Ph: 404.844.4130
Fax: 404.844.4135
3212 Northlake Pkwy #450906
Atlanta, GA 31145

The federal 5th Circuit Court of Appels has ruled that the U.S. Department of Labor (DOL) has the power to set a salary basis floor in order for workers to be considered exempt from overtime pay. Given the Supreme Court’s recent ruling that curtailed a great deal of power held by federal agencies and instructed federal judges to exercise their own independent authority when ruling on these types of rules, the September 10, 2024 ruling is by no means the final word on this issue. But, a three-judge panel from the conservative 5th Circuit agreed with the DOL and upheld the salary basis floor of $58,656,  just months before the new rule takes effect on January 1, 2025.  Thus, in order to treat employees as exempt from overtime, the employee must earn an annual salary of at least $58,656 as of the first of the year.

Background

Congress passed a federal wage and hour law almost 90 years ago – the Fair Labor Standards Act (FLSA) – saying that employees must be paid an overtime premium of 1.5 times their regular rate of pay for all hours worked beyond 40 in a workweek unless their salary and duties qualify them for an exemption from the overtime provision. The DOL then issued regulations to spell out which workers fall under the administrative, executive, and professional exemptions, collectively known as the “white-collar” exemptions.

The regulations also say that employees must be paid a certain minimum salary in order to be deemed exempt from overtime pay under the white-collar exemptions. Effective July 1, 2024, the DOL raised this minimum annual salary level from about $35,000 to $43,888 ($844/week), and will raise that floor to an annual equivalent of $58,656 at the start of 2025.

And while another court battle is ongoing about whether this large increase is proper, that’s not what was before the 5th Circuit.  The Appeals Court was deciding whether the agency had the authority to set any floor whatsoever.  An employer owning 13 Dairy Queen franchises in and around Austin, Texas, challenged the DOL’s authority to set any salary floor at all, arguing that the DOL’s “expansive” view of its own authority has no basis in the text or structure of the FLSA, and is inconsistent with legal doctrines that call for Congress to create laws to answer major questions. While the employer lost at the lower court in 2023, it gained renewed hope this past summer with the Supreme Court’s decision in Loper Bright Enterprises v. Raimondo overturning the long-standing Chevron doctrine, significantly reducing the power of federal agencies and placing more authority in the hands of judges. Rather than being forced to defer to a federal agency’s position when a statute is open to interpretation, the courts are now free to provide an independent judicial interpretation in such situations.

5th Circuit Decision

The 5th Circuit used its independent power to agree with the DOL’s position and keep the salary basis test alive, finding that Congress gave the DOL explicit authority to define and delimit the terms of the overtime exemptions, and therefore the DOL was not acting outside its authority by setting a salary floor. The court noted that the DOL has “consistently issued minimum salary rules for over 80 years, and its authority to do so has not been questioned by Congress.”   Given that lawmakers were not concerned about the DOL’s actions, the 5th Circuit determined that the courts should not be concerned either.

National Injunction is Still Possible

This is a major victory for the DOL, but the pathway to the January 1 salary hike is still not without obstacles. As noted above, other court challenges attacking the salary bump are pending, and at least one court has ruled that the DOL doesn’t have the power to raise the amount to the $58,656 level set to take effect at the start of 2025. While that ruling only impacts Texas state employees, it’s possible that judges could decide to extend that ruling nationwide and halt the overtime rule from taking effect for all employers across the country.

Preparing for the Increase in the Salary Threshold

While waiting for a final ruling and the arrival of the new year, employers should also consider: 

  • Carefully evaluating your options, costs, and budgets
  • Performing a privileged review of your classifications with legal counsel
  • Preparing to reclassify employees as needed (especially if their work does not satisfy the duties test)
  • Reviewing your HR, payroll, and timekeeping systems to ensure you can capture all time worked and properly calculate overtime
  • Preparing communications for employees and their supervisors clearly explaining any changes and providing written notice if required by state law
  • Conducting an annual compensation review (including a pay equity audit) to holistically evaluate pay practices

If you have any questions about what steps you need to take to get ready for the implementation of the new rule, feel free to contact our attorneys, Jay Rollins or Debra Schwartz by calling  404.844.4130.

Related Posts