This week, the Federal Trade Commission (“FTC”) issued its final rule (consisting of 570 pages) banning most non-compete agreements. This new rule—originally proposed back in January 2023—broadly prohibits employers from imposing and enforcing non-compete agreements in all but a few situations. Not unexpectedly, the vote broke down along party lines, with the three Democratic commissioners voting in favor of the law and the two Republican commissioners voting against it. As if that wasn’t enough to keep employers busy (especially as they become familiar with their compliance obligations under the Pregnant Workers Fairness Act (discussed in a recent Client Alert here)), the Department of Labor (“DOL”) also announced its final rule on the substantial increase to the salary threshold for exempt employees under the Fair Labor Standards Act. We will discuss the highlights of each new rule below and share some strategies for employers attempting to navigate these new regulations. The Ban on Non-Competes An oft-utilized tool by employers, non-compete agreements prohibit employees from engaging in competition with their employer for a particular period of time and within a specified geographic area. An estimated 30 million workers – nearly one in five Americans – are subject to a non-compete agreement. The FTC’s final rule, existing non-competes for the vast majority of workers will no longer be enforceable after the rule’s effective date (120 days after it is published in the Federal Register, which is expected to happen sometime within the next week, putting the effective date in late August). There is a limited exception for enforcing existing non-compete agreements against “senior executives” (who, according to the FTC, represent less than 0.75% of workers), as well as a narrow exception for non-competes in connection with the sale of a business. Senior executives are defined in the final rule as workers who earn more than $151,164 annually and are involved in “policy-making decisions”. The rule also requires employers to provide notice to workers (other than senior executives) who are bound by an existing non-compete that they will not be enforcing the agreement against them. Non-competes are defined under the final rule as follows: “A term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from: (i) seeking or accepting work in the United States . . . where such work would begin after the conclusion of the employment . . . ; (ii) operating a business in the United States after the conclusion of the employment . . . .” The biggest question moving forward will likely center around what agreements “function” as a noncompete. Increase to Salary Threshold for Exempt Employees The DOL has been discussing for quite a while its intention to increase the salary threshold for employees who are classified as exempt under the Fair Labor Standards Act (“FLSA”), a federal law that establishes minimum wage and overtime requirements. The key difference between exempt and nonexempt employees is that nonexempt workers are entitled to certain protections under the FLSA, such as receiving overtime pay at one and one-half times their regular rate of pay for all hours worked over 40 in a workweek. (Remember, overtime is not simply paid at 1.5 x an employee’s hourly rate– the “regular rate” for purposes of overtime includes all compensation paid to an employee. Thus, any commissions, non-discretionary bonuses, shift premiums, etc., that are paid to a non-exempt employee must be included in their regular rate of pay for overtime purposes). In order to qualify as an exempt employee under the FLSA, an employee must meet certain salary and job duties criteria. A common misconception among employers is that paying an employee a salary alone is sufficient to qualify them as exempt under the FLSA. However, an employee is not exempt from the FLSA’s overtime requirements simply because they are paid a salary. The employee also must meet one of the job duties tests outlined in the FLSA, which requires a fact-specific and detailed inquiry. The current salary threshold for exempt employees is $35,568. With the DOL’s recent announcement, however, that will increase in two stages over the next six months: to $43,888 on July 1, 2024, and then to $58,656 on January 1, 2025. This means that employees making less than those amounts must either (i) be treated as non-exempt employees under the FLSA (which requires careful tracking of hours worked and the payment of overtime) or (ii) receive a pay increase so they can continue to be treated as exempt. The new rule also includes a provision for automatic updates to the salary threshold every three years, beginning July 1, 2027. According to DOL estimates, this new rule will impact approximately four million workers. What Should Employers Do Now? The FTC’s ban on non-competes is already facing legal challenges, and it is likely that the DOL’s new salary threshold will be challenged as well. The U.S. Chamber of Commerce filed suit in Texas on April 24, challenging the FTC’s rule. Many commentators believe that the final rule will not survive the lawsuit, but time will tell. Nevertheless, employers should not delay in familiarizing themselves with these new regulations and ensuring compliance with them. There is no guarantee that a legal challenge will succeed, nor is there any guarantee that a successful challenge will result in a rule’s complete recission. There are steps employers can take now to be prepared in the event that these laws go into effect as currently written. Non-compete agreements are not the only tools that employers can use to protect their businesses. The final rule specifically permits non-solicitation agreements, which would allow employees to compete against a former employer, but prohibit them from soliciting customers of the former employer. The final rule also permits the use of reasonable nondisclosure/confidentiality agreements. Employers should consider using such alternative agreements to protect their business needs. Such agreements, however, must be carefully drafted to ensure that they do not “function” to prevent an employee from competing with a former employer. Employers should also take the time to identify current exempt employees who do not satisfy the new minimum salary thresholds and decide whether to raise their salaries or convert them to non-exempt. Now is also a good time to review your employee classifications to make sure your employees are properly classified as exempt or nonexempt. The FLSA imposes a high burden on employers to prove that an employee is exempt, and the penalties for misclassifying an employee are severe. Employers could be liable for back pay, liquidated damages, civil penalties, and attorney’s fees. If you have any questions about the FTC’s non-compete ban or the DOL’s salary increase (or your obligations under the Pregnant Workers Fairness Act) and what these new rules mean for your business, please feel free contact your FGKS Law attorney.Client Alert: Two Significant Legal Developments: A Ban on Non-Competes and an Increase to the Minimum Salary for Exempt Employees
