On June 28, 2024, the U.S. District Court for the Eastern District of Texas issued a limited injunction of the U.S. Department of Labor’s new regulations increasing the minimum salary that certain executive, administrative, and professional (EAP) employees must be paid to qualify for the so-called “white-collar” exemption under the Fair Labor Standards Act (FLSA). The injunction is limited, however, to the State of Texas in its capacity as an employer of state employees—businesses in Texas (and throughout the country) are not currently shielded from the scheduled increases by the court’s injunction, although other challenges to the rule, including one with a request for nationwide injunctive relief, remain pending. The first phase of the increase is scheduled to go into effect on July 1, 2024, with a second increase kicking in on January 1, 2025.

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 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 threshold (the “salary test”).

In April of this year the DOL issued final regulations raising the white-collar exemption salary threshold (which was last updated to its current $35,558 per year in 2019). The final rule raises the minimum salary in two steps. First, using the same methodology used in 2019, the rule raises the salary threshold to $43,888 effective July 1, 2024. That marks a 23% increase over the current level. Then, in January 2025, the rule will raise the salary threshold to $58,656. That increase relies on a new methodology and marks a 64.9% increase. And from there, the rule contemplates automatic updates every three years. The new methodology pegs the salary threshold at the 35th percentile of full-time, non-hourly workers in the lowest-earning Census region (currently, the South). That methodology will be used to update the salary level going forward. The new white-collar overtime rule increases the threshold of the salary test only; it makes no changes to the salary basis or duties tests.

The final rule also raises the minimum salary for highly compensated employees (although this exemption is not recognized in every state). That increase will also take effect in two stages. First, on July 1, 2024, the salary threshold will rise from $107,432 to $132,964 per year (a 23% increase). Second, on January 1, 2025, it will rise to $151,164 (a 41% increase from current levels). The new level will be pegged to the 85th percentile of all non-hourly workers nationwide. And like the white-collar thresholds, it will be updated every three years.

Legal Challenge

The State of Texas sued the DOL, claiming that the increased salary threshold was so high as to constitute an unlawful de facto “salary only” test, and thus exceeded the DOL’s authority under the FLSA. In enjoining enforcement of the rule against Texas, the court found that the state was likely to succeed on the merits of that claim, holding that the increased threshold “effectively eliminate[d]” the duties test and thus was entitled to injunctive relief. The court limited that relief only to Texas in its capacity as an employer, however; it did not extend injunctive relief to businesses in Texas (or anywhere else in the country). That said, at least two other challenges to the rule are pending, including one in the Northern District of Texas in which nationwide injunctive relief has been specifically requested. As of this writing, that request is still pending before the court. A third suit brought by a coalition of trade associations and businesses is also pending, although injunctive relief in that case has not yet been requested. That suit is pending in the same court as the Texas lawsuit; the cases have been consolidated for future consideration. A substantially similar overtime regulation promulgated by the DOL was enjoined and ultimately vacated entirely.

The legal landscape is changing here quickly, and Littler’s Workplace Policy Institute will keep readers apprised of relevant developments. In the meantime, employers should review their salaries and evaluate their classification policies to determine what is necessary to come into compliance with the new overtime rule, if and when it becomes effective. Employers may need to increase salaries or reclassify currently exempt employees. That decision can be complicated and should be made with the guidance of experienced counsel.