In April of this year, the U.S. Department of Labor (DOL) announced it was rolling out a new final rule on eligibility for overtime pay. The move prompted mixed reactions from observers, much concern among employers and, inevitably, legal challenges from its staunchest detractors.

In November, those legal challenges likely became insurmountable when a federal district court struck down the final rule. The DOL has filed an appeal but with a new presidential administration set to take the reins in January, the rule appears doomed.

Recap of the rule

Under the Fair Labor Standards Act (FLSA), many salaried employees are exempt from overtime pay. However, they’re not all exempt. To qualify as such, an employee must primarily perform certain executive, administrative or professional duties and be paid an annual salary that’s above a federally mandated threshold.

A major feature of the DOL’s final rule is that it would raise the FLSA minimum annual salary threshold in two stages:

1. On July 1, 2024, the threshold would (and did) increase from an annual salary of at least $35,568 to at least $43,888, and
2. On January 1, 2025, the threshold would increase from $43,888 to $58,656.

Note: A separate overtime exemption was to apply to some highly compensated employees. The threshold for these employees increased to $132,964 on July 1, and was scheduled to rise to $151,164 on January 1.

The final rule also stipulated that the FLSA minimum annual salary threshold would be updated every three years beginning on July 1, 2027, by applying updated wage data to the new methodology.

The court’s decision

The final rule was struck down on November 15 by the U.S. District Court for the Eastern District of Texas. In the court’s view, the DOL exceeded its authority in creating the rule because an employee’s exempt vs. nonexempt status must be based primarily on duties, not salary. The rule, according to the court, impermissibly flips that formula and makes salary the dominant factor. The agency also exceeded its authority, said the court, when it came up with the aforementioned three-year updating methodology.

The ruling was partly driven by the U.S. Supreme Court’s recent overturning of a legal doctrine known as “Chevron deference.” Under this long-standing doctrine, courts deferred to the interpretations of “permissible” federal agencies, such as the DOL, regarding the actual administration of laws. The Supreme Court’s ruling has cleared a path for courts to more readily reject agency rules, as demonstrated in this case.

Your next move

Because of the district court’s action, the FLSA minimum annual salary threshold has returned to its previous amount of at least $35,568 annually for regular salaried employees and $107,432 for highly compensated employees. This may be good news for employers that took no action to prepare for the final rule’s two-stage threshold increase. However, many organizations did take action by:

• Reclassifying some employees as nonexempt,
• Increasing salaries to retain exempt status, or
• Reducing salaries to offset new overtime pay.

If your organization undertook such measures, you must plot your next move carefully in consultation with an attorney. You could reverse your status changes or even roll back salary increases. However, particularly in the latter case, affected employees won’t be happy. Trying to undo your actions may even prompt them to challenge — with the help of their attorneys — whether their duties warrant an exemption.

Slim to none

As mentioned, the chances of survival for the DOL’s final rule are slim at this point. What will likely occur is that, when the new presidential administration comes into power, its leadership in the DOL will withdraw the appeal currently filed. Work closely with your attorney to review and, if necessary, update your overtime policies.

© 2024