Understanding Federal Ruling on White Collar Overtime Exemptions

Understanding the Federal Court’s Decision on White Collar Overtime Exemptions

On November 15, 2024, the U.S. District Court for the Eastern District of Texas issued a significant ruling that vacated the U.S. Department of Labor’s (DOL) 2024 rule aimed at increasing the salary threshold for white-collar overtime exemptions under the Fair Labor Standards Act (FLSA). This decision halts changes that would have redefined overtime eligibility for millions of employees across the United States.

The court determined that the DOL exceeded its statutory authority, particularly by prioritizing salary levels over the duties-based test central to the FLSA exemptions. Employers now find themselves navigating a complex landscape as they reevaluate their compliance strategies, financial planning, and operational adjustments.

What happened?

The U.S. District Court for the Eastern District of Texas ruled against the DOL’s 2024 rule, which proposed significant changes to the salary level for determining exemption from overtime pay under the FLSA. Specifically, the 2024 rule included:

• An Initial Salary Increase: Raising the minimum salary threshold for exempt status from $684 per week ($35,568 annually) to $844 per week ($43,888 annually), effective July 1, 2024.
• A Second Salary Increase: Increasing the threshold further to $1,128 per week ($58,656 annually) starting January 1, 2025.
• Automatic Updates: Introducing triennial automatic adjustments to the salary threshold based on current economic data without requiring regulatory notice-and-comment periods.

The two-stage increase and automatic adjustment mechanism represented a dramatic shift in how the FLSA’s white-collar exemptions would be applied. While the initial salary threshold increase took effect in July 2024, the ruling invalidated the entire rule.

The court found two primary issues:

• Overstepping Statutory Authority: By emphasizing salary levels over job duties, the DOL’s rule created a “salary-only” test that contradicted the FLSA’s focus on the duties performed by an employee. This shift undermined the longstanding balance between salary and duties requirements that has been central to exemption determinations.
• Automatic Adjustments Violated Administrative Law: The automatic updates circumvented the regulatory process required for significant rule changes, such as public notice and comment periods, which are intended to provide transparency and allow public input on such important matters.

As a result, the court vacated the 2024 rule entirely, halting the January 2025 increase and invalidating the salary threshold increase that went into effect in July 2024.

For more details on the ruling, read the Bloomberg Law article here.

The Preceding Events

The FLSA, enacted in 1938, established minimum wage and overtime requirements for most employees in the United States. However, Congress carved out exemptions for certain categories of employees classified as Executive, Administrative, and Professional (EAP). These roles, often referred to as “white-collar exemptions,” rely on a combination of three factors:

• The Duties Test: Evaluating whether an employee’s primary responsibilities meet the criteria for executive, administrative, or professional work.
• The Salary Level Test: Setting a minimum salary threshold to help distinguish exempt employees from nonexempt employees.
• The Salary Basis Test: Ensuring that exempt employees are paid a predetermined, fixed salary that is not subject to reduction based on the quality or quantity of work performed.

The salary test has historically served as a secondary screening tool, intended to exclude “obviously nonexempt” employees without displacing the duties test. However, disputes over how high to set this threshold—and how it impacts exemption determinations—have persisted for decades.

Historical Context

• 2004 Rule: The DOL introduced a standard salary threshold of $455 per week ($23,660 annually) while consolidating the duties test into a single evaluation. This standard remained in place for over a decade.
• 2016 Rule: The DOL attempted to increase the salary threshold to $913 per week ($47,476 annually) and introduced automatic updates. However, the same Texas court struck down this rule, finding it overly reliant on salary levels at the expense of duties-based evaluations.
• 2019 Rule: The DOL recalibrated, setting the salary threshold at $684 per week ($35,568 annually). This figure reflected the 20th percentile of weekly earnings for full-time, salaried workers in the lowest-wage Census region (the South) and the retail sector.

The 2024 Rule

The DOL’s 2024 rule built upon the structure of the 2016 rule, proposing increases to the salary threshold and reinstating automatic updates. The DOL argued that these changes were necessary to ensure the exemption’s relevance in a modern labor market. However, opponents contended that the new thresholds effectively made salary the primary determinant of exemption status, overshadowing the duties test.

The Lawsuit

A coalition of employers, business organizations, and the state of Texas challenged the 2024 rule, arguing that:

1. The increased thresholds improperly excluded millions of employees from exemption without regard to their duties.
2. The automatic adjustment mechanism violated the rulemaking requirements of the Administrative Procedure Act (APA).
3. The DOL lacked statutory authority to make these changes.

The court’s ruling ultimately sided with the plaintiffs, invalidating the 2024 rule and emphasizing the importance of maintaining a balance between salary and duties in exemption determinations.

Read the full court decision here.

What Does This Mean?

The court’s decision has wide-ranging implications for federal contractors and their employees. Below are key points employers should understand and address as they adjust to the ruling.

For Federal Contractors

1. Reassessing Financial and Contractual Planning: Many federal contractors had anticipated the increased salary thresholds and incorporated these changes into their financial planning. With the ruling invalidating the 2024 salary increase, contractors must now reassess their budgets, pricing strategies, and contracts with federal agencies.
   1. Price Adjustment Requests: Contractors who had already requested price adjustments to offset the anticipated increases in salary thresholds may encounter resistance from federal agencies. Agencies will no longer need to account for the higher threshold, but contractors should still consider pursuing these adjustments, especially if they had already incurred additional costs due to the July 2024 increase.
   2. Reevaluating Contracts: Federal contractors who had prepared for the changes may need to revisit ongoing contracts and adjust their labor cost estimates accordingly. Some contractors might even consider renegotiating terms with federal agencies to address any unforeseen budget shortfalls.
2. Compliance with State and Federal Laws: While the federal salary threshold increases have been halted, employers must remain vigilant in complying with state-level wage regulations. States such as California, New York, and Washington have set their own salary thresholds for overtime exemptions, which exceed the federal standard.
   1. Navigating State Laws: Employers operating in multiple states will need to continue ensuring compliance with state laws, even if the federal standard has reverted to its previous levels. States may have higher salary thresholds or stricter exemption criteria, and employers must stay informed about evolving regulations to avoid noncompliance.
   2. Multi-Jurisdictional Complexity: For employers with operations in several states, this ruling adds a layer of complexity, as they must keep track of different salary thresholds across jurisdictions. This will require significant attention to detail, especially to employee classifications and payroll management.
3. Revisiting Employee Classifications: The core issue at the heart of the DOL’s 2024 rule was the potential shift in determining exempt status based primarily on salary. The court’s decision reaffirms the importance of the duties test in making exemption determinations.
   1. Reclassification of Employees: Employers who had previously reclassified employees in response to the July 2024 salary increase may need to reexamine those classifications. Employees who were deemed nonexempt due to the higher salary threshold may now qualify as exempt if they meet the duties test and the previous $684-per-week threshold.
   2. Operational Adjustments: Reassessing classifications may involve adjustments to employee compensation, benefits, and overtime eligibility. Employers may need to communicate with affected employees about potential changes in their exemption status and overtime eligibility.

What’s Next?

The court's ruling has profound legal and administrative implications. It underscores the limits of the DOL’s regulatory authority, highlighting the need for a balance between salary thresholds and the duties test central to the FLSA. Additionally, the rejection of automatic updates emphasizes the importance of public input and regulatory oversight in future rulemaking.

Looking ahead, the DOL may attempt to revise its rule to address the court’s concerns. This could include more modest salary increases and the removal of automatic updates. Employers should also monitor state labor laws, as many states continue to set higher salary thresholds and stricter exemption standards than the federal level. As the situation evolves, further lawsuits may arise, further shaping the fallout from this decision.

Employers must remain proactive to ensure ongoing compliance with both federal and state labor laws, minimizing disruptions in their operations.

How Onsi Group Can Help

Onsi Group specializes in helping federal contractors navigate the complexities of regulatory changes with customized compliance solutions. Our team provides expert guidance to ensure you stay informed about evolving federal and state labor laws, helping you understand how these changes impact your operations.

In addition to offering ongoing regulatory support, we host in-depth compliance training sessions, such as our upcoming EO 14026 Compliance Training on December 3, 2024, designed to equip you with the latest updates and practical strategies for maintaining compliance. With our expertise, you can confidently navigate the shifting regulatory landscape and maintain compliance across all levels of your organization.

Need additional guidance? Contact us today to learn how we can help your organization navigate these changes and achieve compliance excellence.

- Aaron Ramos & Angela Hendrix