On November 15, 2024, Judge Sean D. Johnson of the Eastern District of Texas issued an order setting aside the final rule created by the U.S. Department of Labor’s (DOL) earlier this year that was set to increase the minimum salary thresholds for certain employees by 40% to 50% (the 2024 Rule).[1] In his 62-page decision, Judge Johnson concluded the 2024 Rule “is an unlawful exercise of agency power,” and the DOL exceeded its authority when it issued the 2024 Rule. The Court set aside and vacated the 2024 Rule, and effectively avoided the second significant increase to the minimum salary threshold that was set to take effect on January 1, 2025 under the 2024 Rule. Although employers are no longer required to comply with the 2024 Rule, many employers are left wondering how this ruling impacts their workforce. Below are TALG’s highlights and predictions regarding the Court’s recent decision, and its implications on employers.
What is the 2024 Rule?
On April 23, 2024, the DOL issued the 2024 Rule, which sought to significantly increase the minimum salary threshold for employees that may be classified as exempt under the Fair Labor Standards Act (FLSA). The 2024 Rule primarily targeted two classifications of exempt employees: (1) executive, administrative, or professional employees (EAP); and (2) highly compensated employees (HCE). Among other requirements, EAP and HCE employees must be paid a certain salary or annual compensation to qualify for the exemption. To qualify for the exemptions, EAP employees must receive a salary of at least $684 per week ($35,568 per year) and HCE employees must receive an annual salary of at least $107,432 per year (including at least $684 per week paid on a salary or fee basis).
The 2024 Rule increased these minimum salary thresholds by between 40% to 50%, and were expected to impact millions of employees. Under the 2024 Rule, beginning July 1, 2024, the salary necessary to qualify for the EAP exemption increased from $684 per week ($35,568 per year) to $844 per week ($43,888 per year), and then was set to increase again on January 1, 2025 to $1,128 per week ($58,656 per year). Additionally, under the rule, beginning July 1, 2024, the salary necessary to qualify for the HCE exemption increased from $107,432 per year to $132,964 per year, and then was set to increase again on January 1, 2025 to $151,164 per year.
The practical effect of the 2024 Rule required employers to re-classify employees as nonexempt due to the increased minimum salary threshold to qualify for the EAP and HCE exemptions. The DOL estimated that approximately 1 million workers were affected by the July 1, 2024 increase to the minimum salary threshold.[2] The January 1, 2025 increase was expected to impact an additional 3 million workers “who were previously exempt, with no change in their duties,” and render those employees nonexempt.[3]
Prior DOL Rules & Their Impact on the 2024 Rule
This is not the first time the DOL has attempted to increase the minimum salary necessary to qualify for an exemption, and it likely will not be the last. In 2004, the DOL enacted a rule that exempted certain employees from overtime requirements if the employees were paid a set salary level and met other requirements (the 2004 Rule).[4] To qualify for the EAP exemption, employees would need to receive a salary of at least $455 per week ($23,660 annually). The 2004 Rule also introduced, for the first time, the HCE exemption and set the HCE salary level at $100,000 per year.[5]
Then, in 2016, the DOL promulgated a rule to increase the salary to qualify for the EAP exemption from $455 per week ($23,660 per year) to $913 per week ($47,476 per year), and increase the salary to qualify for the HCE exemption from $100,00 per year to $134,004 per year (the 2016 Rule). However, on August 31, 2017, a federal judge in the Eastern District of Texas issued a permanent injunction blocking implementation of the 2016 Rule.[6]
Next, in 2019, the DOL issued another rule seeking to increase the minimum salary necessary to qualify for an exemption (the 2019 Rule). The 2019 Rule increased the salary to qualify for the EAP exemption from $455 per week ($23,660 per year) to $684 per week ($35,568 per year), and increased the salary necessary to qualify for the HCE exemption from $100,000 per year to $107,964 per year. Recently, on September 11, 2024, the Fifth Circuit upheld the 2019 Rule and found the DOL did not exceed its authority when it issued the 2019 Rule. [7]
The recent DOL rules involving the Department’s attempts to increase the minimum salary necessary to qualify for an exemption are detailed below:
|
Rule |
EAP Exempt Minimum Salary Rule |
HCE Exempt Minimum Salary Rule |
Disposition |
|
2004 Rule |
$455 per week ($23,660 per year) |
This Rule first introduced the HCE Exemption.
$100,000 per year |
This rule remained in effect until the 2019 Rule. |
|
2016 Rule
|
$913 per week ($47,476 per year) |
$134,004 per year |
Not effective, permanent injunction issued |
|
2019 Rule |
$655 per week ($35,568 per year) |
$107,964 per year |
Remains in effect |
|
2024 Rule
|
$844 per week (July 1, 2024) ($43,888 per year) $1,128 per week (Jan. 1, 2025) ($58,656 per year) |
$132,964 (July 1, 2024) $151,164 (Jan. 1, 2025) |
Not effective, set aside |
The DOL’s 2024 Rule Has Been Vacated, But What Does That Mean for Employers?
Employers have been preparing for the implementation of the 2024 Rule since it was first published in April. On July 1, 2024, in compliance with the 2024, many employers increased the salaries of certain workers to meet the new salary threshold or reclassified exempt employees as nonexempt workers. Although the 2024 Rule has now been set aside and is no longer legally in effect, it may still continue to have a lasting impact on employers.
- Potential Appeal. The DOL may appeal the district court’s decision to the Fifth Circuit, and there is a possibility that an appellate court may reverse Judge Johnson’s decision. With the recent election of Trump, it is somewhat unlikely that the new heads of the DOL will be interested in pursuing such an appeal once they assume office. However, given the 2019 Rule was enacted in Trump’s prior presidency, it is possible the DOL could continue with an appeal if one is filed. If the decision is ultimately reversed, employers will need to adjust to ensure compliance with the 2024 Rule.
- Salary Increases. The salary threshold to qualify for the EAP and HCE exemption will no longer take effect on January 1, 2025. Employers that have not yet communicated a change in salary to comply with the 2024 Rule may now reconsider whether they may hold off on the salary increases. Employers that have already communicated changes in salary beginning on or around January 1, 2025 to comply with the 2024 Rule are in a stickier situation. Before making any adjustments to the scheduled salary increases, those employers should consider the language contained in the communication promising the salary increase, the potential impact upon morale and company culture, and consult with counsel if possible.
- Employee Classification. The salary threshold to qualify for EAP and HCE exemptions reverts back to the 2019 Rule. If employers classified their employees as nonexempt due to the 2024 Rule, they may evaluate whether to reclassify the employees as being exempt. Bear in mind, the Court’s decision does not modify the other requirements necessary to establish an employee is exempt from overtime, so employers should consult with counsel before making modifications to employee classification. Employers should be mindful that any changes to the classification of an employee may cause employees to question their classification or impact employee morale.
- Salary Listed in Job Postings. Employers that are actively seeking applicants to fill positions that qualify for the EAP and HCE exemptions should consider whether the salary listed in the post should be modified. Employers that have recently hired or are in the process of hiring candidates that were promised a higher salary due to the 2024 Rule should consult with counsel before rescinding or modifying any job offers.
- Comply with Local Laws. Employers should also take into consideration the local laws where the employees are working. A growing number of states now impose a higher minimum salary threshold to qualify for an exemption (NY, CA, CO, WA) than federal law. Some states also evaluate different factors for determining whether the duties of the employee qualify for an exemption. Employers should be cognizant of the local laws to ensure that any changes to employee classifications and salaries are in line with the local law.
Disclaimer: This article is not intended to constitute legal advice. Please consult legal counsel for personalized advice.
[1] State Plano Chamber of Commerce v. United States DOL, No. 4:24-CV-499-SDJ, ___ F. Supp. 3d ___, 2024 U.S. Dist. LEXIS 207864, at *77 (E.D. Tex. Nov. 15, 2024).
[2] Id. at *7.
[3] Id.
[4] Id. at *22.
[5] Id. at *24.
[6] Nevada v. DOL, 275 F. Supp. 3d 795, 806–07 (E.D. Tex. 2017) (Mazzant, J.) (concluding the 2016 rule increased the minimum salary for the EAP Exemption to a level that “essentially ma[de] an employee’s duties, functions, or tasks irrelevant if the employee’s salary f[ell] below the new minimum salary level,” and unlawfully “ma[de] salary rather than an employee’s duties” the determinative factor for the EAP Exemption).
[7] Mayfield v. United States DOL, 117 F.4th 611, 622 (5th Cir. 2024) (affirming Mayfield v. United States DOL, 693 F. Supp. 3d 712, 725 (W.D. Tex. 2023) (Pitman, J.)).
