Overtime Rule Challenges Are Still Pending

Despite legal challenges to the Biden administration’s overtime rule, HR professionals should make plans in case the salary threshold increase scheduled for Jan. 1, 2025, survives.

“There is a great deal of uncertainty in whether the final rule will survive the pending legal challenges,” said Natalie Bare, an attorney with Duane Morris in Philadelphia.

Background on the Final Rule

In April, the U.S. Department of Labor (DOL) raised the salary threshold for white-collar exemptions from overtime requirements: first from $35,568 per year ($684 per week) to $43,888 per year ($844 per week) on July 1 and then to $58,656 per year ($1,128 per week) on Jan. 1, 2025. There are to be further automatic increases to the salary threshold every three years, starting July 1, 2027.

The final rule applies to the Fair Labor Standards Act’s (FLSA’s) executive, administrative, and professional (EAP) exemptions, which are sometimes referred to as “white-collar exemptions,” Bare explained. Employees who qualify are exempt from the FLSA’s minimum wage and overtime pay requirements. Employees can qualify for one of the EAP exemptions if they pass the job duties test, are paid on a salary basis, and are paid at least the standard minimum salary level.

The job duties test is relaxed for highly compensated employees who earn the minimum annual threshold for highly compensated employees and are paid on a salary basis, Bare noted. The final rule also increased the annual salary threshold for highly compensated employees to $132,964 on July 1, and to $151,164 effective Jan. 1, 2025.

Following the release of the rule, Emily M. Dickens, J.D., SHRM chief of staff, head of government affairs, and corporate secretary, said that “the new EAP salary level that determines overtime exemption will see a significant increase.”

She added, “Although SHRM and its membership support reasonable increases to the EAP salary threshold that reflect the modern economy, the nearly 65% increase from the current level may not be in line with local wage rates for employees holding administrative, professional, and executive positions in some areas of the country. For this reason, SHRM advocated for a more nuanced, geographically tailored approach to any increase in the EAP salary threshold.”

SHRM believes any future adjustment should follow a notice-and-comment period and a comprehensive analysis of worker earnings and economic trends, Dickens said.

Legal Challenges

Pending legal challenges to the overtime rule are in federal district courts in Texas and are likely to be decided on the merits by the end of the year, Bare said.

Many of the arguments initially raised by the plaintiffs appear to have been foreclosed by the 5th U.S. Circuit Court of Appeals decision in Mayfield v. U.S. Department of Labor, said Brett Coburn, an attorney with Alston & Bird in Atlanta. In the 5th Circuit’s decision, the appeals court ruled that the DOL has authority under the FLSA to use a minimum salary as part of how it defines the EAP exemptions, he noted.

However, Mayfield left open the argument that succeeded in getting the 2016 Obama administration’s overtime rule halted, Coburn added. That argument, he explained, was “that the drastic increase in the minimum salary threshold under the current rule effectively supplanted the duties test of the EAP exemptions.”

The amount of the Jan. 1, 2025, minimum salary threshold to $1,128 per week represents the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage census region—currently the South—based on data collected by the Bureau of Labor Statistics. In 2016, the DOL under the Obama administration had tried to set the standard minimum salary level at the 40th percentile, which was $913 per week at the time.

“A federal court in Texas invalidated that proposal as too high,” Bare noted. “By comparison, in 2019, the DOL under the Trump administration set the standard minimum salary at the 20th percentile.”

She said that while the DOL is not using the exact methodology that resulted in the invalidation of the 2016 proposal, at the 35th percentile, “they are not that far from the invalidated 40th percentile.”

Action Steps

Employers need to make sure they are in compliance with the new salary threshold that went into effect on July 1, 2024, Coburn said.

The Biden administration’s overtime rule was blocked from applying to employees of the state of Texas on June 28. But Texas said that only 88 employees would be impacted by the overtime rule on July 1 and nearly 4,000 employees on Jan. 1, 2025. For all other employers in Texas and around the U.S., the rule still takes effect in two phases—first July 1 and then Jan. 1, 2025.

With respect to the Jan. 1, 2025, increase to the salary threshold, “my recommendation is to plan now to determine which employees will need to get a raise to meet the new threshold, and which employees will need to be reclassified as nonexempt as of Jan. 1, 2025,” Coburn said. “But I would not implement anything or communicate anything to employees for the moment.” 

While the Mayfield decision knocks out some of the challengers’ arguments, Coburn said there is a good chance that a court may invalidate the rule.

“But I do recommend having a fully baked plan in place that will allow the employer to implement these changes quickly in the event that the court challenges are unsuccessful, or if the courts have not issued rulings by Jan. 1, 2025,” he said.