FLSA Federal Court Ruling: What Is the Overtime Exempt Threshold?

Previously, the overtime-exempt salary threshold was increased in July of 2024, with a second increase scheduled for January 1st, 2025. However, a recent court ruling has canceled the scheduled increase and reversed the increase that took place earlier in 2024.

Here’s what you need to know about these upcoming changes and their implications for both employers and employees. 

Note: Employers can review the previous 2024 FLSA Changes, that have now been rolled back.

What is the Fair Labor Standards Act (FLSA)?

The Fair Labor Standards Act, enacted in 1938, set the foundation for labor rights, establishing key provisions such as:

• Federal Minimum Wage
• Overtime Regulations
• Recordkeeping Requirements
• Child Labor Laws
• Rules for Employees vs Independent Contractors

Over the years, the FLSA has undergone various amendments, and recently some have been rolled back.

New FLSA Update

On November 15, 2024, the U.S. District Court for the Eastern District of Texas invalidated a U.S. Department of Labor (DOL) regulation that raised the salary threshold for the "white-collar" overtime exemption under the Fair Labor Standards Act (FLSA). This decision applies nationwide, rendering the rule ineffective.

The court ruled that all three aspects of the regulation exceeded the DOL’s legal authority under the FLSA. Previously, the court had blocked the rule's enforcement against the State of Texas as an employer, but this latest decision nullifies the rule across the entire country.

The court decision was based on the following key points:

1. The DOL overstepped its authority by setting a salary threshold so high that it effectively created a “salary-only” test, overshadowing the duties-based requirement explicitly stated in the FLSA.
2. Automatic updates to the salary threshold violated the Administrative Procedure Act, as any changes must go through the regulatory process.
3. Striking down the rule nationwide was justified due to its widespread impact on employers and employees.

This is a major change, impacting the employment status of over one million employees across the country. 

What is the Overtime Exempt Salary Threshold for 2024 and 2025?

As a result of the court ruling, the overtime-exempt salary threshold for 2024, 2025, and the foreseeable future is $684 per week ($35,568 annually). This threshold reflects the most recent update that is still in effect, made in 2019.

What Should Employers Do Now?

The recent ruling certainly does no favors to employers, many of whom likely already made adjustments due to the increase that took place in July of 2024. Those who didn't have lucked out. 

Now, employers have a few options set before them to address the recent change. 

First and foremost, employers can convert employees impacted by the increase on July 1st, 2024, back to exempt status. However, it is important to ensure the employee still meets the requirements of the duties test before doing so. 

Another option is to reduce salaries so that employees are still non-exempt. However, employers should carefully assess their payroll and exemption practices. For starters, reducing salaries can not be done retroactively. 

Employers should also note that while reducing an employee's salary is legal, there are still concerns, such as: 

• Some states have their own, higher thresholds which still supersede Federal requirements
• Some states have laws requiring 30-days notice before pay changes or changes in employment status
• Reducing an employee's pay can cause disagreements and disgruntled workers

Employers who adjusted salaries back in July of 2024 in order to meet the now-invalidated thresholds should consult an HR service company before rolling back changes or making any decisions so that they are legally prepared.

Strategies for Managing the Update 

While the above options are necessary, employers should take care to manage the change as best they can.

As an HR Service company, we recommend that employees consider the following:

• Businesses that rely on freelance workers may need to reassess their hiring practices and possibly reclassify some workers, resulting in additional compliance obligations
• Employers will also need to implement better tracking systems and possibly re-evaluate their remote work policies to comply with the updated regulations
• Employers should review all jobs, and ensure proper classifications
• Employers should evaluate their compensation strategies, plans, and schedules
• Employers should address employee relations and possible morale issues (especially if reducing pay or switching back to exempt status
  • Draft carefully worded communications, and be transparent

Otherwise, employers should make sure they understand the effect of the recent ruling.

Key Implications of the Court's Decision

As a result of the court's ruling, employers should note the following key implications:

• January 2025 Increase Cancelled: The scheduled salary threshold increase for January 1, 2025, will no longer take effect.
• July 2024 Increase Struck Down: The court also invalidated the increase that had already been implemented on July 1, 2024. While this ruling may have limited immediate impact for many employers who already adjusted their payrolls, it legally nullifies the change.
• Automatic Escalator Provision Invalidated: The regulation's provision for automatic salary threshold increases every three years was also deemed unlawful.

Contact an HR Service Company

Companies will need to invest in more robust HR and payroll systems to help maintain compliance and avoid penalties for inadequate recordkeeping. You can also follow this FLSA compliance checklist to prepare for the salary threshold increases.

If you need help in complying with the updated FLSA regulations, you may want to consider reaching out to an HR outsourcing company to see how they may be able to help and assist you.