Seyfarth Synopsis:The DOL's revised overtime exemption rule takes effect today, July 1, 2024. While several lawsuits are challenging the rule, a last-minute injunction was ultimately granted for only one employer: the State of Texas. The rule is in effect for all other businesses, including businesses in Texas.
In Apr il 2024, the U.S. Department of Labor published its final rule revising the FLSA's executive, administrative, and professional exemptions—the so-called "EAP" or "white-collar" exemptions. The rule was promptly challenged in court. With the rule set to take effect today, many wondered if the rule would meet the same fate as a similar rule issued in 2016, which was halted at the last minute by a federal judge in Texas.
Employers now have their answer: The rule will take effect for all but one employer—the State of Texas.That's because on Friday evening, a federal judge overseeing a case filed by the State of Texasgranted the Lone Star State's request for a preliminary injunction. But the injunction benefits only the State of Texas in its capacity as an employer of state employees—it does not benefit any other employer, whether inside or outside of Texas.
The rule is still being challenged in several cases. It is quite possible that the rule will ultimately be enjoined on a nationwide basis. But whether that will happen (and if so when) is uncertain. What is certain, for now, is that the new rule is in effect for all but one employer.
The Rule
It is well-known that the FLSA generally requires employers to pay time-and-a-half to employees who work more than 40 hours in a week. But the law exempts some employees from this overtime pay requirement. While hardly the only exemptions available to an employer, the "EAP" exemptions are the most commonly utilized (and litigated) exemptions.
While the EAP exemption is set out by statute, it is defined through regulations issued by the U.S. DOL. Under the DOL's rules, to qualify for an EAP exemption, an employee must generally satisfy a three-part test: their primary duty must be the performance of exempt work; they must be paid on a salary basis; and their salary level must exceed a minimum threshold. This last requirement—salary level—is the focus of the DOL's recent rulemaking.
In late April 2024, the DOL published a rule revising the EAP exemptions, with changes set to take effect today, July 1, 2024. The changes, which the DOL intends to extend overtime pay to around 4 million workers, increase the minimum salary level; increase the annual compensation threshold for the highly-compensated employee (or "HCE") exemption; and call for automatic increases to these thresholds every three years.
Under the new rule, effective today, an EAP employee must receive a weekly salary of at least $844 per week (equivalent to $43,888 per year) to be exempt.1 Then, on January 1, 2025, the threshold will increase more dramatically to $1,128 per week (equivalent to $58,656 per year). Meanwhile, the annual compensation threshold for the HCE exemption increases to $132,964 as of today, and then again to $151,164 on January 1, 2025.
Also, as noted above, the new rule calls for automatic increases to these thresholds every three years, starting on July 1, 2027.
Injunction for One
The new rule is similar to one issued under the Obama Administration in 2016. That rule was ultimately enjoined on a nationwide basis by a federal judge in Texas just a few days before it was scheduled to take effect. Given that history, it is no surprise that multiple challenges have been filed to the DOL's latest rule—once again in Texas.
Three cases present similar arguments to those that stymied the 2016 rule, arguing at a high level that the DOL has gone too high (with its salary level increases) and too far (with its introduction of an auto-increase mechanism). One is brought by the State of Texas; a second, assigned to the same judge, is brought by various business interest groups; a third case is brought by a software company.
A fourth case, which predates the new rule and is already before the Fifth Circuit Court of Appeals, challenges whether the DOL has the authority to set a salary level at all.
Many have been watching to see if any court would halt the DOL's rule before today's effective date. That answer came on late Friday night, when Judge Sean Jordan, who is overseeing the State of Texas's case and the business interest groups' case, issued an order specific to the former in which he granted the State's request for a preliminary injunction. Judge Jordan reasoned that the State had shown a likelihood of ultimate success that the DOL exceeded its authority in including automatic increases every three years.
Importantly, the preliminary injunction applies only to the State of Texas as an employer.It does not apply to any other employer within or outside of Texas. Judge Jordan noted that the plaintiffs in the business interest group case had not moved for a preliminary injunction and the record before him was insufficient to justify an injunction beyond the limited one he granted.
Continued Challenges
The cases challenging the DOL's rule will continue from here. The rule could ultimately be enjoined on a broader and permanent basis. Or it could not.
It is possible that certainty will come fairly soon. In the preliminary injunction order issued in the State of Texas case, Judge Jordan noted that "the Court expects that this case will be resolved in a matter of months"—which could mean before January 1, 2025, when the more sizable salary level increase is set to take effect. Alongside the order, Judge Jordan also consolidated the State of Texas's case with the case filed by the business interest groups. Together, the cases provide a path to strike down the rule nationwide. So do the other cases noted above.
As an added layer, judges overseeing these cases may feel called to more seriously question the DOL's EAP rule framework in light of the Supreme Court's landmark three-day-old ruling striking down the Chevron doctrine.
Looking Ahead
We will be watching these battles unfold in the months ahead. In addition to court challenges, Congress passed joint resolutions in the House and Senate seeking to eliminate the new rule—though such a bill, if passed, would have a hard time surviving President Biden's veto.
Whether the DOL's rule will be enjoined on a nationwide basis, and if so when, is unknown. And unless and until that happens, the rule is in effect for employers other than the State of Texas—the new EAP salary threshold is $844 per week, the HCE annual compensation threshold is $132,964 per year, and these numbers are set to increase again on January 1.
Compliance is crucial. Determining who needs to be reclassified is an important step. It's also important to keep in mind that reclassifying employees has rippling impacts that are important to plan for and manage. You should feel free to contact the blog authors or your favorite Seyfarth lawyer to help navigate these waters.
Footnote
1. There are some limited exceptions to this, for example for: certain doctors and lawyers; employees compensated on a fee basis at a sufficient level; and employees who qualify for the computer employee exemption who are instead paid an hourly rate of at least $27.63 per hour.
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