Federal Court Blocks Changes to Overtime Rules: Key Takeaways and Guidance for Employers

A federal judge in Texas has struck down the Biden administration’s overtime rule that would have extended overtime protections to an estimated four million additional workers. Judge Sean D. Jordan of the U.S. District Court for the Eastern District of Texas found on November 15^th that the Department of Labor (DOL) exceeded its statutory authority in issuing the rule, and, as a result, halted its application.

The DOL Rule and Court Decision

As described in our article from April 2024, the DOL’s rule significantly increased the minimum salary that an employee must earn in order to potentially qualify as “exempt” from the Fair Labor Standards Act’s (“FLSA”) overtime requirements. The DOL’s rule implemented this increase two phases:

• The first phase, effective July 1, 2024, raised the salary threshold for overtime eligibility to $844 per week ($43,888 annually)
• The second phase, which was set to go into effect January 1, 2025, further raised the salary threshold to $1,128 per week ($58,656 annually)

The DOL rule also raised the threshold for the highly compensated employee exemption to $132,964 and provided for automatic increases to both the regular and highly compensated thresholds every three years.

The Texas court’s decision blocked the implementation of all aspects of the rule nationwide. As a result, none of the changes (the increase that went into effect in July, the increase that was set to go into effect on January 1^st, the increase to the highly compensated employee threshold and the automatic increases) apply. Rather, the “old” thresholds of $684 per week ($35,568 annually) and $107,432 per year for the highly compensated employee exemption, now apply.

In his decision, Judge Jordan found that the rule’s salary threshold effectively bypassed the requirement to evaluate employees’ job duties, making it a “salary-only test,” which the court deemed unlawful. Judge Jordan acknowledged in his opinion that the DOL may use salary as part of its authority but found that the salary level cannot be at a level that it overtakes the duties test. 

The DOL could appeal Judge Jordan’s ruling, and if it does, the appeals court could stay the ruling pending its decision.  However, given how long the appeals process takes, and the fact that we are less than two months from the new Trump Administration, it is unlikely that the DOL rule will become effective once again.

Practical Advice for Employers

Many employers made changes in advance of the July 2024 change, and even more have either implemented changes or are prepared to do so prior to January 2025, begging the question, what should employers do now? Here are some practical issues employers should be considering:

• Decide how to handle changes already made. As all of the DOL rule has been blocked, employers that made changes to comply with the July 2024 threshold or that have already made changes in advance of the January 2025 deadline can either maintain those changes or reverse them – whichever works best for the business. Keep in mind, though, that salary threshold is only part of the analysis. As part of your decision whether to keep or reverse changes already made, make sure that those you will treat as exempt don’t just meet the salary threshold but also satisfy the job duties test. Regardless, it is likely worth waiting until we have a better sense of what’s coming next (probably before the end of the year) before “undoing” changes already made. 
• Decide whether to continue with planned changes. At the same time, employers should consider whether to continue with planned changes. If the changes were solely because an employee would no longer meet the salary threshold for exempt status, then it’s appropriate to keep things as they are. However, if the individuals whose statuses were being changed (in part or whole) because there was a question regarding whether they met a job duties test, then it’s best to move forward with the change. If moving forward, it will be important to message to employees that changes are being made because of the uncertainty and potential reinstatement of the DOL rule. 
• Stay Informed.  While Judge Jordan’s ruling is significant, this situation is still evolving. Employers should keep an eye on potential appeals and other legal developments regarding the DOL rule, as the issue is likely to remain in the spotlight both in the final months of the Biden administration and after inauguration day. LP will provide updates as they develop.
• Remember that salary is only one piece of whether an employee can be considered “exempt.” As noted above, the salary threshold is only one part of the test for whether an employee is “exempt” from overtime requirements, and the job duties tests remain unchanged. It’s important that employers periodically review the classifications of salaried employees to confirm that they also satisfy one of the job duties tests.
• Confirm and comply with state-specific requirements. A number of states (Alaska, California, Colorado, Maine, and Washington) have exempt status salary thresholds that are higher than the federal threshold of $35,568. In addition, some states (including Illinois) do not recognize the highly compensated employee exemption, while others (such as California) apply materially different job duties tests. Make sure that any employees you treat as exempt from overtime requirements are meeting the requirements for exempt status in the state where they work.
• Prepare for future changes. The legal landscape around overtime rules could change again, especially given the change in administration. Employers should remain flexible and be ready to adapt to new regulations and rulings at the state or federal level that impact overtime requirements.

Conclusion

The court’s blocking of the DOL rule’s new salary thresholds offers a reprieve for employers concerned about the financial impact of the increase, but it does not signal the end of the debate regarding overtime regulations. We encourage you to stay informed and proactively review compensation practices to increase compliance while remaining adaptable to potential future changes.