The DOL And FTC Issue Game-Changing Rules On Overtime And Non-Compete Agreements

On Tuesday, two federal agencies issued rules with potential seismic impact on employers and employees. The Department of Labor (DOL) raised the salary threshold for overtime exemptions for executive, administrative and professional employees, while the Federal Trade Commission (FTC) adopted a rule prohibiting employers from requiring employees to sign non-compete agreements in most cases. Each rule is expected to be challenged in court, so it is not clear whether either rules will go into effect on the announced dates, but for now, employers should prepare accordingly.

DOL Overtime Rule

Under current law, employers do not have to pay overtime to employees designated as exempt executive, administrative, or professional employees if those workers earn at least $684 each week ($35,568 annually). Under the DOL rule announced Monday, that amount will increase on July 1, 2024 to $844 each week ($43,888 annually). Then, on January 1, 2025, the threshold will increase again, to $1128 each week ($58,656 annually). The 2025 increase is pegged to the 35th percentile of weekly earnings of full-time salaried works in the lowest wage U.S. census region, which is the southern U.S. Thereafter, automatic updates will occur every three years based on the latest earnings data. The DOL claims that the 2025 increase will impact 3 million workers.

Also changed is the overtime salary threshold for highly compensated employees, from its current level of $107,432 to $132,964 in July and $151,164 in January.

So what should employers be doing now? First, companies may want to review those workers currently classified as exempt executive, administrative or professional employees, and determine whether their current salaries meet the new threshold, and if not, whether the company wishes to maintain their non-exempt status. If so, the salaries will have to be increased. If not, beginning July 1, 2024, overtime at a rate of not less than one and one-half times their regularly hourly rate will have to be paid for all hours worked in excess of forty hours in a work week. The decision as to whether to maintain the exemption for an employee may turn on the hours typically being worked by that exempt (for now) employee. In some cases, it may be more cost effective to waive the exemption and pay overtime than it would be to increase the salary to the minimum threshold. To that end, employers may want to begin tracking those hours. If a company believes it will have a new group of employees who have not in the past been required to track hours, the company will need to create and implement procedures for those employees to record their time, and for accurately paying those employees. As a general rule, exemptions are determined by the class of employee, so a waiver of the exemption as to one employee may be a waiver of the exemption as to all employees in that same class.

As indicated above, though, this evaluation process may be premature, if, as expected, the new rule is challenged in court, and if that court issues a nationwide injunction staying the implementation of the rule. That is what happened in 2016, when the Obama-era DOL sought to increase this salary threshold, from $455 to $973: a federal court in Texas blocked the rule from becoming law. The Trump administration then sought its own change to the rule, which again was blocked and is currently on appeal. In that case, the issue is whether the DOL has the power to issue any rule setting salary level for exempt employees.

The FTC Ban on Non-Competes

In a 3-2 vote, the Federal Trade Commission passed a final rule prohibiting non-compete agreements in all but the most limited circumstances. First proposed in January 2023, the FTC argues that non-compete agreements reduce an employee’s ability to switch jobs for higher pay, disadvantage people not covered by them by reducing the number of people leaving jobs making fewer jobs available, and hurt the economy by limiting the ability of businesses to hire employees covered by such agreements. The ban will become effective 120 days after it is published in the Federal Register, which is anticipated to be within the next few days.

The regulation defines a non-compete provision as a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from: 1) 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 2) operating a business in the United States after the conclusion of the employment that includes the term or condition. Moreover, the prohibition on non-compete agreements applies to any person or employer and covers agreements with employees, independent contractors, interns, externs, volunteers, apprentices and sole proprietors providing services to a client.

The ban will apply to all agreements entered after the effective date of the regulation, with only three exceptions. Current agreements (i.e. entered before the effective date of the regulation) with “senior executives” will remain enforceable. Senior executives are defined as those employees in policy-making positions that earn at least $151,164 per year in salary, bonuses and commissions. Fringe benefits, such as health care premiums and retirement contributions are not counted. While current agreements with senior executives will remain enforceable, employers will be prohibited from entering new agreements with senior executives after the effective date of the regulation.

There is also a carve out for non competes entered in connection with the sale of business where the sale involves the disposition of the person’s ownership interest in the business or all or substantially all of the business’s operating assets. Finally, the ban does not apply to a cause of action related to a non-compete clause if the cause of action accrues before the effective date of the regulation. In other words, the ban will not operate to resolve existing non-compete litigation.

By the effective date of the regulation, employers are required to provide written notice to workers who are not senior executives and who have existing non-competes that existing agreements will not, and cannot legally be enforced. Model language for the notice is included in the regulation.

Several business organizations, including the United States Chamber of Commerce, have already sued seeking to block the finalized rule.

These two rules, if implemented, are likely to have a profound impact on employers. We will be watching closely to evaluate when and if they will actually go into effect, and will keep our clients advised accordingly. In the meantime, feel free to call any of the attorneys at Nemeth Bonnette Brouwer with your questions.