On November 15, 2024, in Texas v. United States Department of Labor, a Texas federal district court struck down a U.S. Department of Labor (DOL) final rule that would have raised the minimum salary threshold for exempt employees, effectively making millions of employees eligible for overtime pay under the Fair Labor Standards Act (FLSA).

The DOL issued the Final Overtime Rule on April 23, 2024, which took effect on July 1, 2024, and raised the minimum salary threshold for exempt employees under the so-called white-collar exemptions from $684 per week or $35,568 per year to $43,888 per year as of July 1, 2024, and then proposed to raise it again to $58,656 per year effective January 1, 2025. The Final Rule would have also mandated increases every three years thereafter. With the recent ruling by the Texas federal district court, the January 1, 2025, salary increase will not go into effect and, in fact, the minimum salary necessary to satisfy the FLSA’s exemptions will revert back to $35,568 per year.

As a reminder, the FLSA mandates that employers pay employees minimum wage for all hours worked and provide overtime pay when employees work more than 40 hours in a week unless that employee qualifies for a statutory exemption. Congress created limited exemptions for certain categories of employees, the most common of which are known as the executive, administrative, and professional exemptions (the EAP exemptions). As a general matter, qualifying for one of these exemptions requires two basic elements to be met: (1) the employee must perform certain duties necessary to meet the exemption (the “duties test”); and (2) they must be paid a minimum salary. Neither the recent DOL Final Rule nor the Texas Court’s invalidation of it concerned the duties test; rather, both focused solely on the minimum salary that must be paid to such employees. Although the Texas case was pending at the time the DOL Final Rule took effect, since the salary threshold increased incrementally to $43,888 on July 1, 2024, many employers likely adjusted employee pay by either (1) increasing employee salaries to the minimum threshold; or (2) converting the employee to an hourly rate. The invalidation of the DOL Final Rule and consequent reversion is expected to hold for the foreseeable future, with the new presidential administration unlikely to advocate for a change.

In light of this ruling, employers may be considering reverting to previous salary levels. There are several legal and non-legal issues to consider before making this decision, particularly for those employees for whom their salary levels were raised to comply with the July 1, 2024, salary increase. Employee morale and retention could be impacted. Moreover, before making any changes, we recommend that employers review the duties performed by employees to ensure they satisfy the duties test applicable to the exemption to ensure the employee, in fact, satisfies the exemption in order to avoid a potential misclassification claim under the FLSA. It is also necessary to consider whether state or contract law may limit the employer’s ability to make such adjustments. With all of these considerations, we recommend that you consult legal counsel before making such changes.

For any employers with questions about this ruling or the steps that can be taken in response, we encourage you to contact a member of Spilman’s labor and employment team.