On Nov. 15, 2024, a federal judge in the United States District Court for the Eastern District of Texas struck down a Biden-era rule that would have expanded overtime payments for millions of employees through a modification of the Fair Labor Standards Act (FLSA) Executive, Administrative, or Professional (EAP) Exemption.

In Plano Chamber of Commerce, et al. v. United States Department of Labor, et al., the Plano Chamber of Commerce challenged a rule modifying the EAP exemption in the FLSA. That exception provides employees categorized as executive, administrative, or professional are exempted from overtime payments. The FLSA permits the Department of Labor (DOL) to promulgate rules to “define and delimit” the EAP Exception, through which it created several iterations of a “duties based” test to determine whether employees fit into one of those three categories. Though there is no minimum salary level that qualifies an employee for the EAP exception, the DOL has traditionally proffered rules setting such a minimum salary.

On April 26, 2024, the DOL issued a final rule that increased the minimum salary threshold for the EAP exemption in two phases. On July 1, 2024, the threshold rose from $684 per week to $844 per week. On Jan. 1, 2025, that threshold was set to increase again to $1,128 per week. Between the two phases, the DOL estimated that the new rule would change the EAP-exempt status of approximately four million employees nationwide.

The DOL’s rule also provided an automatic mechanism to increase the minimum salary threshold on a triannual basis based on “contemporary earnings data.” Collectively, the DOL estimated the rule could “result in millions more employees becoming nonexempt” in coming years.

The State of Texas and certain trade organizations filed parallel suits challenging the rule, arguing that the changes to the minimum salary level exceeded the DOL’s authority under the FLSA because it “increases the minimum salary for the EAP Exemption to a level that effectively displaces the duties-based inquiry required by the FLSA’s text with a predominant salary-level test.” The court granted a preliminary injunction against the implementation of the rule in Texas, but the July 1, 2024, increase resulted in approximately one million employees across the country becoming nonexempt at that time.

The court’s decision relied heavily on an analysis of FLSA historical rulemaking regarding the EAP exemption, emphasizing its historical recognition of three aspects of a salary-level test that ensured it would not displace a duties-based test for the EAP exemption. In particular, it noted that delineating between exempt and non-exempt employees on the basis of salary was not the intent of the exemption and the rules propounding it but rather based on the duties and character of employees’ work. Therefore, the DOL noted that “any salary-level increase must have as its primary objective the drawing of a line separating exempt from nonexempt employees rather than the improvement of the status of such employee.”

The parties filed cross motions for summary judgment, and the court ultimately agreed that the rules exceeded the DOL’s authority. In resolving the salary-level’s role in the current three-part test under the FLSA that considers duties, method of payment, and salary, the court relied on the plain meaning of “executive,” “administrative,” and “professional.” It found that the ordinary meaning suggested, “a functional inquiry into the nature of an employee’s duties within his workplace and industry, rather than his compensation,” and, in short, “the term capacity refers to an employee’s function or duties in the workplace.”

The court then analyzed the DOL’s power to “define and delimit” those terms as provided by the FLSA but noted it cannot “enact rules that replace or swallow the meaning those terms have.” “As applied to a minimum salary level, this occurs when the use of salary as a proxy frequently yields different results than the characteristic Congress initially chose because then use off the proxy is not so much defining and delimiting the original statutory terms as replacing them.”

Among other issues, the court decided that the salary-level increases “effectively displace the FLSA’s duties test with a predominate — if not exclusive — salary-level test.” As was true of a similar rule passed in 2016, the new minimum salary levels “effectively eliminate[d]” considerations of whether an employee performs “bona fide executive, administrative, or professional capacity” duties and considers only the employee’s salary. Accordingly, the court found that “[n]othing in [the FLSA] allows the Department to make salary rather than an employee’s duties determinative of whether a bona fide executive, administrative, or professional capacity employee should be exempt from overtime pay.” Because the salary level would predominate over duties for millions of employees, aligning with the 35^th percentile of full-time employees, the exclusion is “tied exclusively to a percentile of average salary levels for salaried employees, in a specific part of the country, regardless of duties.” Indeed, upon the adjustments, millions of employees’ statuses would have changed, but none of their jobs would have.

Accordingly, the court granted summary judgment and enjoined the rule. Unlike the preliminary injunction, the court’s ruling applies across the country. That poses a conundrum for employers. For employers who previously adjusted their pay practices to comport with the new rule, they now have to decide whether to roll back those adjustments in light of this decision or to await its ultimate resolution in either the Fifth Circuit Court of Appeals or possibly the U.S. Supreme Court. For employers who did not adjust to follow the rule, the gamble paid off. But do these employers continue to gamble on the possible affirmation or reversal of this decision on appeal? The answers to these questions are complex and should not be considered without input from skilled counsel.