Texas Court Strikes Down 2024 Overtime Rule: Dominion Payroll’s Guide to What’s Next

A Texas Federal Judge recently overturned the Department of Labor’s (DOL) 2024 overtime rule. This rule had increased the salary threshold for employees exempt from overtime. This new ruling affects employers nationwide, invalidating the changes that were made in July 2024, as well as the second increase scheduled for January 2025. We are here to give a breakdown of the ruling, why it happened, and what could come next!

What Was the Rule?

In April of 2024, the DOL amended the FLSA-Fair Labor Standards Act and issued a final rule raising the salary threshold of overtime exemption for salaried employees. The rule mandated a significant increase from the 2019 salary threshold of $684 per week ($35,568 annually) to $844 a week (43,888 annually) that became effective on July 1, 2024. Additionally, the rule contained a second increase scheduled for January 1, 2025, raising the salary threshold to $1,128 per week ($58,656 annually).

Since the salary threshold increased incrementally to $43,888 on July 1, 2024, many employers likely adjusted employee compensation by either (1) increasing employee salaries to the minimum threshold to maintain exempt status; or (2) converting the employee to salary-nonexempt or hourly.

Why Was it Overturned?

In November of 2024, in Texas v. United States Department of Labor, a Texas federal district court vacated the Final Rule in its entirety on a nationwide basis, determining that the DOL had overstepped its authority. The court noted that past salary adjustments under the Fair Labor Standards Act (FLSA) aimed to establish a minimal salary threshold designed to exclude only those employees who were nonexempt. However, the 2024 salary increases shifted up to 30-50% of employees who qualified for exempt status into nonexempt status, which is much higher than the usual guideline of keeping this change to under 10%.

The court also invalidated the automatic indexing mechanism, which would have reevaluated and increased the salary threshold every three years, saying they went against administrative rules and exceeded what the DOL is allowed to do.

What Does This Mean for Employers?

• The 2019 DOL overtime salary threshold is back in effect, setting the exempt salary threshold at $684 per week ($35,568 annually) and the highly compensated employee threshold at $107,432 annually.
• Employers no longer need to prepare for the January 2025 federal increase.
• Businesses that raised salaries in response to the 2024 overtime rule can reassess and adjust if needed, however, employers should be mindful of the impact these adjustments could have on employee morale.

What's Next?

The DOL could still appeal the court’s decision in the 5th circuit, and the issues could resurface in the future. For now, here’s what employers should do:

1. Stay Updated: Keep an eye on labor law developments and potential appeals. States are beginning to enact their own legislation regarding overtime eligibility so it’s critical to monitor the respective states where your employees perform their work.
2. Remain Compliant: Follow the reinstated 2019 thresholds to avoid penalties. Employers should be intentional in their analysis of which employees are exempt and nonexempt by using both the salary and duties test to determine their eligibility for overtime compensation.
3. Stay Flexible: Labor laws evolve quickly, and businesses must be ready to adapt. Evaluate your employees periodically to ensure they are correctly classified as exempt or nonexempt so that you are positioned to make changes if future legislation is passed on the federal or state levels.

This ruling is a clear reminder of the importance of staying informed and agile in the face of changing regulations. Stay informed to stay ahead—it's essential for keeping up with the ever-evolving landscape of labor laws!