The Federal Labor Standards Act (“FLSA”) governs certain conditions of work in the U.S., including by setting the federal minimum wage and requiring overtime pay for certain positions. The FLSA is administered by the U.S. Department of Labor (“DOL”), which recently tried to raise the salary threshold below which workers are covered by FLSA’s minimum wage and overtime pay protections. A federal Texas court, however, has just struck down the DOL’s rule, claiming the department overstepped its authority. Many are now wondering what this means for them.
What Is the EAP Exemption?
The FLSA requires that employers (1) pay their employees at least a minimum federal wage and (2) pay overtime wages to employees working more than 40 hours per week. However, salaried employees that occupy bona fide executive, administrative, or professional positions are exempt from FLSA’s minimum wage and overtime requirements. This rule is referred to as the “EAP Exemption.”
FLSA’s EAP Exemption does not itself set a minimum salary requirement for being designated as “exempt.” The DOL that administers FLSA, however, relies on “salary level” to help determine which employees are exempted from FLSA’s overtime pay and minimum wage requirements.
For the EAP Exemption to apply, the following three requirements must be met:
- The employee’s job duties primarily involve executive, administrative, or professional duties. This is the “duties test.”
- The employee is paid a pre-determined and fixed salary. This is the “salary basis test.”
- The salary exceeds the minimum weekly amount set by the DOL. This is the “salary level test.”
The DOL’s First Update Since 2019
On July 1, 2024, the DOL increased the standard salary level to $844 per week (or $43,888 annually). For highly compensated employees, the salary threshold for exemption status increased to $132,964.
Per the DOL, salaries have exponentially increased since 2019, when the rule was last updated. In 2019, the minimum salary for overtime pay exemption was determined to be $684 per week (or $35,568 annually). For highly compensated employees, the minimum annual salary was $107,432.
The update also implemented a new salary level calculation methodology to take effect on January 1, 2025, which would have increased the minimum salary for overtime pay exemption to $58,656 per year, and $151,164 for highly compensated employees. It would have also established automatic updates, every three years, to the minimum salary.
The Effect of the Update
With the increase in the minimum salary level, millions of employees who had previously been
classified as “exempt” would have become eligible for overtime pay, even though their duties would remain the same. The DOL predicted that in the first year of the change taking effect, it would have imposed approximately $1.4 billion in direct costs on employers. Also in the first year, there would have been approximately a $1.5 billion income transfer from employers to workers, resulting from new overtime pay premiums or pay raises to maintain certain employees within the exempt status.
The DOL also stated that the rule would have assisted employers in reducing the risk of misclassifying employees, increasing worker productivity, reducing employee turnover, and increasing personal time for workers.
Federal Court Strikes Down DOL Update
On November 15, 2024, the rule came at issue before a federal Texas court in State of Texas v. U.S. Dept. of Labor, et al., Civil No. 4:42-CV-468-SDJ (E.D. Tex. Nov. 15, 2024).
The Texas court vacated the rule holding that the DOL exceeded its authority in raising the minimum salary requirements because the 2024 rule displaced the “duties test.” The court reasoned that FLSA’s EAP Exemption “requires that an employee’s status turn on duties—not salary—and because the 2024 Rule’s changes make salary predominate over duties for millions of employees, the changes exceed the Department’s authority to define and delimit the relevant terms.”
In its decision, the court relied on the recent Loper Bright Enters v. Raimondo decision by the Supreme Court, which held that courts should be exercising their independent judgement in deciding if an agency acted within its power. 144 S.Ct. 2444, 2273 (2024).
The court also relied on the Fifth Circuit decision in Mayfield v. DOL, 117 F.4th 611 (5th Cir. 2024). In Mayfield, the court held that any DOL attempt to define and delimit the terms of the EAP Exemption was unauthorized by the FLSA.
What Does the Ruling Mean?
With the July 2024 rule vacated, the 2019 rule remains effective. This maintains the minimum salary requirement at $684 per week (or $35,568 annually) for employees to be exempt from overtime pay. And for highly compensated employees, a minimum annual salary of $107,432 will exempt them from overtime pay eligibility. An appeal from the DOL is unlikely given the recent election results.
The court’s ruling impacts employers and workers who have updated or planned to update salaries to be reflective of the 2024 rule. However, even though the 2024 rule has been vacated, certain states still impose stricter overtime pay standards.
It is always wise to consult with an experienced attorney to evaluate best practices for your business and to navigate the rapidly changing federal, state, and local legal landscape.