Once again, a district court judge in Texas has issued a nationwide injunction blocking a federal regulatory change that presented significant implications for employers. Three months ago, it was the Federal Trade Commission’s regulations invalidating noncompete agreements. This past week, it was the Department of Labor’s (DOL’s) regulations further increasing the minimum salary that employers are required to pay employees as one element of being able to classify them as exempt from overtime.
Exempt Status Requires a Minimum Salary Threshold
As we have discussed in a prior blog post, U.S. employers who classify their employees as exempt because they perform work in an executive, administrative or professional capacity, must additionally ensure that the employees are being paid an annual salary that meets or exceeds a base threshold set by the DOL. After hovering at $35,568 since January 1, 2020, the DOL increased the minimum threshold to $43,888, effective July 1, 2024. The threshold was scheduled to increase again, to $58,656 annually as of January 1, 2025, and was then pegged to update beginning on July 1, 2027, and every three years thereafter to align with the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (which is the South).
The state of Texas and a group of trade organizations and employers challenged the DOL’s new regulations as exceeding its authority and inconsistent with the federal Fair Labor Standards Act (FLSA). A federal district court in Texas issued a preliminary injunction that deferred application of the new regulation only within the state of Texas, pending briefing on the merits of the case by both parties. The court’s current decision vacated the DOL’s regulatory changes in their entirety and referred the salary threshold for further consideration consistent with the court’s opinion.
How the Court Analyzed the Issue
The court reasoned, based on dictionary definitions, plain language understanding, and prior court decisions, that identifying whether an individual works in an “executive,” “administrative,” or “professional” capacity is a “functional, duties-based inquiry.” The salary the employee is paid, the court held, is a secondary consideration that historically was used only to screen out those at the most marginal ends of the duties test.
Applying these general principles to the factual circumstances presented by the DOL’s most recent increases, the court held that the regulation could not be sustained. The court observed that, while over the past 50 years, increases had occurred at intervals of 30 and then 15 years, it was just five year ago that the salary threshold was last changed. Further, the court noted, for the first time ever the DOL raised the salary threshold this past July when there had been no change to the federal minimum wage. Analyzing data on the large swath of more than one million employees who were newly classified as non-exempt, the court reasoned that the higher salary threshold thereby was serving to displace the duties test and screen out more than the most obviously nonexempt employees.
The court found the increase scheduled for January 1, 2025, which would disqualify all employees earning less than the 35th percentile of weekly earnings of full-time, salaried workers in the South, as having a potentially “staggering” impact. Historically the DOL had set the minimum salary level at a point that excluded only the lowest paid of salaried workers (about 10 percent as measured by region or industry).
The court observed that the 2025 salary threshold set by the DOL would render nonexempt at least two of every five employees who meet the duties test and thereby reclassify approximately three million employees as non-exempt. The court held this was inconsistent with the FLSA and even the DOL’s own longstanding policy of not setting the salary level so high as to disqualify a substantial number of employees who, based on the nature of their work, would otherwise be considered bona fide executive, administrative, or professional employees. Similarly, the court held that the automatic indexing mechanism built into the new regulation exceeds the DOL’s authority and “effectively abdicates its role of defining and delimiting” the exemptions through a regulatory process. The court therefore concluded that no part of the new regulations could stand.
What Is Going on Here?
The federal minimum wage is defined in the FLSA and can only be changed by an act of Congress. As a result, it increases rather infrequently. The federal minimum wage has held steady at $7.25 per hour since July 24, 2009, while 30 states over subsequent years have increased their own minimum wage thresholds. Here is the current breakdown:
- only two states, Georgia and Wisconsin, specify a minimum wage that is less than $7.25;
- 18 other states are aligned to the federal minimum wage;
- seven states (Washington State, California, New York State (in New York City and the surrounding suburbs), Connecticut, New Jersey, Maryland and Massachusetts) have set their minimum wage at more than double the federal level;
- the remaining states typically have a minimum wage between $11 and $14 per hour; and
- the minimum wage is highest in Washington, D.C. at $17 per hour.
In the absence of sufficient consensus in Congress to increase the federal minimum wage, the past two Democratic administrations have instead sought to increase wages through alternative means using the power of the executive branch. A federal Executive Order has increased the minimum wage for federal government contractors to its current level of $15 per hour. This impacts the wages paid by private employers who seek to do business with the government.
For the rest of the private sector, a failed attempt in 2016 to substantially increase the minimum salary threshold for exempt status, and this current attempt in 2024, were both intended to serve the same purpose – reclassify millions of employees as non-exempt and overtime eligible, so as to thereby effectively increase their gross weekly wages by entitling them to overtime pay for working more than 40 hours in a workweek. Both initiatives failed at the hands of the same federal district court in Texas. Given the outcome of the recent presidential election and the pending change in the administration, employers can feel reasonably confident that the DOL will not seek to appeal the district court’s decision, nor will there be a further attempt to substantially increase the minimum salary threshold for at least the next four years.
New York Remains Different
As we discussed in this prior blog, New York is among just over a handful of states that set their own, higher minimum salary thresholds to classify an employee as exempt. With the exception of Maine, New York is the only state on the east coast that takes this approach.
Presently, the New York minimum salary threshold is $1,200 per week for those in New York City and surrounding suburban counties, or $1,124.20 per week for those in the rest of the state. This annualizes to $62,400 for New York City and surrounding counties, and $58,458.40 for the rest of the state. This is increasing on January 1, 2025, to $1,237.50 per week ($64,350 annualized) for New York City and surrounding counties, and $1,161.65 per week ($60,405.80 annualized) for the rest of the state.
By Tracey I. Levy
