A Busy Week for FTC and DOL: New Rules Announced Restricting Non-Compete Clauses and Expanding Overtime Protection

FTC Issues Anticipated Rule Barring Non-Compete Agreements

On Tuesday afternoon, the Federal Trade Commission issued a final rule largely banning non-compete agreements for employees. The rule is intended to go into effect in around four months but will likely be the subject of multiple legal challenges.  

The rule is short in its nature. 

It defines as “Unfair Methods of Competition” certain actions related to non-compete clauses.

For workers other than “senior executives,” the rule states that it is “unfair” (and thus illegal) to enter into, enforce, or represent that a worker is subject to a non-compete clause.

For “senior executives” (namely those in a policy-making position making more than $154,161 yearly), the rule states that it’s “unfair” (and again illegal) to enter into a new non-compete clause after the effective date, enforce such a clause, or represent that a senior executive is subject to one entered after the effective date. Current non-compete agreements for senior executives will be allowed to stay in effect.  

The rule also requires employers to provide clear and conspicuous notice to workers with existing non-compete clauses that those clauses will not be enforced against them. The notice must identify the entity, and be delivered via paper, mail, email, or text. No notice is required if the employer doesn’t have the worker’s contact information.

Note that a “worker” is defined broadly to even include independent contractors as well.  

There are a few limited exceptions. The rule exempts non-compete clauses related to bona fide sales of businesses or ownership interests and existing causes of action.

For many employers, this may be a big deal. Here are the next steps employers should consider:

1. Employers should understand the entirety of the usage of non-compete agreements in their workplace. They should identify who the worker is, what position they hold, what their salary is, and when the agreement is scheduled to expire (if at all). 
2. Employers should also then review such agreements to determine if there are other restrictive covenants that could be used, such non-solicitation provisions or confidentiality provisions. Note that some states may bar the use of non-solicitation provisions, so now employers have to consider both federal and state rules.
3. Determine what restrictive covenants you intend to use going forward, if this rule is allowed to go into effect. 
4. Designate someone within your organization to oversee the process of either revoking existing non-compete agreements or implementing new restrictive covenants if needed.
5. Before implementation of any steps, continue to stay abreast of legal challenges. Given that certain jurisdictions have a propensity of issuing nationwide injunctions, it is still far from a sure thing that this rule will go into effect 120 days after the official publication.

For now, employers should understand and prepare for the rule, but not yet take dramatic steps of revising all existing agreements.

Biden-Harris Administration Issues Final Rule Expanding Overtime Protections

Another major development in federal employment law was announced yesterday, this time in the form of a final rule from the Department of Labor (DOL). The Biden-Harris administration announced new rules concerning overtime compensation for exempt classification under the Fair Labor Standards Act (FLSA), that increase compensation thresholds for overtime-exempt employees who otherwise meet the Executive, Administrative, Professional or Highly Compensated Employee exemptions, and put in place a schedule for review of these thresholds every three years.

By way of background, the FLSA mandates that employees be paid overtime at time-and-a-half their regular rate of pay for all hours worked over 40 hours in a given workweek. Employees are exempt from the overtime requirement only if they fit within the designated exemptions under the FLSA and are paid on a salary basis (regardless of how many hours they work in a given week) with a minimum annual salary. 

With respect to compensation thresholds, the new rule sets a schedule of increases in two parts. The first will take effect on July 1, 2024, increasing the current minimum annual salary for exempt employees from $35,568 ($684/week) to $43,888 ($844/week). The second increase will take effect on January 1, 2025, increasing the minimum annual salary to $58,656 ($1,128/week). This represents a 60% increase over the course of a year. 

In addition, the annual salary threshold for the Highly Compensated Employee exemption will increase to $132,964 ($2,557/week) on July 1, 2024, and $151,164 ($2,907/week) on January 1, 2025. Note that Connecticut does not recognize a highly compensated employee exemption. 

The rule also puts in place scheduled reviews every three years to ensure that earnings thresholds are updated to reflect the standard salary level at the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region, and the standard salary level at the 85^th percentile of full-time salaried workers nationally for Highly Compensated Employees.

The rule is subject to minor technical revisions, but absent legal challenge by way of injunction, will go into effect on July 1.

Classifying workers as exempt or non-exempt is a highly fact-specific endeavor that poses challenges for many employers. The announcement of the new DOL rule serves as a reminder and an opportunity for employers to review their current classifications and payment methods, and to make adjustments as necessary.