Texas Federal Court Strikes Down U.S. DOL Rule Increasing Salary Threshold for Exempt Employees

On November 15, 2024, a federal district court in Texas struck down the U.S. Department of Labor’s (“DOL”) Minimum Wage and Overtime Exemption Rule (“2024 Rule”)[1] that raised the minimum salary at which employees in a “bona fide executive, administrative, or professional capacity”[2] (“EAP”) are exempt from minimum wage and overtime pay under the Fair Labor Standards Act (the “FLSA”).[3]  As a result of this ruling, the 2024 Rule has been vacated nationwide in its entirety—meaning that employers are no longer required to take action to comply with the 2024 Rule, including adjusting employees’ salaries in anticipation of the previously expected salary threshold increase on January 1, 2025.

FLSA Exemptions

There are two categories of FLSA exemptions: (i) the EAP exemption and (ii) the “highly compensated” employees exemption.[4] The FLSA provides an exemption from minimum wage and overtime pay for employees employed in “a bona fide executive, administrative, or professional capacity.”[5]  Since 1940, the regulations implementing the EAP exemption have generally required covered EAP employees to meet certain tests regarding their job duties and a minimum salary threshold.[6]  The “highly compensated” employee exemption, which was added to the regulations in 2004, also excludes covered employees from the minimum wage and overtime pay requirements.  This exemption applies a higher annual compensation requirement with a “minimal duties” test, which requires covered employees to customarily and regularly perform at least one of the exempt duties or responsibilities of an EAP employee.[7]  Since the FLSA was enacted, the minimum salary level for the EAP exemption had been raised nine times before the 2024 Rule.[8]

The 2024 Rule

As we noted in our May 3, 2024 memorandum,[9] on April 26, 2024, the DOL published the 2024 Rule under the FLSA that (i) increased the standard salary level applicable to EAP employees to $1,128 per week (or $58,656 annually for a full-year worker); (ii) increased the total annual compensation threshold for “highly compensated” employees to $151,164; and (iii) included a mechanism that would adjust these two thresholds every three years to reflect current earnings data. 

For both exemptions, the 2024 Rule took effect in two stages.  As to the EAP exemption, the 2024 Rule raised the salary level from $684 per week to $844 per week (or from $35,568 annually to $43,888 annually) starting on July 1, 2024.[10]  According to the DOL, as a result of this change in July 2024, approximately one million employees became eligible for overtime pay under the 2024 Rule.[11]  The 2024 Rule also sought to raise the salary level from $844 per week to $1,128 per week (or from $43,888 annually to $58,656 annually) starting on January 1, 2025.  The DOL expected that this change would result in an additional three million workers becoming nonexempt.[12]  The 2024 Rule implemented a mechanism to automatically adjust the salary level triennially based on contemporary earnings data.[13]  The first automatic change was set to occur on July 1, 2027.  The DOL had estimated that these automatic updates would result in millions more employees becoming nonexempt.

The 2024 Rule made similar changes for the “highly compensated” employees exemption.  On July 1, the salary level increased from $107,732 per year to $132,964 per year.[14]  On January 1, 2025, the level was scheduled to jump to $151,164 per year.[15]  The DOL had anticipated that 292,900 workers would have their statuses changed in the first year as a result.[16]  And, as with the EAP exemption, the “highly compensated” exemption was to be updated every three years starting on July 1, 2027 to reflect current earnings data.

Court Decision Vacating the 2024 Rule

After the 2024 Rule’s issuance, a legal challenge by the State of Texas and a coalition of trade associations and employees followed.[17]  The plaintiffs in this case argued that the 2024 Rule exceeded the DOL’s authority under the FLSA because it increases the EAP exemption to a level that effectively displaces the duties-based inquiry required by the FLSA’s text with a predominant salary-level test.[18]

On November 15, 2024, the U.S. District Court for the Eastern District of Texas issued a highly anticipated decision, which vacated the 2024 Rule nationwide.  The court explained that, according to the FLSA’s text, whether an employee falls within the EAP exemption turns on their job duties, not salary.[19]  Accordingly, the court was particularly troubled by what it perceived as a large percentage of employees who would lose their exempt status as a result of the 2024 Rule even though they satisfied the “duties” test.  For example, the court calculated a third of otherwise exempt employees who the DOL acknowledged met the duties test were nonetheless rendered nonexempt because of the July 2024 increase.  The court concluded that these numbers show that changes to the minimum salary level are not a reasonable proxy for identifying workers who would also not meet the duties test and that the DOL therefore impermissibly displaced the duties test with a salary-level test.[20]  While the decision did not expressly analyze the highly compensated employees exemption, the court wrote in a footnote that the analysis applies equally to the DOL’s changes to the salary level for the highly compensated employees exemption.[21]

Implications for Employers

• The 2024 Rule has been vacated nationwide in its entirety. The scheduled threshold increase on January 1, 2025 will not go into effect and the threshold increase that took place on July 1, 2024 is nullified.
• The DOL could appeal this decision but given the imminent change in Presidential Administration, the DOL may abandon efforts to appeal. The new DOL may issue a new rule or repeal the rule.
• For both categories of exemptions, employers have the option to (i) cancel scheduled changes, such as increasing employees’ salaries to match the new threshold; (ii) roll back any changes already made to comply with the 2024 Rule; or (iii) maintain any changes made to comply with the 2024 Rule.
• In case of any salary reduction, employers may want to check applicable state law requirements and consult legal counsel before reversing any salary increases.

The court’s decision can be found here.

*       *       *

[1]        DOL, Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees, 89 Fed. Reg. 32,842 (to be codified at 29 C.F.R. Pt. 541). 

[2]        29 U.S.C. § 213(a)(1).

[3]        Texas v. United States Dep't of Lab., No. 4:24-CV-468-SDJ, 2024 WL 4806268 (E.D. Tex. Nov. 15, 2024).

[4]        For a more detailed discussion on these exemptions, see our May 3, 2024 Memorandum.

[5]        29 U.S.C. § 213(a)(1).

[6]        Final Rule at 32,842. 

[7]        Id. at 32,846. 

[8]        Texas v. United States Dep't of Lab., No. 4:24-CV-468-SDJ, 2024 WL 4806268, at *2 (E.D. Tex. Nov. 15, 2024).

[9]        U.S. Department of Labor Promulgates Final Minimum Wage and Overtime Exemption Rule, available at https://www.paulweiss.com/practices/litigation/employment-workplace-investigations-trade-secrets/publications/us-department-of-labor-promulgates-final-minimum-wage-and-overtime-exemption-rule?id=51368.

[10]       Final Rule at 32,854.

[11]       Id. at 32,843.

[12]       Id. at 32,843.

[13]       Id. at 32,971.

[14]       Id. at 32,972.

[15]       Id.

[16]       Id. at 32,891.

[17]       Texas v. United States Dep't of Lab., No. 4:24-CV-468-SDJ, 2024 WL 4806268, at *1 (E.D. Tex. Nov. 15, 2024).

[18]       Id.

[19]       Id. at *14–16.

[20]       Id. at *19.

[21]       Id. at * 10 n.19.