For nonprofits grappling with the mandated salary threshold hike – relief is here! In yet another pivotal Texas court ruling, the federal salary threshold for white-collar employees is now restored – on a nationwide basis – to pre-July 1, 2024, levels. This ruling carries enormous implications for employers, and particularly so for nonprofits facing significant financial challenges to meet the escalating salary requirements per the U.S. Department of Labor’s earlier rule. No longer though; here’s why.
On November 15, 2024, Texas federal court Judge Jordan issued a sweeping decision striking down the DOL’s April 2024 rule. As many employers are well aware, the DOL’s ruling imposed significant increased salary threshold requirements for executive, administrative, and professional (“EAP”) employees under the Fair Labor Standards Act (FLSA), which went into effect in July 2024 and were scheduled to increase again in January 2025. Now, employers may revert to the previously prescribed rules – so long as employees are paid (1) a salary, (2) in at least the amount prescribed as of January 1, 2020 (namely, $35,568, which is $684 per week), and (3) satisfy the duties test for EAP status, they will qualify as “exempt” and therefore not be entitled to overtime pay. This EAP exemption is also known as the white-collar exemption.
Judge Jordan’s preliminary ruling in June 2024 temporarily prevented the DOL from enforcing its 2024 rule and only against the State of Texas for their state employees. However, his November 2024 far-reaching decision applies to all employers, nationwide.
This article first provides important background about the EAP and other potentially available exemptions, followed by a historical tour of the DOL’s multiple attempts to increase salary thresholds and accompanying legal challenges. The article then focuses on Judge Jordan’s recent ruling, particularly so that nonprofit leaders can better understand why a future salary threshold increase is possible but quite unlikely for the foreseeable future. As a result of this important court ruling, nonprofit employers thus can take comfort that the $684 per week salary amount for the EAP exemption will likely continue for some time, as they continue to apply the accompanying duties test, consider whether any other exemptions could apply, and address wage-related compliance measures.
Preliminary Background on Available Exemptions
The EAP (or “white collar”) exemption to overtime requirements applies to employees only if the following three criteria are satisfied: (a) they are paid on a salary basis (the “salary test”); (b)the salary meets the minimum threshold requirement (the “salary level test”); and (c) their job duties fit within the executive, administrative, or professional classifications (the “duties test”). If so, such employees are deemed “exempt” and therefore are not owed overtime pay.
Salaried employees making less than the minimum annual salary threshold thus may be eligible for overtime pay. Further, the fact that an employee is salaried and earns more than the minimum threshold does not necessarily mean that the employee is exempt from overtime pay; the employee’s job duties must consist of executive, administrative, or professional duties as defined in the regulations.
In addition to the EAP exemption, other exemption categories also exist under the FLSA. Examples include exemptions for outside sales employees, employees in computer-related occupations, and highly compensated employees. Special exemptions also exist for certain ministers and religious workers, seasonal employees, and teachers, as those categories are defined in the regulations. No salary threshold applies to these special categories of exemption.
The definitions for executive, administrative, or professional duties are as follows:
An “executive” employee is one (a) whose primary duty is managing the organization or a significant part of it, (b) who regularly directs the work of two or more other employees, and (c) who has the authority to hire or fire other employees or whose input on personnel matters is given particular weight.
An “administrative” employee is one (a) whose primary duty is performing office or other non-manual work directly related to the organization’s operations, and (b) who exercises “discretion and independent judgment” in “significant” matters. The first prong is relatively straightforward. The second prong is much more subjective and fact-specific.
A “professional” employee’s primary duty must be to perform work either (a) requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction, or (b) requiring creativity, invention, imagination, originality, or talent in a “recognized field of artistic or creative endeavor.”
Department of Labor Rulemaking – 2016 Proposed Salary Threshold Increase
In 2016, the DOL sought to increase the minimum salary threshold from $455 per week ($23,660 per year). Under the DOL’s then-proposed overtime rule, this amount would have increased the threshold to $913 per week ($47,476 per year).
This proposed increase sent shockwaves among employers. Employers by the thousands made significant compensation and related personnel adjustments in anticipation of the new overtime rule, such as to raise some employees’ salaries to satisfy the new threshold, to reallocate work assignments to avoid paying overtime for soon-to-be non-exempt employees, and to prepare financially for paying new overtime wages.
Texas Judge Mazzant’s 2016 and 2017 Rulings
On November 22, 2016, on the eve of Thanksgiving, U.S. District Court Judge Amos Mazzant issued a nationwide emergency temporary injunction halting the implementation of DOL’s salary threshold increase, 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.)
In a subsequent court order issued August 31, 2017, Judge Mazzant granted the motion for summary judgment against the government, thereby making his previously issued nationwide injunction permanent. In doing so, Judge Mazzant agreed with the plaintiffs that the new overtime rule exceeded the DOL’s authority to define what constitutes a “bona fide executive, administrative, professional” employee for purposes of the white-collar exemption from the FLSA. As he determined, Congress’ clear intent was for the DOL’s interpretation of “bona fide executive, administrative, professional” to be primarily limited to a duties test. The minimum salary threshold requirement thus should be consistent with such specified duties, but not supplant the proper focus on job duties.
The salary threshold aspect was therefore to be used only as a tool for screening out the obviously non-exempt employees. But as Judge Mazzant determined, by more than doubling the DOL’s previous minimum salary level, the “overtime rule’s significant increase would essentially make an employee’s duties, functions, or tasks irrelevant if the employee’s salary falls below the new minimum salary level.” Such approach would make the duties aspect of the white-collar exemption irrelevant, in a manner contrary to Congress’ intent. Under then-applicable judicial Chevron doctrine of deferring to a government agency’s statutory interpretation but only so long as it is “reasonable,” Judge Mazzant held that the DOL unlawfully overreached its authority.
The litigation concluded with no further appeal and thus with Judge Mazzant’s nationwide invalidation of the DOL’s salary threshold left intact, until the next salary threshold.
Department of Labor Rulemaking – 2020 Salary Threshold Increase
Fast forward to September 24, 2019. On that date, the DOL issued new regulations including a salary threshold increase effective January 1, 2020. As a result, the EAP exemption’s threshold amount change from $23,660 (or $455 per week) to $35,568 (or $684 per week). Notably, the new regulations allowed employers to use nondiscretionary bonuses and incentive payments (e.g., commissions) that are paid annually or more frequently to satisfy up to 10% of the new minimum salary level. The new regulations also added an option allowing an employer to make a final “catch-up” payment within one pay period following the end of each 52-week period, to bring an employee’s compensation up to the required level for exemption.
Notably, the DOL’s regulations did not include any mechanism for automatically updating the salary thresholds. Instead, the DOL announced its intention to review the thresholds more frequently than in the past and propose changes through typical notice-and-public-comment rulemaking procedures.
Department of Labor Rulemaking - 2024
True to its word, the DOL sought to raise the EAP minimum salary threshold and to do so with further future increases. On April 23, 2024, the DOL issued a rule changing the minimum salary threshold as follows:
a. Effective July 1, 2024, the minimum salary level changed from $684 to $844 per week ($43,888 per year);
b. Effective January 1, 2025, a change was scheduled from $844 to $1,128 per week ($58,656 per year); and
c. Effective July 1, 2027, and then every three years after, the minimum salary level was to increase based on current wage data.
Our law firm blogged on the DOL’s April 2024 rule earlier this year, including recommendations for effective nonprofit strategies in the face of such drastic changes. Several of these recommendations may remain important, such as to carefully evaluate whether certain workers should be classified as employees instead of independent contractors, to update job descriptions to better satisfy the duties test, and to periodically modify employee handbooks in light of developing employment trends.
Texas Judge Jordan’s June 2024 Ruling
On June 28, 2024, Judge Jordan granted a preliminary injunction to the State of Texas. His order temporarily prevented the DOL from enforcing its 2024 salary threshold increase, but only against the State of Texas for their state employees. His detailed opinion was issued quickly on the heels of the U.S. Supreme Court’s Loper-Bright ruling (as further addressed below).
As reported in our firm’s related blog, Judge Jordan first reviewed the FLSA’s language, finding that it 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 traditionally done so through the three-part test set out above, which considers the employee’s duties, salaried status, and the salary amount.
As Judge Jordan determined, the DOL’s 2024 rule did not reconfigure the three-part test. Instead, it ventured into other legal areas through raising the required salary amount by a significant margin. Like its 2016 predecessor, however, this salary-focused change was quite problematic. As Judge Jordan recognized, the FLSA does not refer to a salary threshold at all. Instead, the legally prescribed salary threshold has typically been used to screen certain non-qualifying employees out. In other words, it was intentionally set low to help screen out certain workers who - by virtue of their salary – most likely did not have executive, administrative, or professional duties. Through its new 2024 Rule, the DOL flipped that logic on its head, screening out many employees exercising true EAP duties on the basis of salary alone. Judge Jordan further explained a salary requirement that “effectively displaces . . . the duties test, flatly contravenes the Department's authority under the FLSA.”
Texas Judge Jordan’s November 2024 Ruling
Judge Jordan’s subsequent ruling, issued in November 2024, not only confirms the DOL’s salary threshold as legally invalid – it applies on a nationwide basis by vacating the Rule entirely. His second decision is similarly thoughtful, well-reasoned, and lengthy. Among other things, it provides fascinating insight into the white-collar exception’s legislative and administrative history, including how the DOL has handled employment trends amidst myriad geographic, societal, and labor force factors implicated by a salary threshold for white-collar employees. No compensation amount fits all, and the DOL does not have the legal authority to dictate otherwise.
As he concluded from this historical foray:
Taken together, the fundamental aspects of the salary-level test have included setting low minimum salary levels designed to exclude only obviously nonexempt employees, premised on wage-data for the lowest-wage region, the smallest-size business establishment group, the smallest-size city group, and the lowest-wage industry, applied by the [DOL] in a manner consistent with serving only the purpose of separating exempt from nonexempt employees, not improving the status of such employees.
Judge Jordan’s ruling also addressed the Fifth Circuit Court of Appeals’ Mayfield ruling, issued in September 2024 and similarly challenging the DOL’s authority with respect to its 2019 rule. As noted in Mayfield and then by Judge Jordan, “while the [DOL] may enact rules that ‘clarify the meaning’ of the EAP Exemption’s terms or that ‘impose some limitations on their scope,’ it cannot enact rules that ‘replace or swallow the meaning those terms have.’”
Judge Jordan further invoked the U.S. Supreme Court’s landmark Loper-Bright decision, issued earlier in 2024. 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.
After further extensive legal analysis, Judge Jordan then concluded that while the EAP exemption may include a prescribed salary amount, it may not be used a substitute for the duties test, which is very much still applicable. As he instructed: “In short, the plain meaning of these terms makes clear that what matters is the functions or duties of the employee.” Quoting the Fifth Circuit’s 2021 Hewitt decision: “It’s their duties and not their dollars that really matter. Ultimately, the DOL’s 2024 rule failed because it “amount[ed] to a salary-only test.”
Judge Jordan’s opinion continues at significant length, after that pivotal ruling. In particular, he concluded that the effects of the January 1, 2025, salary increase would be “staggering,” rendering “nonexempt at least 2 of every 5 employees who meet the duties test,” and “causing approximately three million EAP-exempt employees to become nonexempt on January 1, 2025. By his estimation, this three million-employee figure is on top of the one million employees rendered nonexempt by the July 2024 increase! And all with no change in duties for the four million affected employees and their employers.
Such drastic changes stand in stark contrast with the DOL’s established policy, as further noted by Judge Jordan: “the Department[] [has a] longstanding policy of setting a salary level that does not disqualify][ any substantial number of bona fide executive, administrative, and professional employees from exemption.” It was thus entirely proper to strike down the DOL’s 2024 rule, and Judge Jordan included extensive statistical and historical information to support his conclusion.
Focusing back on the relevant legislative language (29 U.S.C. § 213(a)(1)), Judge Jordan wrapped up by noting that “Congress created the EAP Exemption for ‘any employee employed in a bona fide executive, administrative, or professional capacity.’” Since the increased salary threshold amounts actually yield different results than intended via the duties test, the DOL’s 2024 rule must fail. Consequently, Judge Jordan vacated the DOL’s 2024 rule in its entirety, thereby “nullify[ing] and revok[ing] this “illegal agency action.’”
What Now?
Because of Judge Jordan’s ruling, the minimum salary level reverts to the $684 per week level ($35,568 annual salary) for the EAP exemption. That’s a remarkable difference, affecting millions of employers and employees alike!
A key theme throughout these court cases has been that the salary test should not displace the duties test for white-collar employees. In other words, the DOL has repeatedly exceeded its executive-branch authority through imposing a financial compensation element that, alone, effectively defeats the exemption’s applicability. The plain Congressional intent has been that the prescribed compensation amount may not effectively serve as a proxy for identifying workers who may not meet the duties test, especially if it so dramatically affects otherwise EAP-eligible employees. To avoid such result, the EAP’s compensation amount thus necessarily must be set low.
Déjà vu? Yes! Both Texas cases involved a legally problematic effort by the DOL to raise the EAP salary threshold, once in 2016 and again in 2024. Interestingly, in both cases, rulings were issued and overturned just before President Trump taking office. Some commentators have expressed that the DOL will likely not appeal this recent ruling, with new leadership and policy expected under the new administration in a few short months.
Per these legal developments, the DOL could again increase the salary threshold. But thanks to Judge Jordan’s carefully developed legal arguments and extensive use of statistical data, any such increase should be done only on a marginal basis, without any significant adverse impact on otherwise EAP-exempt employees, and not otherwise significantly altering the EAP exemption’s availability.
For nonprofit employers today, they may justifiably breathe a sigh of economic relief. And then they should check on HR matters, such as for the proper EAP exemption qualification (including the $684 per week salary minimum), other potentially applicable exemption categories, and other legal compliance including proper worker classification, correct pay practices, and the myriad other HR matters arising under current employment laws. That’s no small challenge!
