U.S. District Court Does Not Prevent Department of Labor’s New Overtime Rule From Taking Effect (For Most) (For Now)

As widely covered, the United States Department of Labor (“DOL”), in April 2024, issued a new rule that increased the salary thresholds for the overtime exemptions for executive, administrative, and professional (“EAP”) employees. We analyzed the new rule in a previous alert, available here. As readers will recall, the new DOL rule set forth a series of salary threshold increases — one set of relatively modest increases to go into effect on July 1, 2024, another set of more significant increases that go into effect on January 1, 2025, and a mechanism for automatic triennial increases. Unsurprisingly, the rule was challenged by multiple entities — primarily via a lawsuit filed by the State of Texas. AGG summarized these legal challenges, as well as those filed in response to other recent agency rulemaking, in a prior alert, available here.

Despite these lawsuits, the July 1, 2024, deadline came and went without any immediately clear relief for affected employers. But that does not mean that the DOL rule will continue to survive judicial scrutiny, particularly in light of the Supreme Court of the United States’ recent decisions limiting the reach of executive agency action.

The leading challenge — State of Texas v. United States Department of Labor — is pending in the United States District Court for the Eastern District of Texas. On Friday, June 28, 2024, the district court handed a narrow victory to the State of Texas, granting its request for a preliminary injunction and enjoining the new rule from going into effect, but only as to employees of the State of Texas. This means that all other employers are required, at least for now, to implement the new DOL rule and either begin paying overtime to EAP employees who no longer meet the salary thresholds or increase those employees’ salaries to meet the new thresholds and remain exempt.

Although the ruling has little immediate effect, the court in the State of Texas case gave strong signals about how it might ultimately decide the validity of the DOL rule. Noting that the EAP exemption, as set forth in the Fair Labor Standards Act, is based on employees’ job duties, not salary, the court pointed to the DOL’s representation that “one million exempt employees will wake up on July 1 non-exempt — i.e., entitled to overtime pay . . . [o]n January 1, the same thing will happen to another three million employees.”

But, at the same time, the court reasoned, “[n]othing about these employees’ jobs will have changed. Their duties and salaries will be identical both before and after the increases.” The court then used the DOL’s own words against it, noting that, in connection with a prior rule change in 2016, the DOL acknowledged that “it has no ‘specific Congressional authorization’ to implement an ‘automatic updating’ mechanism, or for that matter ‘a salary level or salary basis test.’” Thus, the court concluded that the DOL rule would “‘effectively eliminate’ consideration of whether an employee performs ‘bona fide executive, administrative, or professional’ capacity duties in favor of what amounts to a salary-only test.” Such a rule, according to the court, would exceed the DOL’s statutory jurisdiction.

It also bears mentioning that the court took the opportunity to reference another pivotal Supreme Court decision — Loper Bright Enterprises v. Raimondo — which was handed down earlier in the day on June 28, 2024. Loper Bright overturned the longstanding Chevron doctrine of deference to federal agency authority, and the State of Texas court relied upon the new standard in its order, acknowledging its ability to exercise “independent judgment” in determining whether an agency exceeded its statutory authority. After Loper Bright, we expect to see an expanded role for district courts examining agency rulemaking, and the State of Texas case is no exception.

Moving forward, employers should monitor the State of Texas challenge, as we expect the court to enter a final order on the rule’s validity before the January 1, 2025, salary increase takes effect. In the meantime, employers should also prepare to comply with the new thresholds implemented as of July 1, 2024, in the DOL rule as written, unless and until additional injunctive relief is granted.

AGG’s Employment team is continuing to monitor these developments. If you have any questions regarding how the new rule may affect your business or the effect of the recent legal challenges, please contact a member of the Employment team.