While the return of spring is a happy time for baseball fans, employers may be feeling a little less festive this April. Companies across the U.S. have been bracing for two significant regulations that were expected to be made final this month: the Federal Trade Commission (FTC’s) broad ban on non-compete agreements, and the Department of Labor (DOL’s) increase to the salary threshold for exemptions to overtime pay. Yesterday, they both arrived, marking a potentially costly double play for companies who rely on non-competes to protect their competitive advantage, and employers with salaried white-collar employees on their teams. We break down the action below:
Many businesses require their employees to sign non-competition agreements. The rationale is simple: Businesses expend capital to accumulate institutional knowledge, market share, and goodwill with its customers. One of the last things a business wants is to pay an employee and give them access to those assets, only to see the employee exploit that access to the detriment of the business by using it on behalf of a competitor or their own competing business. If the FTC has its way, businesses will lose this important defense.
Over a year ago, we described the FTC’s intent to issue a rule effectively banning the use of non-competition agreements with nearly all categories of employees. On April 23, 2024, the FTC announced its onerous final rule on the issue, which takes effect 120 days after it is published in the Federal Register. As expected, the FTC has taken the position that such long-existing and relatively ubiquitous agreements constitute unfair competition. According to the FTC, non-competition agreements are detrimental to competition in labor markets because they inhibit employees from matching with ideal employers, negatively affect product and service markets, and stifle the formation of new businesses. Indeed, the FTC takes the position that the new rule will result in the creation of 8,500 new businesses.
For all intents and purposes, all non-competition agreements will be banned and unenforceable once the rule takes effect. Most notably, this is not limited prospectively and applies, in almost all circumstances, to existing non-competition agreements. Thus, not only will such agreements be prohibited going forward, but existing non-competition agreements already signed will become invalid, thus depriving employers of the benefit of the bargains they have already entered with their employees. The rule further requires employers to notify employees bound by non-competition agreements that those provisions will not be enforced, thus imposing a significant burden on employers to identify every single employee with an operative non-competition agreement and providing them with the requisite “clear and conspicuous” notice. Although non-competition agreements are effectively banned, the rule does not nullify existing non-competition agreements for senior executives, who are defined as employees who earn more than $151,164 per year and who hold a policy-making position, and still allows non-competes in connection with the bona fide sale of a business.
How can employers protect their assets? Well, for now, the FTC has not decided that nondisclosure agreements or non-solicitation agreements constitute unfair competition, so employers remain able, subject to state laws, to require their employees to sign agreements not to use or disclose trade secret or proprietary business information. The federal Defend Trade Secrets Act (DTSA) and similar state laws protect trade secrets even in the absence of an agreement. Likewise, and also subject to state law, employers may require employees to sign agreements prohibiting the employees from soliciting other employees or customers. However, the FTC has cautioned that non-solicitation agreements may be prohibited under the rule if they amount to agreements that prohibit competition.
This is the first time that the FTC has issued a regulation of this type and breadth, and the rule was narrowly approved by a 3-2 vote, with both Republican commission members dissenting. The U.S. Chamber of Commerce has promised a lawsuit to block the rule, and the expected litigation could go all the way to the Supreme Court. While the rule could be delayed as a result, employers should—for now—prepare to comply with the new rule.
As previously tracked by HR Legalist here, the DOL announced a measure last fall that would substantially increase the threshold under which most employees must be paid time-and-a-half overtime when working over 40 hours per week. Yesterday, the DOL announced the final rule, which is set to take effect on July 1, 2024. As expected, it significantly changes the applicable salary standards and will make it harder for employers to classify some employees as exempt.
A refresher: the Fair Labor Standards Act (“FLSA”) requires employees to be paid overtime unless their employer can demonstrate that an exemption applies. The most common exemptions are the “white collar” exemptions for salaried workers, earning above a certain amount, who work in a “bona fide executive, administrative, or professional capacity.” While employers must demonstrate that their exempt employees primarily perform exempt job duties, the DOL has long relied on minimum salaries to guarantee overtime for lower-paid employees, regardless of their duties.
The DOL’s prior efforts to crack down on overtime have been hit-or-miss. An aggressive 2016 proposal (summarized here) would have bumped the overtime threshold to $47,476 per year, but it was overturned on review by a federal court. The current salary minimum ($35,568 per year) went into effect in January 2020 and has remained there until now.
The new final rule will raise the threshold to $43,888 on July 1, 2024, and then will increase it to $58,656 on January 1, 2025. That second figure is based on the DOL’s new “automatic update” method, which will update the salary minimum every 3 years based on the 35th percentile of weekly full-time earnings in the southern U.S. Census region. The new rule will also raise the threshold for Highly Compensated Employees (who are subject to a less stringent duties test) from $107,432 per year to $132,964 per year on July 1, 2024, then to $151,164 per year on January 1, 2025. The rule includes separate thresholds for employees in U.S. territories and employees in the motion picture industry, and new hourly minimums for exempt computer employees are also changing. The DOL released a handy chart with all the new numbers, and this helpful reminder: “These earnings thresholds do not apply to certain types of employees, including doctors, lawyers, teachers, and outside sales employees.”
The DOL estimates that the rule will impact 3 million workers. If it goes into effect as planned, some employers may need to increase salaries for some exempt workers, or begin paying overtime to more employees before this July’s all-star game. However, legal challenges to the rule are expected, and it remains to be seen whether this new rule will meet the same fate as the 2016 proposal.
Both rules pose significant challenges for the employer community, as well as the courts that may be asked to determine their legality. Watch this space as we’ll keep our readers updated on these rules and other labor and employment developments.
[View source.]
