Are all employers bound by the U.S. Department of Labor’s salary threshold increase for white-collar employees? For the State of Texas, as the employer, the answer so far is a resounding “No.” But what about other employers, especially nonprofits on tight budgets?
The consensus from prior court rulings, the U.S. Supreme Court’s June 2024 Loper Bright ruling, and other pending litigation all point to a similar answer for employers nationwide - but not yet solidified, and not with any assurance that employers could disregard the increased salary threshold. If possible, the best answer for employers may thus be to wait and see.
The White-Collar Exemption’s Scope and Three-Part Test
The case of Texas v. Department of Labor concerns the State of Texas’ challenge to the DOL’s 2024 rule increasing the salary threshold required for so-called “white-collar” employees to qualify as exempt from otherwise legally required overtime pay. Our law firm addressed this change and resulting implications in our April 29, 2024 blog, Exempt Salary Thresholds, just a few months ago.
The white-collar exemption applies to executive, administrative, and professional (“EAP”) employees. Longstanding DOL guidance applies a three-part test to determine who qualifies for such exemption: (1) the employee must perform executive, administrative, or professional duties; (2) the employee must be salaried; and (3) the salary must meet a certain dollar-value threshold. For more information about the duties’ prong, see our article: White Collar Enough? FLSA Exemptions for Executive, Administrative, and Professional Job Duties.
Prior DOL Efforts to Raise the Salary Threshold
The DOL previously sought but failed to increase the salary threshold. More specifically, the DOL issued a proposed rule in 2016, seeking to increase the salary threshold from $455 per week ($23,660 per year) to $913 per week ($47,476 per year). Amidst a flurry of employer efforts to satisfy the new salary threshold, Texas federal judge Amos Mazzant issued a nationwide injunction halting the new rule’s implementation, just before its scheduled effective date of December 1, 2016. In doing so, Judge Mazzant ruled that the DOL, in carrying out the Obama Administration’s directive, had exceeded its administrative authority in implementing the new rule. The litigation was brought by 21 states and over 55 business groups, all challenging the legal validity of this increased salary threshold. (State of Nevada v. U.S. Dept. of Labor, Civil Action No. 4:16-CV-731, E.D. Tex.) For more information about that litigation, see FLSA Developments: Overtime Pay Rule Invalidated by Court, While Trump Administration Takes Up Salary Threshold Question Anew.
Here We Go Again?
Like the DOL’s 2016 rule that was struck down, its 2024 rule, raises the salary threshold apart from employees’ duties. Unlike the 2016 rule, the 2024 rule is currently final – effective July 1, 2024. More specifically, the 2024 rule makes three changes to the salary requirement:
· On July 1, 2024, the minimum salary level was raised from $35,568 to $43,888 annually ($684 to $844 per week);
· Starting January 1, 2025, the salary level will be raised from $43,888 to $58,656 annually ($844 to $1,128); and
· The Rule then provides a mechanism for automatic increases to the salary level every three years, the first of which will occur on July 1, 2027.
These salary threshold changes promise to significantly impact nonprofit employers and their employees. More broadly, the DOL has estimated that because of these salary increases, around 4 million employees nationwide will lose exempt status by January 1, 2025 – absent legally required increases to their salaries.
But like the 2016 rule, a federal Texas judge has pointed the way out from this threshold change – albeit in a less sweeping fashion.
Judge Jordan’ s Ruling – 2024 Rule Invalidated for the State of Texas as Employer
On June 28, 2024, Judge Jordan in the Eastern District of Texas granted a preliminary injunction to the State of Texas. His order temporarily prevents the DOL from enforcing its Rule against the State of Texas and its state employees, based on his conclusion that Texas is ultimately likely to succeed on the merits.
In a detailed opinion, Judge Jordan reviewed the language of the Fair Labor Standards Act (“FLSA”). As including above, the FLSA exempts those employed “in a bona fide executive, administrative, or professional capacity.” 29 USC s. 213(a)(1). But the FLSA itself does not define any of those terms, and instead delegates to the Secretary of Labor the right to “define and delimit” the terms. The DOL has done so through the traditional three-part test set out above, which considers the employee’s duties, salaried status, and the salary amount.
The 2024 Rule does not reconfigure the three-part test. Instead, it ventures into other legal areas through raising the required salary amount by a significant margin. Like its 2016 predecessor, however, this salary-focused change spells legal trouble. As Judge Jordan recognized, the FLSA does not refer to a salary threshold at all. Instead, the legally prescribed threshold has typically been used to screen certain non-qualifying employees out. In other words, it was intentionally set low as a proxy for screening out certain workers who by virtue of their salary likely didn’t have executive, administrative, or professional duties. Through its new 2024 Rule, the DOL flips that logic on its head, screening out many employees exercising true EAP duties on the basis of salary alone.
Judge Jordan thus phrased the question before it as follows: “whether the text of the EAP exemption authorizes the Secretary to increase the minimum salary level as the 2024 Rule would, changing the exemption statuses of millions of employees.” To answer this question, he extensively analyzed the pertinent FLSA terms. First, the use of the term “capacity” means the exemption “turns on an employee’s functions and duties” not on compensation. Correspondingly regarding both “capacity” as well as “executive, administrative, or professional”;
“The plain meaning of these terms makes clear that the proper inquiry into whether someone works in an executive, administrative, or professional capacity must turn on that person’s functions and duties. . . . Glaringly absent from these definitions is any mention of salary.”
Similarly, the term “bona fide” also emphasizes the employee’s actual duties, not their compensation. That requirement “points to Congress’s intent that the EAP Exemption apply only to employees who genuinely perform EAP ‘tasks’ in their employment and to deny the Exemption to employees who merely enjoy a lofty job title without commensurate EAP duties.”
As a final textual hook, Judge Jordan pointed to the use of “any employee” in the statute to support that regardless of salary, any employee who performs EAP duties is exempt. As he concluded, a “salary-only test” is thus impermissible.
Continuing with his legal analysis, explaining that the Fifth Circuit Court of Appeals (within which the Texas federal court is located) has held that prior salary requirements are permissible as components of the three-part test. However, a salary requirement that “effectively displaces . . . the duties test, flatly contravenes the Department's authority under the FLSA.”
Having found that the Rule is likely impermissible under applicable law, Judge Jordan turned to the other prerequisites for a preliminary injunction - irreparable harm and balance of the equities. Both considerations weighed in favor of an injunction. The Court noted that under the new rule, Texas would either have to pay its exempt employees higher salaries, pay them overtime, or forbid them from working more than 40 hours per week. These costs constitute irreparable harm—indeed the DOL itself acknowledged that implementation and compliance costs for state and local governments would be nearly 100 million dollars total in the first year.
Bringing such considerations together, Judge Jordan reiterated the DOL’s statement made in 2019 – similarly dealing with a legally problematic effort to raise the salary threshold:
By excluding from exemption, without regard to their duties, 4.2 million workers who would have otherwise been exempt because they passed the salary basis and duties tests established under the 2004 final rule, the 2016 rule was in tension with the [FLSA] and with the Department’s longstanding policy of setting a salary level that does not disqualify any substantial number of bona fide executive, administrative, and professional employees from exemption.
His ruling was thus consistent with the DOL’s previous acknowledgement that absent Congressional legislation, any salary threshold change is highly problematic. Consequently, although the DOL’s 2024 Rule remains in force for the time being for all other employers, similar challenges surely will work their way through the court system. This rule may therefore ultimately meet the same fate as the DOL’s 2016 rule.
What About Other Salary Threshold Litigation and Loper Bright?
Though the State of Texas sought a nationwide injunction, Judge Jordan provided more limited relief. Because Texas was the only employer before him, the preliminary injunction order applies only to the State of Texas as an employer. This limited court result means – at least for now that other employers in Texas, and across the country, are still subject to the salary threshold increases.
Significantly, however, the Texas case has been consolidated with another legal challenge to the DOL Rule by private employers in Texas: Plano Chamber of Commerce, et al. v. Su, et al., No. 4:24-cv-468. Though no injunction has been sought or issued in that particular case, Judge Jordan’s ruling on the merits of this second case is unlikely to differ. Texas employers thus can take some comfort that this private challenge is before the same judge who has already concluded that the Rule is impermissible, presumably with the same ultimate result upon further litigation proceeds.
Still another case challenging the rule on behalf of a private employer is before a different Texas federal court: Flint Avenue, LLC v. Su, et al., No. 5:24-cv-00130. Summary judgment briefing is expected to proceed in that case in fall 2024. While the case involves a different trial court judge, who is not legally bound to follow Judge Jordan’s injunction ruling, it certainly is important and could be influential for the other judge in ruling on the same legal issue.
Of key importance too in evolving litigation developments may be the U.S. Supreme Court’s Loper-Bright ruling, which overturned the Chevron deference doctrine. Loper-Bright resoundingly accorded federal courts the ability to consider and determine whether a government agency – here, the DOL - has exceeded its statutory authority in setting its rules without deferring to the agency’s interpretation of the statute. Loper Bright overturned what has come to be known as the Chevron deference doctrine, based on a prior 1984 Supreme Court ruling involving Chevron and the EPA. Issuing his court ruling closely on the heels of Loper Bright, Judge Jordan similarly rejected any deference otherwise due to the DOL: “for decades, courts have sometimes been required ‘to defer to “permissible” agency interpretations of the statutes those agencies administer—even when a reviewing court reads the statute differently.’” Loper Bright thus accentuates and strengthens the DOL’s apparently illegitimate changes to the salary threshold.
Such considerations are not merely speculative. Two Supreme Court justices previously signaled that the salary threshold is legal problematic. In Helix Energy Solutions Group, Inc. v. Hewitt, 143 S. Ct. 677 (2023), which involved the “salary basis” portion of the three-part test for overtime exemption Justice Kavanaugh cast doubt in his dissenting opinion (joined by Justice Alito):
Although the Court holds that Hewitt is entitled to overtime pay under the regulations, the regulations themselves may be inconsistent with the Fair Labor Standards Act. . . . Recall that the Act provides that employees who work in a ‘bona fide executive . . . capacity’ are not entitled to overtime pay. 29 U.S.C. §213(a)(1). The Act focuses on whether the employee performs executive duties, not how much an employee is paid or how an employee is paid. So it is questionable whether the Department’s regulations—which look not only at an employee’s duties but also at how much an employee is paid and how an employee is paid—will survive if and when the regulations are challenged as inconsistent with the Act.
What’s Next for Employers?
Additional legal challenges thus may reasonably be expected to work their way through the courts, especially in light of this Texas v. DOL order and very likely to invalidate the DOL’s 2024 Rule. But uncertainty exists too, such as if changes in presidential administration contain any bearing on potential changes – as may or may not have been relevant in the timing of Judge Mazzant’s 2016 ruling, just before a party change in administration. That can be uncomfortable for nonprofit employers, especially with board and executive leaders seeking to remain legally compliant as well as financially prudent.
What should responsible employers do in light of these litigation developments? One option could be to proceed with raising salary amounts for currently exempt employees who will not satisfy the new thresholds, for current legal compliance and particularly in case the DOL Rule remains effective. That would be a legally conservative approach. Another option could be to expect that another court within the employer’s jurisdiction will follow the Texas ruling and invalidate the change – or better yet, to expect the DOL to take heed of Judge Jordan’s legally sound ruling and then withdraw its salary threshold change. Either way, an employer taking this approach need not make any changes. Additional practical options for employers are set forth in our law firm’s April 29, 2024 blog.
Keep in mind too that no one can predict the exact course of specific litigation, its outcomes, or government agency developments. Nonetheless, employers can remain attentive to this legal compliance matter’s continued development, particularly mindful of related enforcement risks, wise financial planning, related attentiveness to HR and other operational aspects, political implications, and accompanying strategic dynamics. As with many employment law trends these days, staying equipped with knowledge and agile enough to modify HR practices can provide the best recipe for optimal effectiveness.
