Last month, the U.S. District Court for the Eastern District of Texas struck down the increased salary levels for overtime exemptions under the Fair Labor Standards Act (FLSA). Let’s explore some practical guidance for employers addressing potential salary changes, reclassifications, and state-level compliance amidst this development.
Background
The U.S. Department of Labor’s (DOL) regulations require executive, administrative, and professional (EAP) employees to be paid at least a minimum salary amount to be exempt from the FLSA’s minimum wage and overtime requirements. In April 2024, the DOL issued a final rule, Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees, increasing the standard salary level for exemption.
The first increase, which went into effect in July 2024, raised the salary level from $684 per week to $844 per week (equivalent to $43,888 per year). The second increase, originally set for January 1, 2025, would have resulted in a salary level of $1,128 per week (equivalent to $58,656 per year). Future updates to the salary and compensation levels were meant to increase every three years beginning July 1, 2027.
The DOL explained that it updated the salary level test “to more effectively identify who is employed in a bona fide executive, administrative, or professional capacity and ensure that the FLSA’s intended overtime protections are fully implemented.”
Where We Are Now
The U.S. District Court for the Eastern District of Texas invalidated the rule, finding that the DOL exceeded its statutory jurisdiction in promulgating the rule. As a result, the salary threshold for exempt status has reverted to the previous threshold, i.e., $684 per week (equivalent to $35,568 annually).
What Does this Mean for You?
Employers are likely wondering how to move forward after the District Court’s ruling. Let’s go over a few questions that may be top of mind.
- Is there any hope for the increased salaries?
The answer is likely, “no.” While the DOL could appeal the District Court’s ruling, it is unlikely that the new administration would support expanding overtime eligibility to more employees.
- What if I’ve already increased my employees’ salaries?
For employers that have already increased their exempt employees’ salaries to meet the July 2024 threshold and/or the previously anticipated January 2025 salary threshold, there may be an impulse to reduce salaries to the reinstated $684 per week threshold. While salary reductions may be technically allowable in certain cases, employers would be wise to avoid hastily seeking clawbacks or reductions and assess the impact of any changes on employee relations and morale. Potential legal risks could also be associated with reducing an employee’s salary, so employers should seek legal counsel before initiating reductions. Instead, employers could consider altering future compensation strategies to offset costs.
- What if an employee was reclassified from “exempt” to “non-exempt”?
This scenario – where an employee who had been exempt under the $684 per week threshold became non-exempt in July because they did not meet the increased salary threshold – is easier to navigate. Because the employee is once again exempt under the reestablished $684 per week threshold, they should likely be reclassified as exempt. Even in this less complicated situation, however, employers should consider seeking legal counsel before initiating reclassifications.
- Are state-level salary thresholds affected by the overturned federal threshold increases?
Generally speaking, no. The FLSA provides minimum standards and does not prevent a state from establishing more protective standards. If a state establishes a more protective standard than the provisions of the FLSA, the higher standard applies in that state. This would include exemption criteria for EAP employees under state law with higher earnings thresholds or more stringent job duties requirements than those provided under the FLSA.
- Have the duties tests under the FLSA changed?
No, the duties tests remain the same. The District Court emphasized the importance of the duties tests, finding that the DOL’s rule “increases the minimum salary for the EAP Exemption to a level that effectively displaces the duties-based inquiry required by the FLSA’s text with a predominant salary-level test.” Employers should ensure employees have job duties commensurate with their pay level, particularly if they remain exempt.
- What if I’ve already earmarked funds to account for the (now vacated) salary threshold increases?
Employers who have allocated funds to meet the anticipated changes can explore alternative strategies to use those funds effectively. These options could enhance employee satisfaction, improve operations, and maintain compliance with existing laws. Investing in training programs, leadership development, or tuition reimbursement could enhance employee skills and productivity and create pathways for career advancement. Boosting employee engagement via recognition programs and/or team-building activities could strengthen collaboration and morale.
Conclusion
With the invalidation of the DOL’s increased salary thresholds, employers are faced with certain critical decisions. Employers should carefully consider the legal, operational, and morale implications of any changes, consult legal counsel where needed, and explore alternative ways to utilize budgeted funds to support employee engagement and organizational goals.
And with a new administration ready to take hold, we’ll likely see more labor and employment-related changes in the new year.
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Navigating FLSA exemption updates and other labor law changes can be complex, but VirgilHR is here to help. Our all-in-one compliance solution offers real-time guidance, a comprehensive legal library, and expert support to help you make informed decisions and stay ahead of regulatory updates.
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