ARTICLE
1 May 2024
Federal agencies have been busy bees this spring, releasing multiple rules that will have a serious impact on employers' labor and employment practices.
United States Employment and HR
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Federal agencies have been busy bees this spring, releasingmultiple rules that will have a serious impact on employers'labor and employment practices. This alert provides a high-levelsummary of some major updates from the Federal Trade Commission(FTC) and the Department of Labor (DOL) this month.
The Federal Trade Commission Bans Non-Competes
In a move over a year in the making, the FTC voted on April 23,2024 to issue its Final Rule banning most non-competes. As we wrotehere, the FTC drew from its authority underthe Federal Trade Commission Act to take aim at "unfairmethods of competition." The Final Rule does so by institutingserious restrictions on the use of non-compete provisions for mostemployees, including workers (i.e., employees, contractors,interns, volunteers, and more) and senior executives alike(together, referred to herein as Covered Persons).
The Final Rule defines a non-compete clause as a term orcondition of employment that prohibits Covered Persons from,penalizes Covered Persons for, or functions to prevent CoveredPersons from (i) seeking or accepting work in the United Stateswith an entity after the conclusion of the Covered Person'semployment or (ii) operating a business in the United States afterthe conclusion of the Covered Person's employment. Notably, theFinal Rule specifies that the term or condition can be in the formof a formalized contractual provision or a less formal written ororal workplace policy. The Final Rule does not expressly prohibitnon-compete clauses for Covered Persons while they areemployed.
Specifically, with respect to workers, employers are prohibitedfrom (i) entering into or attempting to enter into a non-competeclause; (ii) enforcing or attempting to enforce a non-competeclause; and (iii) representing that a worker is subject to anon-compete clause. With regard to senior executives, who aredefined as individuals in policymaking positions who made a totalannual or annualized compensation of $151,164 in the precedingcalendar year, employers are permitted to maintain non-competeclauses that were already in effect as of the effective date, butmay not enter into or enforce or attempt to enforce futurenon-compete agreements. For the purpose of this Final Rule,"compensation" includes salary, commissions,non-discretionary bonuses, and other non-discretionaryearnings.
In addition to this broad prohibition on non-competes, and in amove similar to some state laws such as California, the Final Rulealso requires employers that have previously entered into priornon-compete clauses with workers (not senior executives) to provideclear and conspicuous notice by its effective date to allapplicable workers that their non-compete clause will not be, andcannot be, enforced. The Final Rule provides model language forthis notice.
This far-reaching Final Rule comes with a few exceptions. First,the Final Rule specifically carves out franchisor-franchiseerelationships from its definition of "worker."Furthermore, it explicitly states that it does not apply to anon-compete clause entered into as a result of a bona fide sale ofa business entity or substantially all of a business's assets,or a person's ownership interest in same. It similarly does notapply where a cause of action has already accrued. Finally, theFinal Rule includes a safe harbor provision that exempts theenforcement of a non-compete clause where an employer has agood-faith basis to believe that the Final Rule is notapplicable.
The Final Rule is set to go into effect 120 days after itspublication.
So, what now? As it had vowed to do, the U.S. Chamber ofCommerce has already filed a lawsuit against the FTC to prevent theFinal Rule from going into effect, and we anticipate extensivelitigation on its enforceability that may, at a minimum, delay itseffective date. In the meantime, however, employers shoulddetermine whether they are subject to the jurisdiction of the FTC.If so, they should take stock of their current non-compete andother restrictive covenant agreements, provisions, and policies andprepare to send notice to all current and former employees subjectto them. Going forward, employers should begin to consider how tootherwise safeguard against the improper use of confidentialinformation and their business's goodwill, including throughthe use of strong non-solicit, non-disclosure, work product, andother agreements that protect the confidentiality and integrity oftheir trade secrets, being mindful that the Final Rule applies toterms or conditions that could "function" to prevent aworker from competing, which will require these alternatives to beas narrowly tailored as possible.
The Department of Labor Raises the Stakes for OvertimeExemption
On April 23, 2024, the DOL released its highly anticipated finalrule (DOL Rule) revising regulations issued under the Fair LaborStandards Act (FLSA) implementing exemptions from the FLSA'sminimum wage and overtime pay requirements. Significantly, the DOLRule increases the salary threshold required for an employee toqualify as a bona fide executive, administrative, or professionalemployee, or highly compensated employee, exempt from theFLSA's requirements.
Under the new DOL Rule, effective July 1, 2024, to qualify forthe administrative, executive, or professional employee exemptions,an employee must be compensated on a salary or fee basis at a rateof not less $844 per week ($43,888 annually). Previously, thethreshold for these exemptions was a rate of $684 per week. Toqualify for the highly compensated employee exemption, an employeemust be paid total annual compensation of $132,964 annually. Theseamounts will increase again on January 1, 2025, with the thresholdfor the administrative, executive, and professional employeeexemptions reaching $1,128 per week ($58,656 annually) and thehighly compensated employee exemption reaching $151,164 per year.Thereafter, beginning on July 1, 2027, the salary threshold toqualify for the aforementioned exemptions will automatically updateevery three years.
The DOL estimates that the DOL Rule will impact millions ofworkers who will no longer qualify for an exemption under the FLSAand will soon be eligible for overtime compensation. Accordingly,though the DOL Rule is likely to be met with legal challenges,employers should act quickly to review the classification of theiremployees. Employers are reminded that employees must be paid on asalary basis, receive the salary threshold, and perform certainduties to qualify for one of the above-referenced exemptions. Whenrevisiting employee classification, employers should also consultstate and local wage and hours laws, which may have differentrequirements.
Employers considering reclassifying employees as a result ofthis new rule may need to provide advance notice to employees ofthe change to their classification and should clearly communicatehow the change impacts their employment, including with respect totracking their time, taking meal and rest breaks, charging leavefrom work, receiving approval prior to working outside of standardwork hours, etc. To ensure consistent enforcement, training formanagers or newly non-exempt employees is also recommended.
The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circ*mstances.
