On Friday, November 15, 2024, the U.S. District Court for the Eastern District of Texas held that the Department of Labor’s (DOL) final rule (2024 Rule) raising the salary-level for exempt Executive, Administrative, and Professional (EAP) employees, as well as Highly Compensated Employees (HCE), was unlawful. The court vacated the 2024 Rule in its entirety for all employers, which means that it is no longer in effect nationwide.

By way of background, to be considered an exempt EAP or HCE, the employee must make a certain salary (salary level), be paid on a salary basis, and perform specific job duties. The DOL’s 2024 Rule impacted the EAP salary level in multiple stages:

• On July 1, 2024, the salary level increased from $684 per week ($35,586 annually) to $844 per week ($43,888 annually);
• On January 1, 2025, the salary level was scheduled to increase again to $1,128 per week ($58,656 annually);
• On July 1, 2027, the salary level was scheduled to increase to an undetermined amount; and
• Every 3 years thereafter, the salary level was set to automatically increase.

The 2024 Rule increased the HCE salary level in similar graduated fashion.

In Texas v. Department of Labor, the plaintiffs challenged the 2024 Rule, arguing that DOL's changes to the rule were in excess of the agency’s authority. The court agreed.

The court noted that although the EAP exemption does not refer to a salary level test, Congress delegated to the DOL the power to “define and delimit” the exemption. As part of its duty to “define” what it means to work in an exempt capacity, the DOL may set a minimum salary level for the purpose of screening out obviously non-exempt employees. The court stressed that because the focus of the EAP exemption should be on the exempt employee’s duties, the DOL’s ability to set a salary level is not unlimited. In other words, the DOL must not set a salary level that has the effect of supplanting the required evaluation of the employee’s role to determine whether the employee engages in exempt or non-exempt duties (duties test).

The court found that each aspect of the 2024 Rule did just that. In holding the July 1, 2024 increase unlawful, the court noted that this increase comes only 5 years after the salary-level was increased in 2019 and that, unlike past increases, it does not account for an increase to the federal minimum wage, which has stayed the same. Similarly, the January 1, 2025 salary-level jump is estimated to render non-exempt at least 2 of every 5 employees that otherwise satisfy an EAP exemption’s duties test. Had it gone into effect, the January 1, 2025 increase would have caused approximately 3 million exempt employees to be classified as non-exempt as of that date, even though their duties would not have changed. As a result, the court found that the July and January salary levels impermissibly superseded the respective duties tests for each EAP exemption.

The court also held that the 2024 Rule’s automatic increase provision was unlawful because in having the salary level increase without notice-and-comment rulemaking, the DOL was eschewing its duty to “define and delimit” the EAP exemptions. The court noted that while Congress has given agencies the ability to promulgate rules with automatic indexing functions in other contexts, it did not grant the DOL such authority here.

What’s Next?

Because the court vacated the 2024 Rule nationwide, this means that the July 1, 2024 increase is no longer in effect, and, as of now, the January 1, 2025 increase will not occur.

The DOL has the right to appeal the ruling. However, an appeal is not likely to change the end result, as the incoming Trump administration is expected to change course and either abandon the rule or substantially pare back any changes to the 2019 salary level of $694 per week, which was set by the DOL during Trump’s first term.

Employers who have already raised their EAP or HCE employees’ salaries to comply with the new rule, whether to comply with the July 1, 2024 or January 1, 2025 increase, may be wondering if they can revert employees’ salaries to their previous amounts. While employers technically can do so, rolling back employees’ salaries may be premature before the outcome of the DOL’s likely appeal. Rolling back salaries is also likely to create morale issues, especially in a labor market that remains tight. If an employer is going to revert its exempt employees’ salaries to their pre-July 1, 2024 amount, the employer should provide plenty of advance notice, as well as check to see if additional notice is required by state law.

While employers do not need to increase their salaries again in advance of January 1, 2025, some employers may have already communicated upcoming salary increases to employees. If an employer no longer intends to go through with the increase, they should again provide ample notice to their affected employees, as well as check state law notice requirements. Employers planning to make downward adjustments or who are not going through with a scheduled increase in light of the Texas decision should also be cognizant of how they conveyed the increase to employees. If the employer made a definitive promise to the employee, there may be a looming breach of contract issue.

Due to the 2024 Rule and the legal challenges thereto, exemptions under federal and state minimum wage and overtime laws are getting a lot of attention. Although the Texas decision provides clarity as to the salary level increases, it is still a good time to make sure that exempt employees satisfy the applicable duties test and make any necessary classification changes. After all, the Texas decision made clear that the EAP exemption is about “duties, not dollars.”

If you have any questions about this ruling or compliance with federal and state wage and hour laws, please contact a member of Godfrey & Kahn’s Labor & Employment team.