Employment & Labor Law

A federal district invalidated on a nationwide basis the regulation issued last April by the  U.S. Department of Labor that increased the minimum salary required under federal law for employees otherwise qualifying as exempt from overtime pay (Texas v. DOL, 24-cv-499 (E.D.Tex. 2024). This court decision stops a January 1, 2025 increase of the exempt employee salary minimum to $58,656 per year ($1,128 per week), as well as removing the $43,888 per year ($844 per week) exempt salary minimum that went into effect July 1, 2024. Future increases, scheduled for every three years, under this regulation are also undone by the court ruling. Similarly, the recent court decision enjoined the DOL minimum salary increases for the highly compensated executive overtime exemption from earlier this year and those scheduled for the future. The effect of this court ruling is that the prior DOL exempt employee salary minimum of $35,568 per year ($684 per week) and the highly compensated executive salary minimum of $107,432 per year ($2,066 per week), all of which went into place January 1, 2020, are now back in effect.

Background:

Employers have long been permitted to not give overtime pay to employees in the primary exemption categories of administrative, executive, and professional employees, along with the less common and more recently adopted highly compensated employee exemption, all of which must (1) meet certain job duty requirements that vary with each exemption and (2) be paid on a salary basis of at least a designated amount. When and by how much the minimum salary level for these exemption categories can be changed by federal regulation has been the subject of much litigation over the past 10 years, with the same federal court in Texas invalidating a 2016 DOL increase in the salary minimum (Nevada v. DOL, 16-cv-731 (E.D. Tex. 2016). Other courts and different presidential administrations have taken different approaches. How an appeals court would decide this issue is uncertain. It is unlikely though that this case will go far on appeal, as presumably the Trump administration will retract any appeal filed now by the Department of Labor. The main question is if and when the Trump administration will issue a new regulation with an increased salary minimum. If history repeats itself, the DOL will issue a salary minimum increase in 2027 or 2028, as it did in 2019, increasing the minimum salary under federal law to a lower level than the 2024 regulations but higher than the $35,568 per year ($684 per week) that now goes into effect under the last standing increase from January 1, 2020. Prior to 2020, the minimum salary for the above noted main exemption categories was $23,660 per year/$455 per week (and for the highly compensated executive exemption it was $100,000 per year/$1,923 per week).

In addition to the minimum salary increases of last July and next January, the district court decision also ruled invalid the April 2024 DOL Rule’s future automatic increases every three years from 2027 on (those increases were designated to use a formula to be established by DOL at the time of each increase, which was likely to be based on a percentile of U.S. employees’ salaries—the July 2024 increases were based on the 20^th percentile of the lowest-wage U.S. Census Region (the South) for the traditional exemptions and the 80^th percentile of full-time salaried workers nationally for the highly compensated executive exemption, while the January 2025 increases were based on the 35^th and 85^th percentiles, respectively, and the 2020 increases were based on the 20^th and 80^th percentiles, respectively).

The court’s rationale for invalidating the 2024 and future increases is that the salary increases were so high that “the 2024 Rule’s salary level thresholds ‘effectively eliminate’ consideration of whether an employee performs ‘bona fide executive, administrative, or professional capacity’ duties in favor of what amounts to a salary-only test.” Texas v. DOL, slip opinion, at p. 59.

Some states and local jurisdictions impose their own minimum salary levels for overtime exempt employees, and employers must pay the higher of the federal or state minimum (e.g., higher minimum salaries exist in Alaska, California, Colorado, Washington, and some local New York counties and New York City). Thus, employers in these areas will be unaffected by the recent court decision. Pennsylvania does not have higher minimum salary requirements for overtime exempt employees (it did issue a regulation adopting higher minimum salaries, but that regulation was abrogated by a 2021 state statute).

Our earlier article providing further background on the now-invalidated April 2024 Rule is linked here. The present bottom line is that the pre-2024 minimum salary levels are now back in effect—$35,568 per year/$684 per week for the administrative, executive, and professional overtime exemption categories, and $107,432 per year/$2,066 per week for highly compensated employee exemption.

Employer Considerations:

Employers will have to choose whether to change their upcoming salary plans, as well as whether to reverse course on increases already made this year, based on the minimum salary requirements. We predict that the current increased difficulty and competition to fill positions will mostly prompt employers to maintain and continue rather than reverse salary increases.

Please note that the recent court decision did not address or change the job duties tests required to be met by an employer in order to treat an employee as exempt from overtime pay. There are also other exemptions from overtime pay or coverage under the applicable federal statute (Fair Labor Standards Act) that do not include a minimum salary requirement, such as the outside salesperson (who can be paid on a commission basis). Each employer should periodically review its compliance with the requirements for each exemption category it utilizes or seeks to utilize, as the conditions that must be met for each of them are complicated and sometimes overlooked, misunderstood, or not followed by staff.

Employers should also consider now whether their statements to employees about recent or upcoming pay increases create any binding commitments for the increase aside from the federal minimum salary requirements. Usually this is not a problem as employers can change pay rates prospectively (up or down), unless they made statements to the contrary (another good reason to have not only a good employment at-will disclaimer but also a good no employment contracts except under limited situations notice).

If you have questions on the subject the attorneys at Houston Harbaugh can assist. Contact Craig M. Brooks at 412-288-2214 cbrooks@hh-law.com or Brian D. Lipkin at 412-288-2256 blipkin@hh-law.com for more information.