Texas federal court sets aside DOL overtime rule

The US District Court for the Eastern District of Texas struck down the US Department of Labor (DOL)’s final rule raising the minimum salary level for the executive, administrative, and professional (EAP) and the highly compensated employee (HCE) overtime exemptions under the Fair Labor Standards Act (FLSA) on a nationwide basis. On November 15, 2024, the court found that the 2024 rule exceeded the DOL's authority under the FLSA and violated the Administrative Procedure Act (APA).

For now, employers do not need to comply with the salary increases that were scheduled to take effect on January 1, 2025, or the increases that were previously implemented on July 1, 2024, to maintain an employee’s overtime exemption status under the FLSA.

The 2024 final rule

To be exempt from overtime under federal law, an employee must be paid a minimum salary set by the DOL and satisfy a duties test. On April 23, 2024, the DOL issued its final rule regarding the EAP and HCE exemptions. The rule provided for increases in the minimum salary threshold in two steps – the first increase effective July 1, 2024 raised the minimum salary for the EAP exemption from $684 per week ($35,568 per year) to $844 per week ($43,888 per year) and the HCE exemption from $107,432 to $132,964. The second increase is set to take effect on January 1, 2025 and increase the minimum salary for the EAP exemption to $1,128 per week ($58,656 per year) and the HCE exemption to $151,164 annually.

The 2024 rule also provided for automatic increases every three years going forward, with the amount of the increase tied to contemporary earnings data (which would result in millions more employees becoming nonexempt).

Legal challenges – which were expected based on a successful legal challenge to a 2016 rule (also in the Eastern District of Texas) – immediately followed. In June 2024, the court granted a preliminary injunction preventing the enforcement of the rule against the state of Texas as an employer. The court’s summary judgment decision last week vacates the entire rule for all employers nationwide.

The court’s decision

The court’s decision follows the rationale applied by the Texas federal court in 2016. According to the court, because the EAP exemption requires that an employee’s exemption status involves an evaluation of the employee’s duties – not just salary – and because the 2024 rule’s changes make salary predominate over duties for millions of employees, the changes exceed the DOL’s authority to define and delimit the relevant EAP exemptions.

The court noted that the Kantor Method used by the DOL for decades established the principle that a minimum salary level should not exclude more than about ten percent of employees who meet the duties test. In this case, the DOL’s July 2024 increase more than tripled this percentage. According to the court, the DOL “cannot credibly maintain that a minimum salary level eliminating such a large percentage of employees who would otherwise qualify under the duties test is merely ‘screen[ing] out the obviously nonexempt employees.’” Rather, the proxy characteristic “has effectively displaced the duties test for a significant percentage of otherwise EAP-exempt employees.”

Notably, the court cited the US Court of Appeals for the Fifth Circuit’s recent decision in Mayfield v. DOL (petition for rehearing en banc pending), which upheld the DOL’s explicitly delegated authority to define and delimit the terms of the exemption but cautioned that there are limits. The Fifth Circuit noted that the DOL’s power is not “unbounded” and that it cannot “enact rules that replace or swallow” the meaning of the text of the exemption.

The federal court in Texas also held that the increases scheduled for January are void, observing that the sharp increase similarly is not a reasonable proxy insofar as it screens out substantial percentages of employees who meet the duties test.

Finally, the court found that the proposed automatic increase in the salary level is void: “Nothing in the EAP Exemption authorizes the Department to set its rulemaking on autopilot and evade the procedural requirements of the APA.” It further observed the DOL has previously acknowledged that automatic increases would be contrary to congressional intent and that the FLSA does not provide for indexing for wage rates.

What’s next?

For now, the final rule cannot be enforced anywhere in the nation. The DOL may seek an emergency stay of the vacatur or appeal the decision to the Fifth Circuit. Also, the new Trump administration could abandon litigation about the 2024 rule or propose its own rule (which it did in 2019 during the first administration).

If you have questions in the meantime about the court’s decision, including potential outcomes and options to address actions taken in response to the July 1, 2024 increase, please reach out to the authors or your usual DLA Piper attorney.