FEDERAL COURT BLOCKS SALARY THRESHOLD INCREASE FOR SALARY EXEMPT WORKERS

On November 15th, the U.S. District Court for the Eastern District of Texas blocked implementation of the Biden Administration’s final rule increasing the salary threshold for salary exempt workers under the Fair Labor Standards Act (FLSA). The court ruled that the rule exceeded the Department of Labor’s (DOL) authority under the FLSA.

The FLSA establishes minimum wage and overtime requirements for most workers. However, certain categories of workers are exempt from these provisions based on salary and job duties. The final rule made changes to the minimum salary required to be exempt. The job duties requirement remained unchanged.

Key Points from the Court Ruling

The court’s reasoning for striking down the rule rests primarily on the authority of the DOL to define and delimit the executive, administrative, and professional exemptions under the FLSA. U.S. District Court Judge Sean Jordan found that the final rule was “designed on [its] face to effectively displace the FLSA’s duties test with a predominate–if not exclusive–salary level test” and the DOL did not have authority to make such a change. Judge Jordan highlighted the January 2025 increase, which would have represented a 65% increase compared to the salary threshold in effect before July 2024.

Background on the Final Rule Expanding Overtime Coverage

Earlier this year, the DOL finalized a rule that extended overtime coverage by increasing the minimum salary needed to qualify for exemption under the FLSA. Implementation of the rule meant that approximately 4 million additional workers would be subject to overtime.

Salary Threshold for Executive, Administrative, and Professionals Exemptions

The rule increased the salary threshold in two phases and provided for automatic adjustments every three years. The first increase went into effect on July 1, 2024, increasing the salary threshold from $35,568 annually ($684 per week) to $43,888 annually ($844 per week). On January 1, 2025, the salary threshold would have increased to $58,656 annually ($1,128 per week). Beginning July 1, 2027, and every three years thereafter, the salary threshold would be updated using earnings data and methodology in effect at the time of the update.

Salary Threshold for Highly Compensated Employees

The rule also increased the salary threshold for highly compensated employees. The first increase, which went into effect on July 1, 2024, bought the minimum salary threshold for highly compensated employees to $132,964 annually, with at least $844 per week paid on a salary or fee basis. On January 1, 2025, that salary would have increased to $151,164 annually.

What Should Employers Do Following the Federal Court’s Ruling?

The federal court’s decision blocks the implementation of the rule in its entirety nationwide — including the increase that already went into effect in July. It effectively reset the salary threshold back to what it was before July 1, 2024.

While the Biden Administration could appeal to the Fifth Circuit Court of Appeals, it is unlikely that a decision will be made before the incoming Trump Administration takes office on January 20, 2025 and, like in 2016, the Trump Administration may abandon the appeal and allow the decision of the lower court to stand.

So, where does that leave employers who implemented the initial increase or reclassified employees? Next steps will depend largely on what steps have already been taken and what tone the employer wants to set with its employees.

Can You (And Should You) Reduce Salary or Change Employee Status?

Because the court’s decision comes in November and the initial increase took place in July, many employers have already made adjustments to employee salaries or exemption status to comply with the new salary threshold. Many have also likely made plans for the additional increase in January and may have already made announcements regarding those plans. That puts employers in a difficult position.

Do you revert back to salaries and/or exempt statuses as they were before July 1st? Do you leave any changes that were made as of July 1st in place, but abandon plans for any changes in the new year? Do you continue as planned as if the final rule was still in place?

While employers certainly can revert salaries back to where they were prior to July 1st or some amount below the $43,888 per year ($844 per week) threshold, it may be an unpopular move amongst employees. Employers who reclassified employees from exempt to non-exempt may also find resistance to a change that would remove overtime eligibility. If those employees have been enjoying getting overtime pay for the last several months, employee morale may take a hit when they are not longer getting that additional pay for overtime hours. Nevertheless, those are changes that employers are within their right to make based on this court ruling. However, no change can be made to salary or exempt status retroactively, only prospectively.

If employers choose to reverse salary increases or changes to exempt status, they need to communicate those changes in advance to employees and need to be thoughtful in crafting what will likely be an unpopular message. Employers in Nevada need to keep in mind that Nevada law requires employers provide employees with seven days advanced written notice of any decrease in pay. Other states have similar requirements.

Because this decision comes before the second increase in the salary threshold went into effect, employers do not have to move forward with any additional increase in salary or change to exempt status. However, if there has been any communication to employees about further changes in January, employers will need to communicate that those changes will be delayed (pending resolution of any appeal) or are no longer moving forward.

Of course, employers can always choose to continue with any planned increases in salary in January. The court’s decision does not mandate that employers change course.

What Will Happen Under the Trump Administration?

For employers who remember 2016, you will recall the Obama Administration attempted to increase the salary threshold for salary exempt workers and was similarly blocked by the U.S. District Court for the Eastern District of Texas. The Obama Administration appealed that decision. However, the DOL under the Trump Administration abandoned that appeal in favor of its own rulemaking process, which eventually lead to a rule that established the current salary threshold.

Like in 2016, its unlikely that the DOL under the Trump Administration is going to continue any appeal the DOL under the Biden Administration might pursue. They will likely abandon the appeal and allow the decision to stand. Only time will tell if they will make any attempts to increase the salary threshold under their own rulemaking process. Based on campaign promises made during the 2024 campaign, the incoming Trump Administration may have other priorities.

Nevada Association of Employers (NAE) will continue to monitor the latest developments regarding the litigation of the salary threshold increase and provide updates as they become available. To ensure you do not miss any updates, join our mailing list.

Nevada businesses trust that they are getting the latest information on their rights and obligations from NAE because it’s what we do. For more information about NAE and what we do for Nevada employers, visit our website. If you are a Nevada employer interested in membership, please contact membership@nevadaemployers.org or join today!

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