Ironwood Business Consulting News Release: 11/20/24

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

On November 15, 2024, a Texas federal court invalidated a U.S. Department of Labor (DOL) rule that would have raised the minimum salary required for most employees classified as exempt from overtime and minimum wage requirements under the Fair Labor Standards Act (FLSA). This decision effectively halts the implementation of the new salary thresholds nationwide, creating immediate implications for employers.

Background: Understanding FLSA Exemptions

To classify an employee as exempt from FLSA minimum wage and overtime requirements, employers must ensure the employee meets three key tests:

• Salary Basis Test: The employee is paid a predetermined and fixed salary not subject to reduction based on work quality or quantity.
• Salary Level Test: The salary meets a minimum specified amount.
• Duties Test: The employee performs executive, administrative, or professional duties as defined by the FLSA.

The DOL’s Final Rule: Proposed Changes

On April 23, 2024, the DOL issued a final rule intending to raise the minimum salary levels for exempt employees under the executive, administrative, and professional categories. The changes were scheduled in two phases:

Phase One (Effective July 1, 2024):

• Increase the standard salary level from $684 per week ($35,568 annually) to $844 per week ($43,888 annually).
• Raise the total annual compensation requirement for Highly Compensated Employees (HCEs) from $107,432 to $132,964, including at least $844 per week paid on a salary or fee basis.

Phase Two (Effective January 1, 2025):

• Further increase the standard salary level to $1,128 per week ($58,656 annually).
• Raise the HCE total annual compensation to $151,164, including at least $1,128 per week paid on a salary or fee basis.

Additionally, the rule proposed automatic updates to these salary thresholds every three years to account for wage growth over time.

Legal Challenges and the Court’s Decision

In June 2024, the state of Texas filed a legal challenge against the DOL’s rule, resulting in a temporary injunction preventing the rule from taking effect for state employees. Several business groups joined the lawsuit, seeking to block the rule nationwide.

The court consolidated these challenges and, on November 15, 2024, issued a decision invalidating the rule. The court held that:

• The DOL exceeded its authority by emphasizing the salary level test over the duties test, effectively displacing the latter.
• The analysis applied equally to the HCE exemption and related salary increases.
• The DOL lacked authority to implement automatic updates to salary levels every three years.

Next Steps: What This Means for Employers

Immediate Impact

The court’s decision:

• Blocks the salary increases that were scheduled for January 1, 2025.
• Invalidates the salary increases that took effect on July 1, 2024.
  • Reverts the minimum salary levels to the previous amounts:Standard Salary Level: $684 per week ($35,568 annually).
  • HCE Total Annual Compensation: $107,432, including at least $684 per week paid on a salary or fee basis.

Potential Appeal by the DOL

The DOL may choose to appeal the court’s ruling. An appeals court could:

• Uphold the lower court’s decision, maintaining the invalidation of the rule.
• Reverse the decision, reinstating the new salary thresholds.

Given the timing, this appeal could occur before President-Elect Trump takes office on January 20, 2025. It’s also possible that the appeal remains unresolved by that date, leaving the incoming administration with options to:

• Continue or withdraw the appeal.
• Issue a new rule addressing the court’s concerns.

Considerations for Employers

Employers Who Increased Salaries

If your organization already raised salaries to comply with the now-invalidated rule, you may be considering whether to reverse these increases. Before making any changes:

• Consult with legal counsel to understand potential risks, including employee relations and compliance with employment contracts or state laws.
• Evaluate the impact on employee morale and retention.

Employers Planning Future Increases

For employers who planned increases effective January 1, 2025, but have not yet implemented them:

• Assess whether to proceed with the planned changes.
• Communicate promptly with affected employees regarding any decision to delay or cancel the increases.

State Law Compliance

Be aware that several states have their own overtime exemption criteria, often with higher salary thresholds or stricter duties tests than federal law. Employers must:

• Apply both federal and state tests to determine an employee’s exempt status.
• Comply with the more stringent standard to ensure full compliance.

Employee Communication

Any changes to compensation should be:

• Communicated clearly and promptly to affected employees.
• Documented in writing, adhering to any state or local requirements regarding notice periods for pay changes.

Conclusion

The court’s decision adds a layer of complexity to wage and hour compliance. Employers should:

• Stay informed about developments related to the DOL’s rule and potential appeals.
• Review compensation practices to ensure ongoing compliance with current federal and state laws.
• Consult with legal counsel to navigate these changes effectively.

Our team is here to assist you in understanding how this decision affects your organization and to help you implement any necessary adjustments. Please don’t hesitate to reach out with questions or for further guidance. For support, call 888-743-5238 or email HR@ironwoodbc.com.