Summary of the Ruling
On November 15, the U.S. District Court for the Eastern District of Texas issued a ruling in State of Texas et al. v. United States Department of Labor et al., vacating a DOL 2024 final rule (2024 Rule) that sought to increase the minimum salary EAPs must be paid in order to be properly classified as exempt under the Fair Labor Standards Act. To be exempt, EAPs must meet both a salary test and a duties test (which entails evaluating EAPs actual job duties for purposes of determining if they are exempt).
While the FLSA itself does not specify a minimum salary level for the EAP exemption to apply, the DOL has historically included one in its regulations defining EAP employees. The crux of the issue before the court in this case was the weight that the DOL assigned to that salary-level test. Ultimately holding that the 2024 Rule exceeded the DOL’s congressional authority, the court found that the DOL's approach, particularly the substantial increases to the minimum salary level, effectively made the salary test the primary, if not sole, determinant of an employee's exemption status. As such, the court concluded that this directly conflicted with the FLSA's clear intent that an employee's duties should be the primary factor in determining if they are exempt from overtime.
Further, the court pointed to the DOL's own data, which showed that a substantial portion of employees who would meet the duties-based test for EAP exemption were being categorized as nonexempt solely due to their salary falling below the new thresholds—which were set to be implemented in phases.1 The court determined that these increases were not in line with the DOL's traditional approach of setting a minimum salary level designed to "screen out the obviously nonexempt employees." Additionally, the court struck down the automatic indexing mechanism in the 2024 Rule, which would have increased the salary level every three years starting July 1, 2027, without a new rulemaking process. The court held that this mechanism violated the Administrative Procedure Act, which requires agencies to follow a notice-and-comment process when making rules. The court's decision to vacate the 2024 Rule serves as a reminder that the DOL's authority to define and delimit the EAP exemption is limited. Additionally, it underscores the significance of the duties-based test as the cornerstone of the exemption.
Implications for Employers
While this ruling provides immediate relief for employers, the DOL could potentially appeal the decision or create new regulations. For now, the DOL’s pre-July 1, 2024, minimum salary threshold of $684 per week ($35,568 annually) for the EAP exemption is reinstated, though, notably, several states, have higher minimum thresholds. Employers who adjusted salaries earlier this year to align with the July 1 increase, or preemptively raised them to the January 1, 2025, level, may, in most cases, reduce those salaries on a prospective basis. We advise partnering with trusted legal counsel to mitigate any adverse reactions and employers should continue to carefully assess the classification of their workforce.
Footnotes
1The first increase to $43,888 per year went into effect on July 1, 2024; the second increase to $58,656 per year was set to effect on January 1, 2025.