Important Update Regarding Salaried Exempt Employees
On Friday, November 15, 2024, the U.S. District Court for the Eastern District of Texas invalidated the U.S. Department of Labor's recent rule increasing the minimum salary for salaried executive, administrative, and professional (EAP) employees who are exempt from overtime pay. The rule had provided that starting July 1, 2024, the minimum weekly salary for an EAP employee would increase from $684/week to $844/week, that a further increase to $1128/week would go into effect on January 1, 2025, and that beginning July 1, 2027, the minimum salary would increase automatically every three years thereafter based on current national wage data.
The court held that the DOL exceeded its authority under Section 213(a)(1) of the Fair Labor Standards Act when it issued the rule. Under that section of the FLSA, "[t]he [minimum wage and overtime pay requirements] shall not apply with respect to 'any employee employed in a bona fide executive, administrative, or professional capacity … (as such terms are defined and delimited from time to time by regulations of the Secretary ...)'." Thus, the statute itself lays out a “duties test” for EAP employees. That test is supplemented by a two-part salary test in the regulations: first, the EAP employee must be paid on a “salary basis,” i.e., a predetermined amount that is not based on quality or quantity of work performed, and second, the salary must be at least a specified amount (the salary level test).
As the court explained in its ruling, Congress intended that employees with EAP duties be exempt from overtime pay, subject to DOL regulations that “defined and delimited” what it takes to be an executive, administrative, or professional employee. Historically, the DOL has used a salary test (salary basis pay at a certain minimum level) to distinguish EAP-level employees from other employees with lower-level duties who just happened to be paid a salary. The duties and salary tests are meant to complement each other. However, by setting the salary level so high so quickly, the DOL effectively favored the salary level test over the duties and salary basis tests. That, held the court, exceeded the agency’s authority to adopt rules, so the rule was invalid. Further, the court held that the three-year automatic salary increase provision was unprecedented in the history of the EAP regulations and had no legal basis in the FLSA.
By the time that the federal court issued its ruling, the first increase to $844/week had already gone into effect. Now that the rule has been declared invalid (including the July 1, 2024 increase to $844/week), the planned increase to $1128/week will not take place, and the automatic increases every three years beginning July 1, 2027 will also not occur. This effectively leaves the previous salary level of $684/week in place. DOL is unlikely to appeal since the incoming administration will appoint a new Secretary of Labor and a new Administrator for the Wage and Hour Division, neither of whom would be likely to support salary increases like the ones that were just invalidated by the court.
For the future, employers should consult with their legal counsel regarding proper compensation for EAP employees.
Source: TWC Texas Business Today Newsletter
