On Nov. 15, 2024, the U.S. District Court for the Eastern District of Texas court decision vacated employers from having to comply with an increase in the salary threshold for white-collar employee exemptions [defined as executive, administrative and professional employees – EAP ] from overtime. This threshold had been set to rise to $58,656 annually as of Jan. 1, 2025—the previous July 1, 2024, increase of the salary threshold from $35,568 to $43,880 per year was also struck down.
Decision Applies Nationwide
The U.S. District Court for the Eastern District of Texas ruling applies nationwide. The court criticized the rule’s rise in the salary threshold level as displacing the duties test for white-collar exemptions by being too steep, finding that they violated the notice-and-comment period requirements of the Administrative Procedure Act and that each part of the rule exceeded the U.S. Department of Labor’s statutory authority.
SALARY THRESHOLD REVERTS TO 2019 LEVELS
This means the salary threshold for white-collar exemptions reverts to the 2019 overtime level of $35,568 annually ($684 per week). The court also struck down the automatic increases in the salary threshold every three years that the rule had set in place.
SUMMARY OF THE DUTIES TESTS FOR WHITE-COLLAR EXEMPTIONS
A main takeaway from the court’s decision is that white-collar exemptions are satisfied when workers fulfill the duties tests, in addition to employers meeting the salary threshold and paying the workers on a salary basis.
The district court stated that the salary threshold is intentionally set at a low level to account for regional differences and is not a substitute for an analysis of an employee’s duties.
- For the executive exemption: employees must have a primary duty of managing the enterprise or a department or subdivision of the enterprise; must customarily and regularly direct the work of at least two employees; and must have the authority to hire or fire, or their suggestions and recommendations as to the hiring, firing, or changing the status of other employees must be given particular weight.
- For the administrative exemption: employees must have a primary duty of performing office or nonmanual work directly related to the management or general business operations of the employer or the employer’s customers, and their primary duty must include the exercise of discretion and independent judgment with respect to matters of significance.
- For a professional exemption: employees must have a primary duty of work requiring knowledge of an advanced type in a field of science or learning customarily acquired by prolonged, specialized, intellectual instruction and study or must specialize in a few other similarly, highly specialized fields, such as teaching, computer analytics, and engineering.
- In Oregon: Oregon does not recognize highly compensated employees [HCE] being exempt from overtime. Thus, an Oregon employer’s test to make employees exempt must satisfy the duties of an EAP employee.
- In California: an exempt employee must spend more than one-half of their time engaged in exempt work.
6 QUESTIONS FOR EMPLOYERS TO CONSIDER
1. Have you already made staff salary changes? Can you reduce a salary back to the $35K range?
You might find yourself in a difficult spot if you have already made alterations to your compensation plans or your employees’ exemption status, as it might be unpopular to reverse course now. Although you may have the legal right to revert to the status quo depending on your circumstances, rolling back the changes now could result in a blow to employee morale. Moreover, before making any significant moves, you may want to see what happens with a potential appeal and how the new administration will respond. If you are changing course, you should note that some states require advance notice of wage changes, so you should check your local requirements. Regardless of the state law, however, you should clearly communicate changes before they take effect.
2. Were you waiting for the 2025 deadline to make changes? If you have been waiting until January 1 to implement the next round of changes, you are in luck. If you have said nothing about the potential increase, say nothing. If you have already forecasted the increase, you might consider communicating to your workforce that …
“The expected changes are going to be delayed given the court’s ruling, and we will let you know the status of the updates. We will continue to monitor the situation and make adjustments if and when appropriate.”
It is essential to gauge your communications based on what you have already told your workforce. If there is an expectation that compensation levels would be increased during a specific time period, both for legal compliance and morale purposes, you will want to craft your message carefully.
3. Are you ready to move forward as planned? Of course, if you’ve already factored all the changes into your compensation plan for 2025, you are free to proceed and raise compensation levels on January 1 (or whatever date you choose). After all, the salary threshold is a minimum level, and employers can always opt to pay exempt employees more. Additionally, non-exempt status is the default, so you have the option of maintaining non-exempt status for any newly reclassified employees. Just remember you’ll need to comply with the federal, state, and local wage and hour laws that now apply to those workers.
4. Should you consider a hybrid plan? It is hard to find a one-size-fits-all solution that applies to your entire workforce, so your plan might vary depending on the work unit or job type. Just remember to use objective criteria and to be consistent when applying changes to avoid potential discrimination claims.
5. Should companies review exemption status? This ruling will get a lot of press and may trigger a closer examination of the exemption status by employees. As a result, reviewing positions to see if the duties performed are exempt is a good idea.
6. Should You Reach Out to Legal Counsel? Particularly if you’re planning to pause or roll back changes that were already made or communicated, you may want to seek legal guidance to help you make compliant changes and develop effective communications for your workforce.
Cardinal will keep you updated if there are any changes to this ruling.
If you have any questions about the Department of Labor’s salary requirements or any other wage and hour inquiries, please get in touch with the HR Team at hr@cardinal-services.com for assistance.
CARDINAL SERVICES DISCLAIMER
None of the information stated above is intended to be legal, tax, security, or financial advice. Cardinal Services provides the information in this e-newsletter for general guidance only and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation.
Consult your company’s legal counsel or financial professional for the latest city, county, state or federal laws concerning this newsletter topic.