BACK TO THE WAY IT WAS

Steven Cesare, Ph.D.

An inquisitive business owner from what’s left of the state of California, called me the other day to talk about the recent and proposed changes to the Fair Labor Standards Act (FLSA) exemption status definition. As was presented in the June 4^th Tuesdays with Steve posting, the Biden regime proposed raising the Salary Basis threshold from $35,568 to $43,888 by July 1, 2024 and then again to $58,656 on January 1, 2025, with automatic increases every three years thereafter; a 65% increase across a six-month timeframe.

The Salary Basis test, in conjunction with the Duties test, determines the eligibility criteria for employees to receive overtime pay. If an employee’s position meets or exceeds both test standards, the employee is classified as “exempt” preventing the employee from receiving overtime compensation. Conversely, if the employee’s position fails the Salary Basis test and/or the Duties test, the position is de facto classified as “non-exempt” thereby enabling all incumbents to become eligible to receive overtime pay.

By raising the Salary Basis threshold, business owners would potentially be required to provide overtime pay to a larger segment of their workforce, contributing to significant increases to their payroll costs with derivative implications for their bid rate proposals, gross margin metrics, and net profit expectations.

On Friday, November 15th, a federal judge in Texas rescinded the 2024 and 2025 increases to the FLSA Salary Basis test threshold by stating the rule exceeded the Department of Labor’s statutory authority. Given the nation-wide scope of the rule, the federal judge concluded that the rule is struck down on a nation-wide basis. In specific, the judge’s ruling blocked all three key components of the 2024 overtime rule:

The increase in the minimum weekly salary for most overtime-exempt employees to $844 that took effect July 1, 2024;
The increase in the minimum weekly salary for most overtime-exempt employees to $1,128 that was supposed to take effect January 1, 2025; and
The automatic inflation adjustments that were supposed to take effect starting July 1, 2027, and every three years thereafter.

In sum, the minimum weekly salary now returns to $684 (i.e., $35,568 annually). Thus, the Salary Basis test standard is now back to the way it was, before the Department of Labor’s rule took effect last summer.

But Steve, what do I do about all those employees who received the then-legally required pay increase to meet the July 1^st standard of $43,888?

As a capitalist, I suggest you discuss this matter with your external legal counsel.

As a Human Resources professional, I sincerely recommend leaving those pay increases in effect.

Reducing an employee’s pay for any reason, legitimate or otherwise, is always risky, assuredly providing irreparable damage to the employment relationship with the impacted employee(s), with even more long-lasting damage to the entire company culture. While the employer certainly has the discretion to change the exemption status of any employee who was erroneously reclassified as non-exempt to back to exempt, I ardently suggest that you exercise caution, be careful, and consider latent consequences.

While this judicial nullification has nation-wide application, as the California business owner and I discussed at length, employers should remain aware that some states have salary thresholds that exceed the FLSA threshold, including Alaska, California, Colorado, Maine, New York, and Washington, and as such are not directly affected by this ruling.

The Department of Labor may contest the federal judge’s ruling by appealing his decision to the Fifth Circuit Court of Appeals. That said, with the impending Trump administration taking shape, the Department of Labor will likely abandon any appeal and allow the lower court’s decision to stand.

Notwithstanding collateral impact to certain employees’ pay, in general, we are back to the way it was.

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