Real World Impact: On November 15, 2024, United States District Judge Sean Jordan granted a motion for summary judgment invalidating the U.S. Department of Labor’s (DOL) rule in its entirety which had increased the salary levels for the executive, administration, and professional employee exemptions. The ruling has immediate nationwide application. The proposed salary increases set for January 1, 2025 will not go into effect. The salary levels will revert to their pre-July 1, 2024 levels.
Background
The DOL had issued a salary rule increasing in stages the salary level for executive, administrative, and professional employees to be considered exempt from overtime under the Fair Labor Standards Act (FLSA). The salary level rose from $684 per week ($35,568 annually) to $844 per week ($43,888 annually) effective July 1, 2024. The salary level would increase again to $1,128 per week ($58,656 annually) effective January 1, 2025. Similarly, the rule increased the highly compensated employee exemption from $107,732 per year to $132,964 per year effective July 1, 2024. The salary level for that exemption would increase again to $151,164 per year effective January 1, 2025. Finally, the rule provided an automated indexing mechanism whereby the salary levels would increase automatically every three years with the first increase scheduled for July 1, 2027.
The State of Texas and several employer associations sued the DOL in the U.S. District Court for the Northern District of Texas seeking to invalidate the rule. On June 28, 2024, Judge Jordan granted a preliminary injunction to the State of Texas as an employer finding that it was likely the DOL had exceeded its authority in issuing the rule. However, as the State of Texas was the only plaintiff that specifically sought a preliminary injunction, the injunction granted did not apply to the other plaintiffs, and the July 1, 2024 increase went into effect for all other employers.
Court Decision
Judge Jordan issued a 62-page decision in which he concluded that the DOL exceeded its authority in issuing the rule. Each part of the rule was invalidated: the July 1, 2024 increase, the January 1, 2025 increase, and the automatic indexing mechanism. Judge Jordan stated that the DOL “simply does not have the authority to effectively displace the duties test with such a predominate salary-level test.” Judge Jordan stated that district courts should “nullify and revoke” illegal agency action. He vacated the rule and made it clear his order has nationwide effect.
What About the July 1, 2024 Increase?
The July 1, 2024 salary increase went into effect for all employers except for the State of Texas as an employer. According to the DOL, this change affected about one million employees who would no longer be exempt unless their employer raised their salary level by July 1, 2024 to at least $844 per week ($43,888 annually). Now that the July 1, 2024 increase has been ruled null and void, the minimum salary level has reverted to $684 per week ($35,568 annually) and the highly compensated employee salary level has reverted to $107,732. Employers are no longer required under the FLSA to maintain the increased July 1, 2024 salary levels. However, reducing salary levels once granted would create multiple issues. It would create employee morale issues, lead to increased turnover, and possibly make an employer less competitive. Any reduction in salary level should be done prospectively only. Note, some states have notice requirements to employees before their compensation may be reduced. There also are some states that have salary thresholds exceeding the FLSA salary level. Further, if you are an employer who converted employees to nonexempt due to these increases, we recommend that these converted employees continue to remain nonexempt, at least for the time being. Employers should consult with their legal counsel before reducing salary levels or converting exemption status.
Is This Decision the Final Word?
Judge Jordan’s decision may be appealed by the DOL to the U.S. Fifth Circuit Court of Appeals. We believe that it is unlikely Judge Jordan’s order would be stayed during any appeal. The Fifth Circuit is generally considered a conservative court and the likelihood of Judge Jordan’s well-reasoned order being overturned seems slight. The recent election makes the prospects of a successful appeal more unlikely. The Trump administration likely would withdraw any such appeal. It is possible that the Trump administration might revisit the rule at some point. If so, any new rule likely would have much more modest proposed salary increases and no automatic indexing mechanism.