April 23, 2024, marked a monumental day for the U.S. workforce. Between the Federal Trade Commission banning essentially all non-compete agreements and the U.S. Department of Labor significantly increasing the salary and compensation thresholds for overtime exemptions, employers should prepare to face these changes as early as this summer.
FTC Issues Final Rule Effectively Banning Non-Compete Agreements
In a 3-2 vote, the Federal Trade Commission (FTC) issued a final rule that will prohibit noncompete agreements between workers and employers as “unfair method[s] of competition” under Section 5 of the FTC Act, subject to only a few exceptions. The final rule will become effective 120 days after publication in the Federal Register, and covered employers will be required to comply with the final rule by that effective date, which could come as early as the end of this August. The FTC estimates that its ban could affect up to 20% of the U.S. workforce.
The FTC’s proposed ban has been widely criticized by industry groups, with many calling into question whether the agency has rulemaking authority to regulate “unfair methods of competition” and unilaterally ban non-compete agreements—including two dissenting commissioners from the vote. We can expect to see a wave of lawsuits in the coming weeks challenging the final rule, including from business groups and the U.S. Chamber of Commerce, which immediately sued the FTC to block the ban. Such challenges could further delay—or bar altogether—enforcement of the rule.
However, as it currently stands, by late summer 2024, most employers will not be able to enter into (or enforce their existing) non-compete provisions, except under extremely narrow circumstances.
Here are the key takeaways from the final rule:
- The rule bans all non-compete agreements for almost all workers, regardless of title, job function, or compensation, after the effective date.
- Existing non-competes with “Senior Executives” that were entered into before the rule becomes effective will remain in effect. No new non-competes with Senior Executives may be entered into after the effective date.
- “Senior Executives” are workers who:
- Earned at least $151,164 annually (through salary, bonuses, and/or commissions, but excluding fringe benefits, retirement contributions, and medical/life insurance premium payments); and
- Are in a “policy-making position,” meaning the CEO, President, or any other officer of a business entity or person who has “policy-making authority,” which means “final authority to make policy decisions that control significant aspects of a business entity or common enterprise,” but it does not mean a person whose role is limited to advising or influencing such decisions.
- “Senior Executives” are workers who:
- Other existing non-competes are void as of the effective date. Employers must provide proper notice by the effective date to all affected workers (both past and current) that their non-compete agreement is legally unenforceable and will not be enforced.
- This ban does not include prohibitions on competing during employment with the employer.
- The rule does not apply to a non-compete clause in connection with the “bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.” There is no percentage of ownership required for the exception to apply.
- The rule does not apply “where a cause of action related to a non-compete clause accrued prior to the effective date”—i.e., the regulation does not make currently ongoing litigation seeking to enforce a non-compete unlawful.
- The rule does not apply to non-competes between franchisors and franchisees. However, the rule does apply to workers working for a franchisee or franchisor.
- The rule does not apply to non-profits and certain industries including banks, federal credit unions, and common carriers.
- Non-solicitation provisions do not appear to be covered by the rule unless they are overbroad and “function to prevent” a worker from seeking or accepting other work or starting a new business after employment ends.
- The rule preempts all state laws addressing non-competes to the extent they are less restrictive.
A full summary of the final rule can be found on the FTC’s website.
Although the legal fate of the regulation is uncertain, employers may wish to begin preparing for these eventualities. Businesses should take this time to thoroughly review all existing restrictive covenant agreements, including those that currently restrict former employees, and implement a method for tracking all agreements that remain in effect. Businesses also may wish to begin evaluating the form of notice they may be required to provide to affected workers. Now is also a good time for businesses to examine existing non-compete clauses and other contractual provisions that may be argued to function as a non-compete provision under the regulation, including non-disclosure and non-solicitation provisions, and to confer with employment counsel to consider alternative options to ensure adequate protection of their confidential information, trade secrets, and goodwill.
DOL Releases Final Rule Raising Salary Limits for Federal Overtime Exemptions
The U.S. Department of Labor (DOL) announced its final rule, increasing the salary thresholds for the Fair Labor Standards Act’s (FLSA) overtime exemptions for executive, administrative, professional, and highly compensated employees. The FLSA requires employers to pay employees time-and-a-half for all hours worked over 40 hours during a workweek, provided that the employees do not fall within certain exemptions. The salary increases under the new rule are slated to take effect on July 1, 2024.
The “executive, administrative, and professional” exemptions (otherwise known as the “white-collar” or “EAP” exemptions) exempt employees with certain duties whose salaries exceed a given threshold from the FLSA’s overtime requirements. The new rule raises those salary thresholds from $684 per week ($35,568 annually) to:
- $844 per week ($43,888 annually) beginning on July 1, 2024; and
- $1,128 per week ($58,656 annually) beginning on January 1, 2025.
The new rule also raises the salary thresholds for the FLSA’s “highly compensated employee” exemption—or employees who are exempt from the FLSA’s overtime requirements because of their compensation without consideration of the duties they perform—from $107,432 annually to:
- $132,964 beginning on July 1, 2024; and
- $151,164 beginning on January 1, 2025.
Finally, beginning July 1, 2027, and every three years thereafter, the DOL will implement further increases in the minimum salary for exemptions as an EAP employee and the minimum annual compensation level for exemption as a highly compensated employee, tied to current earnings data. According to the DOL, the final rule will cause approximately four million workers to be eligible for overtime pay.
Unsurprisingly, the DOL’s rulemaking has come under intensified judicial scrutiny, and we expect this final rule will face court challenges that could delay or halt its imminent effect. Notwithstanding these challenges, employers should begin crafting strategies to ensure compliance with the final rule by July 1, 2024. This will likely include first determining which employees will be impacted by the new thresholds (and may lose their exemption status) and evaluating whether to raise the affected employees’ salaries to the new minimum, reclassify them from exempt to non-exempt, and/or limit overtime opportunities, to the extent permitted under the FLSA.
Gallagher & Kennedy attorneys will continue to follow developments and are available to discuss the new rules and help you review and revise restrictive covenant agreements, as well as avoid and manage exposure to wage and hour risks.