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E.D.Tex.: Texas Court Strikes Down DOL Overtime Rule
Texas v. United States Department of Labor
Last week, in a long-awaited decision, the U.S. District Court for the Eastern District of Texas struck down the 2024 Rule issued by the U.S. Department of Labor (DOL), which aimed to increase the salary threshold for the executive, administrative, and professional (EAP) exemptions under the Fair Labor Standards Act (FLSA). The rule which would have provided overtime for approximately 4,000,000 workers who do not currently receive it.
The case continued a back and forth in which Democrat administrations have sought to expand workers’ rights by increasing the salary thresholds required to maintain overtime exemptions, and Republican appointed judges have invalidated the rules, stripping workers of enhanced rights provided by DOL promulgated regulations.
Background of the Case
The FLSA mandates that most employees must receive at least the federal minimum wage and overtime pay for hours worked beyond 40 in a workweek. However, certain employees are exempt from these requirements, particularly those classified under the EAP exemptions. Historically, the DOL has set a minimum salary level to qualify for these exemptions.
In April 2024, the DOL announced the 2024 Rule, which significantly raised the minimum salary threshold for EAP employees—from $684 to $844 per week starting July 1, 2024, and further to $1,128 per week by January 1, 2025. Additionally, the rule included an automatic indexing mechanism for future salary increases based on contemporary earnings data every three years.
The Legal Challenge
Texas, along with a coalition of business organizations, argued that the DOL overstepped its statutory authority by effectively prioritizing salary over the actual duties performed by employees. They contended that the changes would displace the duties-based test required by the FLSA and improperly classify millions of employees as nonexempt from overtime pay, despite no changes to their job responsibilities.
The court’s analysis began with the text of the FLSA, which does not explicitly specify a minimum salary for the EAP exemption. The DOL has historically exercised its authority to define and delimit this exemption, but the court emphasized that such authority has limits—primarily that the focus should remain on the duties performed by employees rather than solely their salary.
The Court’s Ruling
Judge Sean D. Jordan ruled in favor of Texas and the business organizations, stating that the DOL’s 2024 Rule was an unlawful exercise of agency power. The court held that the rule’s changes effectively eliminated the consideration of job duties in favor of a predominately salary-based exemption test, contravening the FLSA’s intent.
The ruling detailed that the DOL’s increase in salary thresholds and the implementation of automatic indexing would improperly classify millions of employees as nonexempt, thereby violating the fundamental purpose of the EAP exemption, which is to protect workers who perform executive, administrative, or professional duties.
Implications of the Decision
This ruling has far-reaching implications for employers and employees alike. By vacating the 2024 Rule, the court has reinstated the previous salary thresholds and reaffirmed the importance of the duties test in determining exemption status.
This order effectively reverts the minimum weekly salary requirement back to the 2019 number, $684 per week (except in jurisdictions, such as California and New York, which have higher minimum requirements under state law). In the months leading up to the July 1 increase, many employers reclassified workers as nonexempt. In theory, employees who were converted to nonexempt due to the July 1 increase may now be reclassified to exempt, if desired.
It is anticipated that the DOL will appeal this decision to the Fifth Circuit. However, any appeal most certainly will not be resolved by the Jan. 1 effective date of the next planned increase, and the new administration may ultimately abandon the appeal at a later date if it is still pending. The 2019 rule, which is now once again in effect, was issued under the previous Trump administration.
Key takeaways at this time are:
- The minimum salary for exempt status under federal law is once again $684 per week, with limited exceptions.
- Employees who earned between $684 and $844 per week and were reclassified as nonexempt as a result may be reclassified as exempt, provided they continue to meet one of the applicable job duties tests.
- The anticipated increase to $1,128 per week on Jan. 1, 2025, will not occur.
- Any future revisions to the minimum salary will not face an uphill battle, ostensibly freezing wages for millions of Americans paid relatively moderate salaries.
Click Texas v. United States Department of Labor to read the entire decision.
Fifth Circuit Strikes Down DOL’s Tip Credit Regulation
Restaurant Law Center v. Department of Labor
Due to its conservative bent, the Fifth Circuit has long been a hotbed of litigation challenging regulations of all sorts, typically in cases brought by business groups. In a recent decision, the then-current Department of Labor (DOL) regulation setting limits on when a business can take advantage of the FLSA’s tip credit rules and pay less than the regular minimum wage was struck down, potentially opening the floodgates for restaurants and bars to pay sub-minimum wages to a much greater extent than previously, at least in certain parts of the country where the regulation had arguably displaced case law allowing restaurants free reign as long as a portion of employees’ work constituted “tipped” duties. Taking up the regulation, the Fifth Circuit vacated the regulation, voiding the provision nationwide.
Background
The Fair Labor Standards Act (FLSA) permits tipped employees to receive $2.13 per hour in a direct wage, so long as the combination of their direct wage and tips equals at least the $7.25 hourly minimum wage.
Consistent with relatively longstanding agency authority (save for the Trump DOL), in 2021, the DOL issued a final rule that codified earlier DOL guidance, often referred to as the “80/20” or “20%” rule. That rule, codified DOL agency position that first appeared in the DOL’s field handbook in 1988, and placed limits on the amount of time an employee could spend on non tip-producing work each week, to the extent the employer wished to take advantage of the tip credit and pay such a worker less than the regular minimum wage. Specifically, the regulation limited such non-tipped work to 20% of the employee’s hours in a given workweek, if an employer wished to take the tip credit.
The final rule distinguished between tip-producing work, such as waiting tables and bartending, and work that directly supports tip-producing work, such as setting and bussing tables. The final rule challenged also imposed a new “30-minute” restriction. Under the 30 minute rule, employers could not pay the tipped minimum wage for work exceeding 30 continuous minutes during a shift that a tipped employee may spend performing tasks that are “directly supporting” tipped work.
The Decision
In a decision directly contrary to that from at least 2 sister circuit courts that preceded the current rule, the Fifth Circuit held the 2021 tip rule is contrary to law and arbitrary and capricious because it draws an impermissible, arbitrary line between tip-producing and tip-supporting work, and conflicts with the statutory scheme that Congress established under the FLSA. Thus, the Fifth Circuit struck down and vacated the rule.
Where Does That Leave Us
The appellate court’s decision vacating the 2021 tip rule is a win for restaurant and hospitality industry employers who would prefer to pay sub-minimum wages for as many hours as they can, relying largely on the generosity of their patrons to ensure that their employees make a fair wage. It is unclear whether the DOL will seek en banc review before the full Fifth Circuit or petition the Supreme Court for review, given both Court’s currently overtly business and anti-regulatory bent.
In the meantime, the vacation of the 80/20/30 rule means that the rules in place prior will govern. However, because the case law differs in different places across the country, with some courts like the 8th and 11th Circuits signaling approval of the preceding 80/20 rule, it appears that the law might differ depending on where a business operates in the country. Moreover, the Fifth Circuit indicated that the “dual jobs” regulation notwithstanding its opinion. Thus, there is a likelihood that what was previously characterized as an 80/20 issue will morph to dual jobs litigation, where employees will contend that they are performing duties so untethered from their principal duties as servers that they are actually performing 2 distinct jobs (and the employer violated the law by taking the tip credit relative to the non-tipped job).
This sets up yet another election issue as well. While both Trump and Harris have signaled that they might be open to a change of tax law to cease taxing tips, the prior Trump DOL supported regulations which allowed restaurant/bar/club employers to pay significantly lower direct wages for many more hours of “non-tipped” work, whereas the regulation struck down was a product of the Biden/Harris DOL. Thus, it’s likely the Trump DOL would again fight to roll-back tipped employees’ rights, where as a Harris DOL would seek to protect workers and move towards new regulation similar to that which was struck down, but which might pass muster in the courts in the years ahead.
In the meantime, many states’ wage and hour laws will continue to provide more protections for tipped employees than the current federal laws.
If you believe that your employer is not paying you in compliance with applicable federal and state laws, contact Andrew Frisch for a free consultation today.
Click Restaurant Law Center v. Department of Labor to read the entire decision.
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