On November 15, 2024, the U.S. District Court for the Eastern District of Texas vacated the Department of Labor regulation increasing the salary amount required to qualify an employee for exempt status as an executive, administrative or professional (“EAP”) employee under the Fair Labor Standards Act (the so-called “EAP Exemption”). This means that the salary amount required for the EAP Exemption reverts to $684 per week (or $35,568 per year) as set forth in the rule prior to its revision (the 2019 Rule).
As our clients are well aware, the U.S. Department of Labor under the Biden Administration, after notice and comment, promulgated a revised final rule increasing the salary threshold to qualify for exempt status in two stages. The first, which became effective July 1, 2024, set the salary amount at $844/week (or $43,888 per year) with a second increase set to take effect as of January 1, 2025, to $1,128/week (or $58,656 per year). The rule also provided for automatic increases to the salary level starting on July 1, 2027, and every three years thereafter.
In its decision vacating the rule, the court ruled that the DOL exceeded the authority delegated to it by Congress by increasing the salary amount to an exceptionally high level and, in doing so, going beyond what the FLSA contemplated. In essence, the Court held that the 2024 Rule effectively displaced the duties test with a predominate, if not exclusive, salary-level test. The Court further noted that the salary threshold was historically deliberately set low, as it was designed to only screen out “obviously nonexempt employees.”
The FLSA defines the Executive, Administrative, and Professional exemptions based on the duties performed by individuals. The law also specifies that such employees must be “bona fide” in holding such status, which allows the DOL some interpretive latitude. However, the court observed, while Congress delegated interpretive authority to the DOL as to what is a “bona fide” executive, administrative, or professional employee and “to use a minimum salary level but only if that salary serves as a reasonable proxy for an employee’s exemption status.”
The court found that the impact of the substantial increases to the salary threshold, including provisions to further increase the amounts automatically every three years starting in 2027, effectively would override the duties tests set by Congress to determine an individual’s FLSA EAP exempt status. The steep increase to the salary threshold “will render nonexempt at least 2 of every 5 employees who meet the duties test, causing approximately three million EAP-exempt employees to become nonexempt on January 1. And those three million employees are in addition to the one million workers already improperly rendered nonexempt by the July 2024 increase, even though their duties have not changed.”
What this means is that employers need not consider further increasing the salaries of executive, administrative and professional employees on January 1, 2025, as would have been the case had the 2024 Rule not been vacated. Whether employers decide to look back to reduce salaries that were raised in July of this year to comply with the 2024 Regulation now vacated is a business judgment.