On November 15, 2024, a United States Eastern District Court in Texas struck down a 2024 Department of Labor (DOL) rule that would have made four million previously exempt workers eligible for overtime by 2025. In an action brought by the State of Texas and a coalition of business associations, the court held that the DOL exceeded its statutory authority under the Fair Labor Standards Act of 1938 (FLSA) by effectively reclassifying these employees as non-exempt based on their salaries without considering their job duties.  

The FLSA requires payment of overtime to employees working more than forty hours in a week but exempts certain executive, administrative, and professional employees. Under the FLSA, the DOL must periodically define and delimit which workers fall under these exemptions. In 1940 the DOL introduced a three-part test, which is still in place today, to determine whether an employee is overtime exempt: (1) the employee must be paid a predetermined, fixed salary; (2) the salary must be at a weekly rate above a minimum threshold set by the DOL; and (3) the employee must have executive, administrative, or professional job duties. The 2024 rule scheduled three increases to the minimum salary threshold, which previously was $684 per week: $844 on July 1, 2024; $1,128 on January 1, 2025; and automatic increases every three years starting in July 2027.

According to the court, the increases set forth in the 2024 rule improperly failed to consider whether the impacted employees performed executive, administrative, or professional job duties. In response to the Fifth Circuit’s recent holding in Mayfield v. U.S. Department of Labor that the DOL has authority to set minimum salary thresholds, the district court quoted a caveat in Mayfield: “The Department may ‘impose some limitations on’ the scope of the EAP Exemption’s operative terms, but it cannot ‘enact rules that replace or swallow the meaning those terms have.’” The 2024 rule effectively did so, the district court found, because it ignored whether the millions of workers who would lose their exempt status worked in executive, administrative, or professional capacities. Moreover, the district court found that automatic increases every three years violated the notice-and-comment procedures in the Administrative Procedure Act.

The decision deals a significant blow to the DOL efforts to expand the reach of the FLSA overtime requirements months before a new presidential administration arrives with a likely antiregulatory agenda. The case also sheds light on how courts may approach challenges to federal regulation in the wake of Loper Bright Enterprises v. Raimondo this past Spring. In Loper, the Supreme Court reversed Chevron, which generally required courts to defer to reasonable agency interpretations of the statutes those agencies administer. Unsurprisingly, the Texas district court began its discussion of the standard of review by quoting Loper: “[c]ourts must exercise their independent judgment in deciding whether an agency has acted within its statutory authority.”

If you have any questions on these developments, need assistance evaluating employee classifications, or have other questions related to wage and hour compliance, please contact Paulo McKeeby at pmckeeby@reedsmith.com or the Reed Smith lawyer with whom you normally work.