On November 15^th, a federal judge in Texas struck down the U.S. Department of Labor’s recently expanded overtime rule nationwide that would have made approximately 4 million more U.S. workers eligible for overtime pay (click here to see more about the recently expanded overtime rule). The rule, which took effect in July, based overtime eligibility on wages rather than job duties.

 

U.S. District Court Judge Jordan ruled that the U.S. Department of Labor (DOL) exceeded its authority by raising the salary threshold too high for exempt employees (in two phases from $35K to $44k and then $59K) and allowing for automatic adjustments every three years.

 

The judge not only struck down the phase-two increase to $59K set to take effect on January 1 but also knocked down the first increase that took the salary level to $44K in July and the automatic three-year adjustments – setting the threshold back to roughly $35K for now ($35,568 per year). While the DOL is expected to appeal the ruling, the incoming Trump administration is not expected to pick up the legal battle right away – which means employers have decisions to make on how they want to proceed with their compensation plans. Here’s what you need to know about the ruling and questions to consider now that the rule has been struck down.

 

 

The Fair Labor Standards Act requires employers to pay employees overtime for working more than 40 hours in a week but it exempts some executive, administrative, and professional (EAP) workers. To be exempt, workers must be salaried, their work must meet EAP duties, and they need to earn a minimum salary.

Back in June, a federal district court temporarily halted the recently expanded overtime rule as it applied to the state of Texas as an employer while the court heard the underlying legal challenge. Several business groups joined Texas and asked the court to vacate the rule completely. This month, the judge heard arguments and agreed that the rule should be blocked nationwide.

The DOL can appeal the ruling, but there is the upcoming change in administration on January 20. Looking to the past, there was a proposed overtime rule in 2016 that was blocked from taking effect. In 2017, the Trump administration ensured the Obama-era rule never took effect. It then issued a new overtime rule expanding overtime pay obligations but to fewer workers than what the Obama rule would have done.

What you do next will depend on what you have already done this year with reclassifying some employees to non-exempt and raising salaries for others to meet the July 1 threshold – and perhaps already communicated your plan for the January 1 salary hike.

 

You could but you probably don’t want to as it would be unpopular to backtrack now. Although you may have the legal right at the moment to revert, rolling back the changes now would result in a blow to employee morale. Before making any major moves, you may want to see what happens with a potential appeal and how the new administration will respond. If you did decide to do this, you should note that some states require advance notice of wage changes, so you should check your specific requirements. Regardless of the state law, you should clearly communicate changes before they take effect.

 

If you have said nothing about the potential increase you can say nothing. If you have already predicted the increase, you may consider communicating to your employees that the expected changes are going to be delayed and you will let them know you will continue to monitor the situation and make adjustments if and when appropriate. If there is an expectation that salary levels would be increased you will want to carefully construct your message.

 

If you have already factored the changes into your 2025 compensation plan, you are free to move forward and raise compensation levels on January 1 (or whatever date you choose). In any case, the salary threshold is a minimum level and employers can always choose to pay exempt employees more. And, non-exempt status is the default, so you have the option of maintaining non-exempt status for any newly classified employees.

 

For making changes to salary, please reach out to your Payroll Coordinator. Remember minimum wage increases in many states each year on January 1. More than 20 states, and additional jurisdictions, will raise the standard hourly minimum wage available to workers on January 1, 2025.

 

For questions on the DOL overtime rule and guidance on HR best practices, please reach out to your FrankAdvice HR Consultant.