Client Alert
Employers Scramble to Decide What to Do Next
By Attorneys James P. Reidy and Karen A. Whitley
On Friday November 15th a federal judge in Texas struck down a US Department of Labor (“USDOL”) Final Rule (the “Overtime Rule”) that would have increased the salary threshold, in multiple phases, for exemptions from overtime pay under the federal wage law (the Fair Labor Standards Act, or “FLSA”). The FLSA’s Executive, Administrative and Professional overtime exemptions (“FLSA White Collar exemptions”) require that an employer pay an exempt worker on a salary basis, at or above a certain salary level, and that the employee’s primary job duties satisfy the responsibilities outlined in one of the exemption categories. In short, the Texas court held that the USDOL’s Overtime Rule was not permissible, its effects would be “staggering,” and something had gone “seriously awry” because the Overtime Rule’s increased salary level would render an employee’s “primary duties” meaningless.
The Biden Administration promoted the Overtime Rule as an overdue increase to the salary threshold component of the overtime exemptions. A proposed increase in 2016 was also blocked at the last minute. The Overtime Rule would change the exempt status of more than 4 million working Americans and would make them eligible for overtime premium pay.
The case in the Eastern District of Texas was filed by multiple business groups who maintained that the Overtime Rule would have “forced employers to reexamine compensation packages for millions of workers nationwide.” Indeed, many employers went through the exercise of adjusting compensation earlier this year when the Overtime Rule was finalized in July and it increased the salary threshold for FLSA White Collar Exemptions from $684 per week ($35,568 per year) to $844 per week ($43,888 per year). The court’s decision last Friday came just six weeks before the salary threshold was due to increase again on January 1, 2025 to $1,128 per week ($58,656 per year).
The court not only halted the January 1, 2025 increase, it also rolled back the July 1, 2024 increase, meaning that the salary threshold for FLSA Overtime Exemptions slid back to $684 per week ($35,568 per year). The court found, similar to a ruling in 2016, that the USDOL exceeded its authority with those significant increases in the salary threshold. The 2016 ruling held that the proposed salary increases at that time “essentially ma[de] an employee’s duties, functions, or tasks irrelevant if the employee’s salary f[ell] below the new minimum salary level.”
The court’s decision last week analyzed the history of the salary threshold factor, finding that the fundamental purpose of that factor was to set “low minimum salary levels designed to exclude only obviously nonexempt employees.” The court noted that the USDOL had admitted in 2019 that the salary level should not “disqualify any substantial number of bona fide executive, administrative, and professional employees from exemption.” Instead, the court noted that the salary level test should play a useful “but limited” role in determining whether a worker is exempt. Because the Overtime Rule substituted the importance of salary over the employee’s duties, it exceeded the USDOL’s authority.
The court also criticized the USDOL’s attempt to include in the Overtime Rule an automatic salary increase every 3 years because those increases wouldn’t follow the requirements of the federal Administrative Procedures Act, the law that governs changes to federal regulations.
This decision and its challenge to USDOL’s authority and discretion in setting the salary threshold seem to be on firm ground given the US Supreme Court’s decision earlier this year in Loper Bright Enterprises v. Raimondo. In that case, the Supreme Court overruled Chevron deference, the long-standing principle under which courts deferred to a federal agency’s interpretations of the laws the agency was charged with enforcing. Friday’s FLSA ruling was one of the first court cases to follow the new standard for review. The tone of the decision was definitely not deferential when it rejected the USDOL’s position that it could increase the FLSA Overtime Exemption salary threshold to such a degree by administrative rule. The decision applies nationwide.
In the wake of this decision, employers are left scrambling to sort out compensation and exemption classifications which many changed during the last six months.
Some have speculated whether USDOL will appeal the court’s ruling. That is certainly possible, but even if an appeal is successful the new Trump Administration may withdraw or reduce the scope or impact of the Overtime Rule.
In any event, many employers are left wondering what to do next especially since most already made changes to salaries to cement exemptions and/or moved formerly exempt employees to non-exempt status (making them now overtime eligible). In the words of one HR Director, “Seriously, I was Santa in July and now I could be the Grinch!”
The answer on what to do next in large part depends on what the employer has done already and its tolerance for change. Likely, employers who already increased salaries to firm up exemptions won’t roll those back. If covered employers planned a new wave of salary increases for the same reasons they could proceed with those increases –especially if they have already been announced to employees. Holding off or reducing those increases by relying on the court ruling could be done but that is a business decision factoring in the adverse impact on employee morale, especially in key positions. If employers seek to reduce salaries, many states, including New Hampshire, have laws that require notice to impacted employees in advance of changes to compensation. In any event, this judicial development presents another opportunity to review FLSA Overtime Exemptions to be sure that covered employees are paid on a salaried basis AND meet all of the applicable duties requirements.
The attorneys in Sheehan Phinney’s Labor and Employment Law Practice Group are ready to discuss these issues with clients and help them navigate through these challenging issues. This article is intended to serve as a summary of the issues outlined herein. While it may include some general guidance, it is not intended as, nor is it a substitute for, legal advice.