Employment Law Update – FTC Bans Noncompetes and DOL Increases Salary Threshold for Exempt Workers

By: Samantha S. Otero, Business Law Practice Group

It’s an election year! Which means the administrative state is particularly active. The Department of Labor and the Federal Trade Commission have recently issued rulings on exempt classifications and noncompetes respectively that require employer attention and reaction.

Department of Labor Rule on Salary Threshold for Exempt Employees

On April 23, 2024, the U.S. Department of Labor (DOL) issued a final rule on the salary threshold for workers exempt from the overtime requirements of the Fair Labor Standards Act (FLSA). In order to be exempt from overtime and minimum wage requirements of the FLSA, a worker must meet both the salary threshold and the duties tests set forth by the DOL.

Effective July 1, 2024, the rule raises the salary threshold significantly, and requires employers to analyze whether they must raise the salaries of the exempt workers whose salaries are less than the new threshold or convert them to nonexempt status, making them eligible for overtime. The rule also provides for subsequent increases in the future. There were no changes to the duties tests of the FLSA.

In essence:

• The final rule raises the minimum salary threshold for exempt workers to $844 per week or $43,888 per year effective July 1, 2024, and $1,128 per week or $58,656 annually effective January 1, 2025.
• The rule also provides for automatic salary increases every three years thereafter, beginning on July 1, 2027. The DOL has stated it will establish those increases based on the earnings data in the United States available at the time of the increase. 
• For highly compensated employees, the threshold will increase from $107,432 to $132,964 in July 2024, and to $151,164 in January 2025. 
• The new rule will likely face legal challenges, including arguments that the rulemaking process did not satisfy the mandates of the Administrative Procedure Act, in addition to arguments that the rule exceeds the statutory authority of the DOL.

Though the FLSA itself sets no minimum salary threshold for what are commonly called the EAP (executive, administrative, professional) exemptions, the DOL has long held that a worker must both (1) perform duties consistent with an exempt position, and (2) be paid on a salary basis at a threshold amount established by the DOL before an exemption will apply.

The current minimum salary threshold for the EAP exemptions is $684 per week or $35,568 per year, and the salary threshold for the highly compensated employee exemption is $107,432 per year. Clearly, the proposed increases are significant, and will force most employers to re-evaluate their worker classifications.

While legal challenges to the new rule are a certainty, employers cannot assume that those will be successful. Accordingly, employers should review their existing exempt workers’ salaries and identify whether any increases may need to be made to comply with the rule, or whether it would be more cost efficient to convert those workers’ classifications to nonexempt. They should also keep an eye on any challenges that are filed, and be prepared to adjust and adapt as needed.

Federal Trade Commission Bans Noncompete Agreements

The Federal Trade Commission (FTC) issued a new rule on April 23, 2024, banning new noncompete agreements in all employment contexts. The rule also makes all existing noncompete agreements except for those covering senior executives unenforceable and requires employers to provide notice to current and former workers that their noncompete clauses are no longer in effect. The FTC defines the term “senior executive” as those employees earning more than $151,164 annually who are in a “policy-making position.”

The FTC said noncompete clauses constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act. The agency estimated that about 20 percent of U.S. workers are bound by a noncompete agreement. That figure is higher in technology and health care industries.

The rule is expected to have significant impacts on millions of workers in a wide swath of industries. It already faces legal challenge, and chances are good that an injunction will delay its enforcement/implementation.

In essence:

• Under the new rule, for-profit employers are prohibited from entering into new noncompete agreements with all employees, including senior executives.
• Existing noncompete agreements with senior executives remain enforceable. However, for all other workers, employers must notify them that their existing noncompetes are unenforceable by the effective date.
• The rule becomes effective 120 days after publication in the Federal Register.
• The rule defines “noncompete clause” to mean a contractual term that blocks a worker from working for a competing employer, or starting a competing business, within a certain geographic area and period of time after the worker’s employment ends.
• There is an exception for the sale of business.
  

Because the FTC's authority only extends to for-profit businesses, the rule will not affect employment agreements entered into by workers employed by nonprofit organizations. The rule also permits limited use of noncompete agreements between franchisees and franchisors.

All current state laws limiting noncompetes would be preempted unless they provide greater worker protection than the FTC rule. In Virginia, noncompetes are banned for all “low wage workers” (currently defined as those making less than $73,320 annually). Because this Virginia law is not as broad as the FTC rule, the Virginia law could be preempted should the FTC rule pass muster in the courts.

This is a highly partisan, and therefore highly criticized rule that will likely face an injunction in the near future. Those who are critical of the rule contend that the FTC is acting well outside of its authority, particularly in its attempt to apply the rule retroactively to private contracts already in place. The U.S. Chamber of Commerce has already filed a legal challenge to the rule in a Texas federal court, requesting an injunction, which would delay enforcement of the rule.

Employers should continue to monitor the situation closely to ensure they comply with the notification and other requirements of the rule, should the courts decide to permit the rule to be enforced and implemented. While noncompetes may not be permitted on a going forward basis, employers can utilize non-solicitation and non-disclosure/confidentiality provisions to protect their customer base and their proprietary information.

McCandlish Holton can assist with these issues, should you need further guidance.

Samantha (“Sam”) Otero counsels employers and executives in all aspects of employment law. Sam routinely advises her clients on the requirements they face in hiring, employment policies, layoffs, discipline, EEOC Charges, discrimination allegations, and wage and hour issues, including overtime and classification determinations.  She also defends allegations of harassment as well as disputes arising out of employment contracts, including covenants not to compete.