What Employers Need to Know About the FTC’s Non-Compete Rule and the Increased FLSA Salary Thresholds
By Ami Zweig - April 25, 2024
May 7, 2024 Update: The FTC’s non-compete rule was published in the Federal Register on May 7, 2024. This means that the rule banning most non-competes will take effect on September 4, 2024 – unless halted before then by the pending lawsuits challenging the rule in court.
Employers were hit this week with a double whammy of major regulatory developments at the federal level that may require significant changes to their employment practices: the Federal Trade Commission (the “FTC”) approved a final rule banning employment-based non-competition agreements, and the Department of Labor (the “DOL”) released its final rule increasing the minimum salary threshold for exempt status under the Fair Labor Standards Act. Below, we discuss what employers need to know right now with respect to these two developments and what actions employers may need to take in the near future.
FTC Final Rule Banning Employment-Based Non-Competes
Importantly, for the time being, employers can continue to take a “wait and see” approach before implementing any sweeping changes to their non-compete practices because the FTC’s final rule is already being challenged in court (including by the U.S. Chamber of Commerce, among other parties). Such challenges, if successful, could stop the final rule in its tracks.
However, in the event such challenges are unsuccessful and the final rule takes effect, here is what employers will be facing:
As of the effective date of the final rule (which will be 120 days after publication in the Federal Register), non-compete clauses – i.e., covenants with employees, independent contractors, or other workers prohibiting them from working elsewhere or operating another business after the conclusion of the employment or engagement – will be banned. The final rule defines a “non-compete clause” as a “term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from: (i) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (ii) operating a business in the United States after the conclusion of the employment that includes the term or condition.”
Non-competes entered into prior to the effective date of the final rule will become unenforceable, except with respect to “senior executives” (defined as workers in a “policy-making position” whose annualized total compensation in the preceding year was at least $151,164). For senior executives, non-competes entered into before the effective date may remain in effect and be enforced, but non-competes entered into after the effective date will be unenforceable.
For pre-existing non-competes that will become unenforceable as of the effective date (i.e., non-competes with workers who are not senior executives), employers must provide written notice to such workers by the effective date that their non-competes are no longer enforceable. The final rule provides model language for such notice and details regarding the method of communication.
Of great significance to private equity firms and other acquisitive businesses, the FTC’s final rule contains an exception for covenants entered into “pursuant to a 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.” Notably, while the FTC’s original proposed rule included a 25% ownership threshold for the exception for sale-based non-competes to apply, the final rule omits any such threshold, leaving the door open for purchasers in M&A transactions to continue entering into sale-based non-competes with sellers whose ownership interest is less than 25%.
While employers should monitor the pending litigations over the FTC’s final rule before implementing any sweeping changes to their non-compete practices, steps that employers may wish to take in anticipation of the final rule potentially becoming effective include the following:
Prior to the effective date of the final rule, consider entering into non-competes with any newly hired “senior executives” or with existing “senior executives” who do not already have non-competes (subject to any applicable state law requirements for such executives).
Identify and collect contact information for any current or former workers who (if the final rule takes effect) would need to receive notice that their non-compete is no longer enforceable.
Review and consider strengthening non-solicitation covenants in agreements with workers (as discussed in more detail in a previous client alert). Notably, while the FTC’s original proposed non-compete ban also would have covered any “de facto non-compete” (which, arguably, may have covered broadly drafted non-solicitation clauses), the final rule omits that language, instead adding the “non-compete clause” definition referenced above. Based on that definition, as long as a non-solicitation clause does not “function to prevent a worker from” working for or operating another business, it would not be covered by the FTC’s ban on non-competes.
FLSA Minimum Salary Threshold Increasing to $58,656 Per Year
Not to be lost in the frenzy of the FTC’s non-compete ban, the U.S. Department of Labor this week released its final rule increasing the minimum salary thresholds for exempt status from the overtime pay requirements of the Fair Labor Standards Act (the “FLSA”). Unless successfully challenged through litigation (which happened when the DOL previously attempted to raise the salary threshold during President Obama’s administration), the DOL’s final rule will require action by employers as soon as early this summer and, again, at the end of the year.
Under the new rule, the minimum salary threshold for the FLSA’s executive, administrative, and professional exemptions will increase twice over the next year: first, from its current rate ($35,568 per year) to an interim rate of $43,888 per year (effective as of July 1, 2024); and then, to the final rate of $58,656 per year (effective as of January 1, 2025). Remaining unchanged is the requirement that for an employee to qualify for these exemptions, in addition to receiving at least the minimum salary threshold, the employee’s role must satisfy a duties test, which differs for each exemption. (Certain other exemptions under the FLSA, such as the outside sales employee exemption, do not have a salary threshold.)
The DOL’s final rule also raises the total annual compensation threshold for the “highly compensated employee” exemption (which involves a relaxed version of the duties test) from its current rate ($107,432 per year) to $132,964 (effective as of July 1, 2024), and then to $151,164 (effective as of January 1, 2025).
The thresholds for each of these exemptions will automatically increase again every three years, beginning July 1, 2027, to reflect current earnings data.
While some states (such as California and New York) already require salaries above the new FLSA thresholds, most states do not. Employers should assess their workforces to identify any employees currently classified as exempt under the executive, administrative, professional, or highly compensated employee exemptions whose pay is below the applicable new threshold under the DOL’s final rule. Employers must then determine whether to (a) raise the employee’s pay to the applicable new threshold level or (b) re-classify the employee as non-exempt, meaning that the employer would need to record the employee’s time worked and pay the employee at the overtime rate (one and one-half times the employee’s “regular rate of pay”) for any hours worked over forty (40) in a week. Any such changes should be implemented on or before the effective dates of the new salary thresholds (July 1, 2024, and January 1, 2025, respectively) – pending the possibility of any successful challenges in court to the DOL’s final rule, which employers should monitor over the coming months.