Overtime rule overturned: Employers face decisions on pay and classification

A recent federal court decision has many employers breathing a sigh of relief, while others are now in a state of uncertainty regarding overtime pay.

The U.S. District Court for the Eastern District of Texas vacated the Biden administration’s overtime rule, effectively reverting the salary threshold for white-collar exemptions to the 2019 level of $35,568 annually.

The ruling, which applies nationwide, has significant implications for employers who had already implemented changes. Phase one raised the salary threshold to $43,888 in July 2024 and phase two was set to reach $58,656 by January 1, 2025.

The ruling

The court deemed the Biden rule an overreach of authority, criticizing the steep rise in the salary threshold and the automatic increases scheduled every three years.

The court said the Department of Labor (DOL) increase was so high that it essentially rendered the duties test irrelevant, and that the automatic salary increase violated “notice and comment” requirements.

While it is still possible the DOL will appeal, political analysts predict the Trump administration will withdraw support for any legal defense. Employers should remain watchful.

Navigating the new landscape

Many businesses had already taken steps to comply with the anticipated changes, including raising salaries above the new thresholds to maintain exempt status for certain employees or adjusting staffing to avoid overtime costs.

Legally, employers can roll back those salaries to pre-raise levels, provided they adhere to state laws and contractual obligations. Businesses also may switch employees back to exempt status and increase their hours, provided employees meet the duties test and are paid on a fixed salary basis.

Employers should keep in mind, however, that salary decreases and reclassifications can impact employee morale and job satisfaction. Ensure transparent communication and prepare for potential implications.

State laws and next steps

While the federal rule has been overturned, state laws regarding overtime pay still apply.

Some states, such as California, Colorado, Maine, and New York, have salary thresholds above the federal $35,568 minimum.

For businesses that proactively implemented salary increases, maintaining those raises may be a prudent strategy, despite the added cost. Ultimately, businesses must weigh the financial implications against the impact on employee morale and potential legal risks.