The U.S. District Court for the Eastern District of Texas recently ruled that the Biden administration’s new overtime rule, which increased the salary threshold for white-collar exemptions from overtime on July 1, 2024, was unlawful. The rule also called for future increases on January 1, 2025, and every three years after that. As a result of the Court’s ruling, which applies nationwide, the salary threshold for white-collar exemptions from overtime has reverted to its 2019 rate of $35,568.00 per year, or $684 per week.
The Court vacated all aspects of the new overtime rule, finding that the U.S. Department of Labor exceeded its statutory authority in changing the rule. In its ruling, the Court criticized the steep increases in the salary threshold as eliminating the duties test for white-collar exemptions, which is a required element for employees to be classified as exempt. The Court also struck down the triennial increases in the salary threshold as violating the notice-and-comment period required by the Administrative Procedure Act.
The Biden administration’s overtime rule affected about one million workers when it went into effect in July and would have affected another three million workers, with the salary threshold increase slated to occur on January 1, 2025. The rule raised the salary threshold from the 20th percentile of the median wage of full-time, salaried workers to the 35th percentile.
Although the Biden administration may appeal the Court’s decision, the U.S. Court of Appeals for the Fifth Circuit would not act on an appeal until after the inauguration. Once in power, the Trump administration could formally repeal the new overtime rule or amend it.
Some employers may decline to rescind the increase in the salary threshold for white-collar exemptions from overtime that took effect on July 1, 2024, as a matter of maintaining employee relations. However, some employers may reclassify employees who became nonexempt because of the 2024 rule again if they still meet the duties test. Any employer choosing this option should give prior written notice to the affected employees – which is required under some states’ laws – and may consider a slight salary increase to preserve employee relations.
The Court emphasized in its decision that meeting the duties test is just as mandatory as the salary threshold in determining the proper classification of employees. Therefore, employers should be cautious to periodically check all positions to ensure that they continue to meet the duties test, as follows:
- Executive Exemption – Employees must have a primary duty of managing the enterprise or a department or subdivision of the enterprise. They also must customarily and regularly direct the work of at least two employees and either have the authority to hire or fire them or have their suggestions and recommendations as to the hiring, firing, or changing the status of other employees be given particular weight.
- Administrative Exemption – Employees must primarily perform office or nonmanual work directly related to the employer’s or its customers’ management or general business operations. Their primary duty must include the exercise of discretion and independent judgment concerning matters of significance.
- Professional Exemption – Employees must have a primary duty of work requiring knowledge of an advanced type in a field of science or learning customarily acquired by prolonged, specialized, intellectual instruction and study. Alternatively, employees must specialize in a few other similarly highly specialized fields, such as teaching, computer analytics, and engineering.
Additionally, under California law, workers must spend at least one-half their time engaged in exempt work.
HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and H.R./employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 470-571-1007.
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