In a highly anticipated ruling, a federal judge for the U.S. District Court for the Eastern District of Texas stopped the U.S. Department of Labor (DOL) from raising the minimum salary level for certain exempt employees of the State of Texas. Although the ruling only impacts a handful of employees working for the State of Texas, it may signal future decisions on the DOL's April final rule, which raised salaries for certain exempt employees and went into effect July 1.
Background on Overtime Exemptions
Unless covered by an exemption, employers must pay overtime pay—generally at the rate of one and one-half the employee's regular pay rate—for any hours worked over 40 in a workweek. To qualify for an executive, administrative, or professional (EAP) exemption or computer employee exemption, the employee must satisfy the job duties test of the applicable exemption and be paid at least the minimum weekly salary. There is also an exemption for "highly compensated employees" (HCEs). HCEs customarily and regularly perform at least one of the duties of an exempt EAP employee and are paid total annual compensation above a minimum amount.
The Fair Labor Standards Act does not define the exemptions. Instead, Congress directed the DOL to "defin[e] and delimit[]" the scope of the EAP exemptions and to modify their criteria "from time to time by regulations." U.S.C. § 213(a)(1).
Earlier this year, the DOL announced a final rule that increased the minimum weekly salary needed to qualify for the EAP and computer employee overtime exemptions. Under the final rule, the minimum salary that such white-collar employees must earn to maintain overtime pay exemptions was set to increase significantly on July 1, 2024, from $684 per week ($35,568 annually) to $844 per week ($43,888 annually). The minimum would rise again to $1,128 per week ($58,656 annually) on Jan. 1, 2025, and continue to increase every three years. The final rule also raised the annual minimum salary level for highly compensated employees on July 1, 2024, and Jan. 1, 2025.
Consistent with its rulemaking authority, the DOL has historically issued rules raising the salary level. But the boundaries of its authority have been the subject of legal challenges. In an unsuccessful attempt to raise the salary level in May 2016, the DOL issued a similar rule that increased the standard minimum salary level from $455 per week ($23,660 annually) to $913 per week ($47,476 annually) and provided for regular updating of the minimum salary level.
However, a federal court in Texas enjoined the rule, finding that the significant increase to the salary level created a "de facto salary-only test" which undermined congressional intent. The court held that the DOL exceeded its authority in Section 213(a) by doubling the existing salary threshold and effectively eliminating the duties test for the white-collar exemptions. It also found that the automatic salary-level adjustments under the 2016 rule were unlawful.
In 2019, the DOL issued another final rule which increased the standard minimum salary level from $455 per week ($23,660 annually) to $684 per week ($35,568 annually) and allowed employers to credit certain compensation toward the minimum. The 2019 final rule was challenged, but a federal court in Texas concluded that that it was within the authority conferred by Congress in Section 213(a). This rule went into effect on Jan. 1, 2020 (though an appeal is still pending).
Legal Challenges to the 2024 Final Rule
The 2024 final rule faced legal challenges after its announcement. Three lawsuits were filed in federal court in Texas to enjoin it. In one suit, the State of Texas sought to enjoin the final rule, claiming that the change would drive up its payroll costs and deplete its budget.
The challenges to the final rule created uncertainty among employers which were faced with a choose-your-own-adventure for approaching potentially impacted salaried employees. Diligent employers assessed their salaried employees to determine which would be impacted if the final rule went into effect. From there, approaches varied. Some employers raised salaries or prepared to raise salaries in anticipation of July 1, 2024. Others reclassified employees to non-exempt. Still others took a wait-and-see approach, reasoning that the final rule may be enjoined and never go into effect (like the 2016 rule).
On June 28, 2024, Judge Sean D. Jordan of the U.S. District Court for the Eastern District of Texas granted the injunction as to only the State of Texas as an employer. Judge Jordan reasoned that the EAP "[e]xemption turns on an employee's functions and duties, requiring only that they fit one of the three listed, i.e., 'executive,' 'administrative,' or 'professional capacity.'" He continued, "[t]he exemption does not turn on compensation." In other words, the court found that the final rule had the same problems as the 2016 rule and enjoined it on similar grounds.
Takeaways for Employers
- The court enjoined the DOL from enforcing the increase as to Texas government employees only. Therefore, the June 28, 2024, injunction applies only to Texas as an employer (not as a geographic territory). Employers taking a wait-and-see approach are thus still waiting but not without the possibility of relief.
- The status of the final rule remains uncertain, though it is presently in effect for all employers other than the Texas government. Two legal challenges to the rule remain, either of which could result in a nationwide injunction.
- In finding that the State of Texas had a likelihood of success on the merits, Judge Jordan applied the Loper Bright Enterprises v. Raimondo case issued the same day by the Supreme Court which overturned the Chevron
- It is not too late for employers to ensure that they are well positioned to respond to future rulings regarding the final rule.
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