How Should Employers Respond Now that Overtime Rule Is Blocked?

A Nov. 15 federal court decision spared HR professionals from having to comply with an increase in the salary threshold for white-collar exemptions from overtime, a threshold that had been set to rise to $58,656 annually as of Jan. 1, 2025. The July 1, 2024, increase of the salary threshold from $35,568 to $43,880 per year was also struck down. 

That means the salary threshold for white-collar exemptions is effectively back to the 2019 overtime level of $35,568 annually ($684 per week), said Chuck McDonald, an attorney with Ogletree Deakins in Greenville, S.C. 

Decision Applies Nationwide

The U.S. District Court for the Eastern District of Texas vacated the Biden administration’s overtime rule. In its ruling, which 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.

In addition, the court struck down the automatic increases in the salary threshold every three years that the rule had set in place, finding that they violated the notice-and-comment period requirements of the Administrative Procedure Act. 

The court concluded that the 2024 rule was not based on a permissible construction. Like the blocked 2016 rule’s attempt to dramatically increase the minimum salary level from the 20th to the 40th percentile of full-time, salaried workers in the South, the 2024 rule mandated raising the minimum salary level for white-collar exemptions from the 20th to the 35th percentile—$58,656 annually—on Jan. 1, 2025.

The July 1 increase affected fewer workers—1 million—than the 3 million who were to be affected by the Jan. 1, 2025, increase, noted Jim Paretti, an attorney with Littler’s Workplace Policy Institute in Washington, D.C. The judge could not have been clearer that each part of the rule exceeded the U.S. Department of Labor’s statutory authority, he said.

The Biden administration might appeal, but the 5th U.S. Circuit Court of Appeals would not act on an appeal before President-elect Donald Trump takes office, McDonald predicted.

The Trump administration might formally repeal the Biden administration’s overtime rule or revisit parts of it, Paretti noted.

Reclassify Employees Again?

Employers that bumped up a few employees’ salaries at or above the 2024 rule’s salary thresholds to keep them exempt as of July 1 or in anticipation of the Jan. 1 increase aren’t likely to lower their salaries now for employee relations reasons, McDonald said.

On the other hand, employees whose salaries remained below the July 1 salary threshold and who were reclassified from exempt to nonexempt status due to the 2024 rule might be switched back to exempt, he added. 

That’s assuming they still meet the duties test, which should be checked periodically as more job functions become increasingly automated, Paretti noted.

Employees who are switched back to exempt as a result of this ruling might be given a slight salary increase for employee relations purposes, McDonald noted.

Prior written notice would need to be given and is required in some states before reclassifying an employee as exempt, he said. 

Each company will have to decide if reclassifying workers as exempt is best for its operations, McDonald noted.

Duties Tests Matter

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 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, the district court said.

Here is a summary of the duties tests for white-collar exemptions:

• 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 California, an exempt employee must spend more than one-half of their time engaged in exempt work.