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UPDATE: U.S. Employment Law: Court Invalidates Higher Salary Threshold for Exempt Employees
UK companies with U.S. based employees may be reeling from a bit of whiplash recently, having prepared for proposed changes to several federal rules impacting employers only to see those rules later invalidated by the courts:
- First, in August 2024, we saw the proposed rule that would have prohibited virtually all non-compete agreements between employers and their workers invalidated by a federal court in Texas, on the eve of the rule’s proposed implementation date. Given the rule’s invalidation, it remains lawful under federal law to enter into non-compete agreements with employees. However, employers must ensure compliance with applicable state laws, and some states continue to restrict or prohibit the use of non-compete agreements. Our original blogs on this topic can be found here: UPDATE: US Court Issues Nationwide Prohibition Against FTC Enforcement of Non-Compete Ban and here: Key Upcoming Changes to Non-Compete Laws: What Steps Should Employers with US Employees Take?
- Then, in mid-November, we saw a rule that raised the minimum salary level for salaried “exempt” employees invalidated, again by a federal court in Texas, this time after the rule had already taken effect. U.S. law requires that certain employees be paid an hourly rate for each hour worked plus overtime for any hours worked in excess of 40 in a workweek (hourly employees are known as “non-exempt”). However, some employees are “exempt” from this obligation and can, instead, receive a salary that does not fluctuate based on the number of hours worked if they meet certain criteria, among which is receipt of a salary above a certain threshold. It is this salary level test that is at issue.
Prior to July 2024, the minimum salary required to pay an employee on a salaried exempt basis was at least $684/week (annualized to $35,568 per year). That threshold changed when the U.S. Department of Labor, a federal agency, passed a rule last spring raising the minimum annual salary level, first to $43,888 on 1 July 2024 and then to $58,656 on 1 January 2025, with updates scheduled every few years thereafter. Our original blog on this rule can be found here: Key Upcoming Changes to United States Wage: What Steps Should Employers with US Employees Take?
The rule went into effect in July 2024, but its fate was uncertain because several lawsuits had been filed challenging the authority of the Department of Labor to issue such a rule. In mid-November, a judge in Texas overseeing one of those lawsuits agreed with the challengers and struck down the rule in its entirety nationwide. This means the threshold reverts to the previous one, and employees need only receive a minimum annual salary of $35,568 to meet the salary level test.
The return to the lower salary threshold is welcome news for some employers because it makes more employees eligible to be paid on a salaried exempt basis, simplifying payroll and potentially saving company costs in overtime avoidance. Employers with employees who are currently exempt but whose salaries do not meet the higher threshold that would have been required in January ($58,656) no longer must decide between raising salaries to meet that threshold or converting those employees to non-exempt hourly employees. However, employers must take care because the salary level test is only one of the required criteria to lawfully classify an employee as exempt. Employees must also perform certain non-manual and independent duties, and some state laws impose additional restrictions (including higher salary thresholds in places like California and New York). Please let us know if we can help you determine how this return to the previous salary level impacts your U.S. workforce.
Although this may be welcome news for some employers, it also illustrates a particular challenge of operating in the U.S. where the fate of agency rules is under increasing judicial scrutiny. Both recently invalidated rules – the salary level test and the proposed ban on the use of non-compete agreements – were issued by federal agencies led by presidential appointees. These federal agencies have historically been one of the mechanisms by which presidents can impact policy: by directing their appointees to pursue the president’s agenda through rulemaking. Until recently, courts have generally deferred to these federal agencies. However, several recent decisions, including one by the U.S. Supreme Court, suggest that courts will review such agency rules with increasing scrutiny moving forward and may be more inclined to invalidate agency rules. In other words, we expect the whiplash to continue.
How can you plan to grow your U.S. operations in this unpredictable regulatory climate? Companies should remain knowledgeable about proposed regulatory changes, ideally planning well in advance for multiple contingencies. Take advice on your options so that you can maximize your growth potential and minimize your legal risk. As always, the U.S. Team at MBM Commercial is happy to assist you on your growth journey.
