationwide. Key findings include:

• Exceeding Authority: The court ruled the DOL’s salary increases went beyond the authority granted to them by making salary the predominant factor for exemption and not the duties test as Congress envisioned.
• Automatic Adjustments: The court also invalidated the automatic triennial updates, finding that they bypassed the rulemaking process required by the Administrative Procedure Act (APA).

Implications for Employers

With the salary threshold reverting to the pre-rule levels of $684 per week ($35,568 annually) for exempt employees and $107,432 annually for highly compensated employees, employers who implemented raises in anticipation of the now-overturned rule must evaluate their next steps carefully. Reducing salaries or withholding planned increases could create legal risks and employee-relations challenges. Employers are advised to consult legal counsel to assess potential liabilities, especially in states with stricter wage laws than the FLSA, review compensation policies to ensure compliance with federal and state regulations and communicate any pay adjustments thoughtfully to employees. While the DOL may appeal the ruling to the 5th Circuit Court of Appeals, it is expected that the incoming administration will withdraw any such appeal.

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