Background on the overtime rule

Under the FLSA, there are a number of exemptions from overtime including the executive, administrative, and professional exemptions—the so-called “white collar” exemptions. 29 U.S.C. §213(a)(1). Under these exemptions as implemented in regulations, an employee must meet three requirements to be classified as exempt: (1) satisfy a “duties test”; (2) be paid on a salary or fee basis (as opposed to an hourly basis); and (3) be paid at least a specific monetary threshold amount per week. There are some exceptions to the above requirements. For example, employees earning over a specified monetary threshold each year may also be exempt under the “highly-compensated employee” exemption if they satisfy a relaxed version of the “duties” test. Likewise, certain types of employees need not meet the above salary tests to be exempt, such as doctors, lawyers, and teachers.

In April 2024, the U.S. Department of Labor (DOL) finalized its 2024 Rule on overtime. The 2024 Rule provided that on July 1, the minimum salary level for exemption from overtime would increase from $684 per week to $844 per week. Then, on January 1, 2025, the minimum salary level would increase from $844 per week to $1,128 per week. Lastly, the 2024 Rule implemented mechanisms to automatically increase the salary level triennially starting in 2027. DOL estimated that by January 1, 2025, the 2024 Rule would have impacted more than four million employees who at that time had been classified as exempt, either requiring that employers raise their pay or begin paying them overtime and tracking the time they work.

Likewise, the 2024 Rule increased the highly compensated employee exemption on July 1, 2024, from $107,732 to $132,964 per year. On January 1, 2025, the highly compensated employee exemption would have risen to $151,164 with triennial increases thereafter. 

Federal court decision

The court’s decision vacates the entire 2024 Rule, including the increases that took effect in July. Judge Sean D. Jordan of the Eastern District of Texas held that the FLSA defines the white-collar exemptions primarily based on the duties employees perform, not salaries, and therefore the salary thresholds exceeded the DOL’s Congressionally delegated authority to “define” and “delimit” the white-collar exemptions. Specifically, Judge Jordan explained that the increase in the minimum salary was so large that it “effectively displaces the duties based inquiry required by the FLSA’s text with a predominant salary-level test”. The court also held that the automatic triennial increases violate the notice-and-comment rulemaking requirements of the APA by abdicating DOL’s responsibility to “defin[e] and deliminat[e]” these exemptions. Therefore, the court ordered that the 2024 Rule be set aside and vacated in full. 

Absent reconsideration by the court or reversal on appeal, the court effectively reinstated the salary thresholds for executive, administrative, and professional exemption to their previous level of $684 per week and $107,732 per week for the highly compensated employee exemption. It also blocks the January 1, 2025, increases from going into effect. 

Next steps for employers

Although the current DOL may appeal the decision in its final days to the Fifth Circuit, we expect if any such appeal is filed, it is likely to be withdrawn or abandoned under the Trump administration. That said, it is possible that the salary thresholds may be raised under the Trump administration by a more modest amount. In 2016, a federal judge had blocked the Obama DOL’s attempt to double the salary threshold for the white collar exemptions (from $455 to $913 per week), along with automatic updating, under similar reasoning as Judge Jordan’s present decision. Then, in 2019, the Trump DOL increased the salary thresholds from $455 per week to $684 per week, without automatic updating. It is possible that a new Secretary of Labor under the incoming Trump administration might again propose modest increases to the salary thresholds, without automatic updating. 

Employers can safely halt plans meant to address the new rule in making changes to their compensation or exempt status classification that were planned for January 1, 2025. However, many employers already made such changes to address the July 1, 2024, increase, and must carefully consider whether to unwind those changes. Reducing employee compensation would likely risk negative employee morale; however, re-classifying employees back to exempt may be feasible and positive to morale given that many employees prefer to be classified as exempt rather than non-exempt. In making any such changes, employers should anticipate the potential for further changes from the incoming Trump DOL. Employers that decide to make changes should carefully consider state law as well as federal law, as in states like New York, California, and Washington, the states’ minimum salary threshold for overtime exemption already exceeds the reinstated $684 per week threshold. 

For more information about the overtime exemptions or any other legal issue in the workplace, contact the authors of this article or the Hogan Lovells lawyer with whom you work.

Authored by Michael E. DeLarco, Tao Leung, Kenneth Kirschner, George Ingham, Michelle Roberts Gonzales, and Olivia McCann.