Texas District Court Narrowly Enforces White Collar Overtime Law | Littler

On June 28, 2024, the United States District Court for the Eastern District of Texas issued a limited injunction against a new U.S. Department of Labor rule that increases the minimum wage that certain managerial, administrative, and professional (EAP) employees must earn to qualify for the so-called “white-collar” exemption under the Fair Labor Standards Act (FLSA). However, the injunction is limited to the state of Texas in its role as an employer of state employees—businesses in Texas (and nationwide) are not currently protected from the scheduled increases by the injunction, although other challenges to the rule, including a nationwide injunction, remain pending. The first phase of the increase is set to go into effect on July 1, 2024, and the second increase is set to go into effect on January 1, 2025.

Background

The FLSA generally requires an employer to pay an employee time and a half (“overtime”) if the employee works more than 40 hours in a week. However, the statute exempts certain employees from this requirement, most notably certain EAP employees under the white-collar exemption. To qualify for the white-collar exemption, an employee must generally meet a three-pronged test: the employee must be paid on a salary basis, iebe paid a fixed and pre-agreed amount each week, regardless of the amount or quality of work done (the ‘base salary test’); the employee’s primary job must be to perform duties that are exempt from the EAP (the ‘duties test’); the employee must earn a minimum wage (the ‘salary test’).

In April of this year, the DOL issued final regulations raising the salary threshold for white-collar workers (which was last updated to the current $35,558 per year in 2019). The final regulations raise the minimum wage in two steps. First, using the same methodology as in 2019, the rule raises the salary threshold to $43,888 as of July 1, 2024. That’s a 23% increase from the current level. Then, in January 2025, the rule raises the salary threshold to $58,656. That increase is based on the new methodology and represents a 64.9% increase. And from that point on, the rule provides for automatic updates every three years. The new methodology sets the salary threshold at the 35th percentile of full-time, nonhourly workers in the lowest-wage census region (currently the South). That methodology will be used to update the salary level going forward. The new overtime rules for white-collar workers only raise the salary test threshold; they do not introduce any changes to the criteria for determining the base salary or to the scope of duties.

The final rule also raises the minimum wage for highly compensated workers (although this exemption is not recognized in every state). This increase will also go into effect in two stages. First, on July 1, 2024, the salary threshold will increase from $107,432 to $132,964 per year (a 23% increase). Second, on January 1, 2025, it will increase to $151,164 (a 41% increase from the current level). The new level will be tied to the 85th percentile of all nonhourly workers nationwide. And like the thresholds for white-collar workers, it will be updated every three years.

Legal challenge

The State of Texas sued the DOL, arguing that the increased salary threshold was so high that it constituted an unlawful “wage-only” test and thus exceeded the DOL’s authority under the FLSA. In ordering a stay of enforcement of the rule against Texas, the court found that the state would likely prevail on the merits of its claim, finding that the increased threshold “effectively eliminated” the duty test and was therefore entitled to an injunction. However, the court limited the remedy to Texas in its role as employer; it did not extend the injunction to businesses in Texas (or anywhere else in the country). That said, at least two other challenges to the rule are pending, including one in the Northern District of Texas that specifically seeks a national injunction. As of this writing, that motion is still pending before the court. A third lawsuit filed by a coalition of trade associations and businesses is also pending, although an injunction has not yet been sought in that case. This case is pending in the same court as the Texas case; the cases have been consolidated for future consideration. A substantially similar overtime regulation issued by the DOL was found to be invalid and ultimately overturned altogether.

The legal landscape here is changing rapidly, and Littler’s Workplace Policy Institute will keep readers informed of significant changes. In the meantime, employers should review their payroll and evaluate their classification policies to determine what is necessary to comply with the new overtime rules, if and when they take effect. Employers may need to increase wages or reclassify currently exempt employees. This decision can be complicated and should be made with the guidance of an experienced attorney.