Federal agencies have been busy bees this spring, releasing multiple rules that will have a serious impact on employers’ labor and employment practices. This alert provides a high-level summary 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 wrote here, the FTC drew from its authority under the Federal Trade Commission Act to take aim at “unfair methods of competition.” The Final Rule does so by instituting serious restrictions on the use of non-compete provisions for most employees, 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 or condition of employment that prohibits Covered Persons from, penalizes Covered Persons for, or functions to prevent Covered Persons from (i) seeking or accepting work in the United States with an entity after the conclusion of the Covered Person’s employment or (ii) operating a business in the United States after the conclusion of the Covered Person’s employment. Notably, the Final Rule specifies that the term or condition can be in the form of a formalized contractual provision or a less formal written or oral workplace policy. The Final Rule does not expressly prohibit non-compete clauses for Covered Persons while they are employed.
Specifically, with respect to workers, employers are prohibited from (i) entering into or attempting to enter into a non-compete clause; (ii) enforcing or attempting to enforce a non-compete clause; and (iii) representing that a worker is subject to a non-compete clause. With regard to senior executives, who are defined as individuals in policymaking positions who made a total annual or annualized compensation of $151,164 in the preceding calendar year, employers are permitted to maintain non-compete clauses that were already in effect as of the effective date, but may not enter into or enforce or attempt to enforce future non-compete agreements. For the purpose of this Final Rule, “compensation” includes salary, commissions, non-discretionary bonuses, and other non-discretionary earnings.
In addition to this broad prohibition on non-competes, and in a move similar to some state laws such as California, the Final Rule also requires employers that have previously entered into prior non-compete clauses with workers (not senior executives) to provide clear and conspicuous notice by its effective date to all applicable workers that their non-compete clause will not be, and cannot be, enforced. The Final Rule provides model language for this notice.
This far-reaching Final Rule comes with a few exceptions. First, the Final Rule specifically carves out franchisor-franchisee relationships from its definition of “worker.” Furthermore, it explicitly states that it does not apply to a non-compete clause entered into as a result of a bona fide sale of a business entity or substantially all of a business’s assets, or a person’s ownership interest in same. It similarly does not apply where a cause of action has already accrued. Finally, the Final Rule includes a safe harbor provision that exempts the enforcement of a non-compete clause where an employer has a good-faith basis to believe that the Final Rule is not applicable.
The Final Rule is set to go into effect 120 days after its publication.
So, what now? As it had vowed to do, the U.S. Chamber of Commerce has already filed a lawsuit against the FTC to prevent the Final Rule from going into effect, and we anticipate extensive litigation on its enforceability that may, at a minimum, delay its effective date. In the meantime, however, employers should determine whether they are subject to the jurisdiction of the FTC. If so, they should take stock of their current non-compete and other restrictive covenant agreements, provisions, and policies and prepare to send notice to all current and former employees subject to them. Going forward, employers should begin to consider how to otherwise safeguard against the improper use of confidential information and their business’s goodwill, including through the use of strong non-solicit, non-disclosure, work product, and other agreements that protect the confidentiality and integrity of their trade secrets, being mindful that the Final Rule applies to terms or conditions that could “function” to prevent a worker from competing, which will require these alternatives to be as narrowly tailored as possible.
The Department of Labor Raises the Stakes for Overtime Exemption
On April 23, 2024, the DOL released its highly anticipated final rule (DOL Rule) revising regulations issued under the Fair Labor Standards Act (FLSA) implementing exemptions from the FLSA’s minimum wage and overtime pay requirements. Significantly, the DOL Rule increases the salary threshold required for an employee to qualify as a bona fide executive, administrative, or professional employee, or highly compensated employee, exempt from the FLSA’s requirements.
Under the new DOL Rule, effective July 1, 2024, to qualify for the administrative, executive, or professional employee exemptions, an employee must be compensated on a salary or fee basis at a rate of not less $844 per week ($43,888 annually). Previously, the threshold for these exemptions was a rate of $684 per week. To qualify for the highly compensated employee exemption, an employee must be paid total annual compensation of $132,964 annually. These amounts will increase again on January 1, 2025, with the threshold for the administrative, executive, and professional employee exemptions reaching $1,128 per week ($58,656 annually) and the highly compensated employee exemption reaching $151,164 per year. Thereafter, beginning on July 1, 2027, the salary threshold to qualify for the aforementioned exemptions will automatically update every three years.
The DOL estimates that the DOL Rule will impact millions of workers who will no longer qualify for an exemption under the FLSA and 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 their employees. Employers are reminded that employees must be paid on a salary basis, receive the salary threshold, and perform certain duties to qualify for one of the above-referenced exemptions. When revisiting employee classification, employers should also consult state and local wage and hours laws, which may have different requirements.
Employers considering reclassifying employees as a result of this new rule may need to provide advance notice to employees of the change to their classification and should clearly communicate how the change impacts their employment, including with respect to tracking their time, taking meal and rest breaks, charging leave from work, receiving approval prior to working outside of standard work hours, etc. To ensure consistent enforcement, training for managers or newly non-exempt employees is also recommended.
Employers with questions regarding the recent legal developments addressed in this alert, or who would like assistance reviewing their employment policies and practices in light of these updates, are invited to contact the authors of this article or any other attorney in Venable’s Labor and Employment Group.