Federal Court Strikes Down US DOL Overtime Exemptions Rule Nationwide
The DOL could decide to appeal the court's ruling and an appeals court could either uphold the lower court's ruling or reverse the lower court's ruling.
On November 15, 2024, a Texas federal court struck down a U.S. Department of Labor (DOL) rule that raised the minimum salary required to be paid to most employees classified as exempt from overtime and minimum wage requirements under the Fair Labor Standards Act (FLSA). The court's order invalidates the rule nationwide effective immediately.
The details
Background
For an employee to be exempt from the FLSA minimum wage and overtime requirements, the employee must generally meet the following three tests:
Salary basis test: Employee is paid a predetermined and fixed amount that is not subject to reduction because of variations in the quality of quantity of worked performed.
Salary level test: The amount of salary paid to the employee must meet a minimum specified amount.
Duties test: The employee must perform executive, administrative, or professional duties.
On April 23, 2024, the DOL released a final rule that would have raised the minimum salary required to be paid to most employees classified as exempt from the FLSA overtime and minimum wage requirements (the salary level test). The final rule specifically impacted those employees classified as exempt under the executive, administrative and professional employee exemptions.
The final rule raised the minimum salary in two phases. First, the final rule raised the salary amount from $684 per week ($35,568 annually) to $844 per week ($43,888 annually) effective on July 1, 2024. A second increase would have raised the salary amount to $1,128 per week ($58,656 annually) on January 1, 2025.
The final rule also increased the salary amount for certain highly compensated employees (HCEs) who are paid a salary, earn above a higher total annual compensation level, and satisfy a minimal duties test. Employees meeting the requirements of this alternative HCE test, are also exempt from the FLSA overtime and minimum wage requirements. The final rule increased the amount required to be paid to HCEs from $107,432 annually (including at least $684 per week paid on a salary or fee basis) to $132,964 annually (including at least $844 per week paid on a salary or fee basis) effective on July 1, 2024. A second increase would have raised the amount to $151,164 (including at least $1,128 per week paid on a salary or fee basis) on January 1, 2025.
Finally, the rule would have provided for an automatic update to the minimum salary and HCE amounts every three years.
This past June, a federal district court temporarily blocked the rule from going into effect for state of Texas employees pending resolution of legal challenges brought by the state of Texas. Several business groups joined the state of Texas legal challenge and sought to permanently block the rule for all employers. The court consolidated these legal challenges and issued a decision.
The court's decision
The court held that the DOL exceeded its authority indicating that the DOL "simply does not have the authority to effectively displace the duties test with such a predominant salary-level test." The court also noted that its analysis applied equally to the HCE exemption and the related increases to the minimum compensation amounts.
Finally, the court found that the DOL lacked the authority to implement automatic increases to the required salary level for executive, administrative and professional employees and the HCE compensation amounts every three years.
Next steps
- The court's decision blocks the minimum compensation increases that were scheduled to go into effect on January 1, 2025 and invalidates the previously required July 1, 2024 increases nationwide.
- Effective immediately, the salary level test amount for executive, administrative and professional employees returns to $684 per week ($35,568 annually) and the required amount to be paid to HCEs returns to $107,432 annually (including at least $684 per week paid on a salary or fee basis).
- The DOL could decide to appeal the court's ruling and an appeals court could either uphold the lower court's ruling or reverse the lower court's ruling. This could occur prior to President-Elect Trump taking office. It's also possible that any such appeal is still pending when President-Elect Trump takes office on January 20, 2025. The Trump administration could choose to abandon such an appeal and could also choose to issue a new rule. ADP will continue to monitor developments.
- Employers that have already raised compensation amounts based on the final rule might be considering whether to now decrease amounts based on prior DOL requirements. If you are planning to decrease amounts or are planning to not increase amounts in the future that have been previously communicated (e.g., increases that were planned for January 1, 2025), then you should discuss your strategy with counsel.
- Several states have their own test for exempt status. These tests are typically harder to satisfy. You should apply both the state and federal tests to determine an employee's status under both federal and state law.
- Finally, be prepared to communicate any changes to employees promptly and in writing, taking into consideration any state or local requirements governing the timing of pay change notifications.
ADP compliance resources
ADP maintains a staff of dedicated professionals who carefully monitor federal and state legislative and regulatory measures affecting employment-related human resource, payroll, tax and benefits administration, and help ensure that ADP systems are updated as relevant laws evolve. For the latest on how federal and state tax law changes may impact your business, visit the ADP Eye on Washington Web page located at www.adp.com/regulatorynews.
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Updated on November 18, 2024
