On November 15th, Judge Sean Jordan of the Eastern District of Texas halted a 2024 Department of Labor (“DOL”) Final Rule (“2024 Rule”) that massively increased salary requirements for employees classified as “exempt” from the Fair Labor Standards Act (“FLSA”). If implemented, the 2024 Rule would have reclassified untold millions of employees as “non-exempt” from the FLSA—making them eligible for overtime pay. Judge Jordan’s sweeping, 62-page ruling vacated the 2024 Rule nationally for all employers. While the DOL may appeal, it is unlikely the forthcoming Trump administration will defend the 2024 Rule. Judge Jordan’s ruling is a massive win for employers everywhere and leaves questions about the scope of the DOL’s authority to increase salary thresholds for FLSA exemptions moving forward.
Statutory Framework
The FLSA generally requires employers pay at least the federal minimum wage and, in addition, overtime for all hours worked in excess of forty during the workweek. The FLSA contains several exceptions to these requirements. Chief among them, the executive, administrative, and professional exemption (“EAP Exemption”). The EAP Exemption provides that the FLSA’s minimum wage and overtime requirements do not apply to employees working “in a bona fide executive, administrative, or professional capacity” as those terms are defined by DOL regulations. The plain text of the FLSA does not specify any salary or wage requirements for employees to qualify for the EAP exemption.
Since the FLSA was enacted in 1938, the DOL has promulgated various regulations defining the scope of the EAP Exemption. As a general matter, for an employee to qualify for the EAP Exemption, two components are required:
- The employee’s job duties must be of a certain nature (the “Duties” component); and
- The employee’s salary must reach a certain threshold (the “Salary Level” component).
The 2024 Rule sought to substantially modify the Salary Level component of the EAP Exemption. Previously, employees must have earned at least $684 per week to qualify for the EAP Exemption. But the 2024 Rule dramatically altered that calculus. Specifically, the 2024 Rule required three, staged changes to the EAP Exemption’s Salary Level component:
- Raised the Salary Level to $844 per week starting July 1, 2024;
- Raised the Salary Level to $1,128 per week starting January 1, 2025;
- Starting July 1, 2027, automatically increased the salary level every three years, indefinitely, based on contemporary earnings data.
According to DOL estimates, the 2024 Rule would cause millions of employees to become nonexempt before the automatic increases began in 2027.
Importantly, the Fifth Circuit Court of Appeals recently confirmed that the DOL has inherent authority to impose some minimum Salary Level as part of its statutory duty to define the scope of the EAP Exemption. But a key question remained: How high a Salary Level could the DOL require?
In its opinion, the Fifth Circuit commented that the DOL must not set a Salary Level so high that it effectively renders the Duties component of the EAP Exemption meaningless. This warning from the Fifth Circuit would prove crucial in Judge Jordan’s recent opinion vacating the 2024 Rule.
Procedural Background
The State of Texas, along with a coalition of trade groups and employers, each separately brought suit in the Eastern District of Texas challenging the 2024 Rule. Texas quickly moved for a preliminary injunction against enforcement of the 2024 Rule, which Judge Jordan granted in June 2024. But that injunction applied only to Texas as an employer. Accordingly, the 2024 Rule’s July 1 salary increase became effective for all other employers across the country.
The two cases were then combined before Judge Jordan—who quickly ordered all parties to submit final briefing on whether to issue a permanent, nationwide injunction vacating the 2024 Rule. After briefing and argument, Judge Jordan ruled the DOL exceeded its statutory authority when promulgating the 2024 Rule. In his order, Judge Jordan vacated the 2024 Rule nationwide for all employers.
Judge Jordan’s Opinion
In vacating the 2024 Rule, Judge Jordan focused on the impact of the massive salary increases on the EAP Exemption. For example, Judge Jordan expressed grave concern that millions of employees would become nonexempt despite meeting the Duties component of the EAP exemption. Judge Jordan also noted that, historically, the DOL recognized that the Salary Level component of the EAP Exemption “was designed to screen out the obviously nonexempt employees” but not “displace the duties-based test required by the FLSA.” In short, the DOL must not “adopt a test based on salary alone”.
But, Judge Jordan commented, that this was exactly what the 2024 Rule did. Following the Fifth Circuit’s earlier guidance, Judge Jordan noted that the 2024 Rule’s “staggering” increase in the Salary Level portion of the EAP Exemption resulted in a de facto replacement of the Duties component. This was particularly concerning to Judge Jordan because the FLSA itself, when defining the EAP Exemption, makes no mention of salary when discussing a “bona fide administrative, executive, or professional” role.
Previously, the DOL operated on the assumption that the Salary Level component should not result in more than ten (10) percent of employees who meet the Duties component of the analysis being nonexempt. But the 2024 Rule would have at least tripled this number. That was a massive concern to Judge Jordan, who summarized the resulting incongruity this way:
“When a third of otherwise exempt employees who the Department acknowledges meet the duties test are nonetheless rendered nonexempt because of an atextual proxy characteristic—the increased salary level—something has gone awry[.] The Department cannot credibly maintain that a minimum salary level eliminating such a large percentage of employees who would otherwise qualify under the duties test is merely screening out the obviously nonexempt employees. To the contrary, the proxy characteristic has effectively displaced the duties test[.]”
Accordingly, Judge Jordan found the 2024 Rule’s increased salary thresholds exceeded the DOL’s authority to define the EAP Exemption. Judge Jordan also found the 2024 Rule’s automatic, tri-annual salary level increases to the EAP Exemption were unlawful. In a sternly worded portion of his opinion, Judge Jordan commented that the FLSA does not permit “the Department to set its rulemaking on autopilot and evade” procedural requirements—even if those requirements are “inconvenient” to the DOL.
Key Takeaways for Employers
Judge Jordan’s sweeping order invalidating the 2024 Rule offers several takeaways for employers throughout the country.
- Reconsider salary increases. Businesses who may have considered broad, sweeping salary increases to retain employees’ exempt status should reconsider. With the 2024 Rule vacated, the increased—and increasing—salary requirements to maintain an employees’ exempt status are no more.
- Communicate clearly to employees. Companies who may have promised or implemented salary increases to meet the 2024 Rule’s requirements should think long and hard about whether and how to claw back such raises. Regardless of an employer’s legal right to reduce employee salaries, the impact on employee morale and performance of such decisions should not be ignored.
- Monitor any appeals. As noted above, the DOL may appeal Judge Jordan’s ruling. Although we do not expect a Trump administration to staunchly defend the 2024 Rule, nothing is certain. Accordingly, employers should not consider this matter closed until any and all appeals are exhausted.
- Remember state requirements. While Judge Jordan’s opinion eviscerated the 2024 Rule it did nothing of the sort to any state-level regulations that might require certain salary thresholds for employees to meet exempt status. Employers should work closely with outside employment counsel to ensure they are compliant with accompanying state wage-and-hour laws.