The case was brought by lawyers for Evelyn Coke, a 73-year-old retiree who spent more than two decades in the home care industry helping the ill and the elderly.
Now in failing health, Coke said her employer never paid her time and a half for all her extra hours on the job.
Lawyers for Coke challenged the Labor Department regulation, and the 2nd U.S. Circuit Court of Appeals in New York City ruled in the workers' favor.
The appeals court said it was "implausible" that Congress would have wanted the Labor Department to wipe out protection for an entire category of workers.
The Labor Department wrote the restrictive regulation after Congress expanded the law's coverage.
Paying overtime would cost billions, the home care industry says.
In New York City, the annual cost of the Medicaid-funded Personal Care Services Program would rise by at least a quarter of a billion dollars if the appeals court decision is allowed to stand, the city says. The Personal Care Services program pays 90 private companies to send 60,000 home attendants to the homes of low-income elderly and disabled.
Coke's former employer, Long Island Care at Home Ltd., says it would experience "tremendous and unsustainable losses" if it had to comply with federal overtime requirements.
The Bush administration and the company that employed Coke opposed her lawsuit.
If Congress had wanted to apply the law's wage and overtime provisions to such workers, "it easily could have done so," the Bush administration said in papers filed in the case. Instead, Congress assigned the secretary of labor the task of deciding the issue, the administration said.