FTC Rule On Noncompetes

New Federal Rules Increase Access To Overtime Pay And Ban Noncompete Agreements Nationwide

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New Salary Thresholds Increase Employee Access To Overtime Pay

A new rule issued by the Department of Labor revises the regulations issued under the Fair Labor Standards Act (FLSA) that implement the exemptions from overtime pay requirements. The first phase of the rule becomes effective July 1, 2024 and the second phase becomes effective January 1, 2025.

The rule alters the landscape for access to overtime pay for many employees, including executive, administrative, professional, outside sales, and computer employees.

The FLSA requires that employees be paid overtime for all hours that are worked above 40 hours in a workweek, with statutory exemptions which allow an employer to forgo paying overtime to certain employees. The “white-collar” exemptions apply to executive, administrative, or professional (EAP) employees who receive a fixed and predetermined salary, meet a certain salary threshold, and perform executive, administrative, or professional duties. There is also an exemption for highly compensated employees (HCE).

The rule updates the salary level provision of the EAP and HCE exemptions. Previously, the annual salary threshold for the EAP exemption was $35,568 and $107,432 for the HCE exemption.

EAP Employees: The new rule increases the minimum salary threshold level for EAP exempt employees and is implemented in two phases. Effective July 1, 2024, the threshold will increase to $844 per week, which is the equivalent of an annual salary of $43,888. Effective January 1, 2025, the threshold will then increase to $1,128 per week, which is the equivalent of an annual salary of $58,656.

HCE Employees: The rule Increases the highly compensated employee total annual compensation threshold, also in two phases. Effective July 1, 2024, the total annual compensation requirement for highly compensated employees will be $132,964. Effective January 1, 2025, the annual compensation requirement will increase to $151,164.

Thereafter, automatic increases are built into the new rule and provides a mechanism that provides for automatic updates to the thresholds listed above based on wage data at the time of the update.

Business groups joined in a lawsuit filed in federal court in the Eastern District of Texas to block the new rules from taking effect. The Texas Attorney General filed a second federal lawsuit seeking an injunction to prevent the implementation of the 2024 Overtime Rule. The challenges are largely based on the new rule’s focus on minimum salary levels rather than an employee’s duties to assess whether they should be exempt from overtime pay.

Rule, With Few Exceptions, Will Ban Noncompete Agreements For American Workers

Last month, the Federal Trade Commission issued a final rule banning noncompete agreements nationwide.  The rule is intended to promote competition, protect the fundamental freedom of workers to change jobs, increase innovation, and foster new business formation.

The FTC announced that receiving tax-exempt status from the IRS is not enough to avoid the rule’s coverage.

“Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned,” said FTC Chair Lina M. Khan. “The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”

The final rule is also expected to lead to an estimated average increase of 17,000 to 29,000 more patents each year for the next 10 years under the final rule.

According to the FTC, noncompetes are a widespread and often exploitative practice imposing contractual conditions on employees that prevent workers from taking a new job or starting a new business. Noncompetes force workers to either stay in a job they want to leave or bear other significant harms and costs, such as being forced to switch to a lower-paying field, being forced to relocate, being forced to leave the workforce altogether, or being forced to defend against expensive litigation. An estimated 30 million workers—nearly one in five Americans—are subject to a noncompete.

So, how will the new rule work?

Under the FTC’s new rule, existing noncompetes for the vast majority of workers will no longer be enforceable after the rule’s effective date.

Existing noncompetes for senior executives – who represent less than 0.75% of workers – can remain in force under the FTC’s final rule, but employers are banned from entering into or attempting to enforce any new noncompetes, even if they involve senior executives. Senior executives are defined as workers earning more than $151,164 annually who are in policy-making positions.

Employers will be required to provide notice to workers other than senior executives who are bound by an existing noncompete that they will not be enforcing any noncompete agreements against them.

The new rule does not impact laws governing protection of trade secrets and non-disclosure agreements (NDAs). The FTC estimates that over 95% of workers with a noncompete already have an NDA.

Non-solicitation agreements – agreements that prevent employees from soliciting business from their employers’ customer bases – are unaffected by the rule.

Noncompete agreements are still permitted between a buyer and seller in the bona fide sale of a business.

The definition of worker includes employees, independent contractors, externs, interns, volunteers, apprentices, or sole proprietors who provide a service to a person.

The rule also preempts any state law that conflicts with it.

One area of ambiguity is the applicability of the rule to nonprofit entities, particularly hospitals, which are often set up as nonprofit entities. The rule does not apply to entities that are not subject to the FTC Act, including certain financial institutions, common carriers and nonprofit entities. The FTC announced that receiving tax-exempt status from the IRS is not enough to avoid the rule’s coverage. The FTC uses a two-part test to determine whether the entity is organized for profit and falls under the agency’s authority. It evaluates (1) whether the entity “is organized for and actually engaged in business for only charitable purposes” and (2) whether “either the corporation or its members derive a profit.” Nonprofits should proceed with caution and secure reliable legal advice.

In New York, the FTC estimates that over 7.4 million workers will be covered by the new rule (80% of the total employed population), that the estimated increase in total annual workers earnings will be about $5.8 billion, and that the estimated increase in annual workers earnings is $793. That increase in estimated workers earnings is the third highest in the nation, after Massachusetts and Washington, DC.

The rule passed the FTC by a vote of 3-2. Commissions Melissa Holyoak voted against the Rule, saying that while she supported a ban on anti-competitive noncompete agreement, she did not believe the FTC had the authority to pass the rule absent a clear congressional mandate.

Commissioner Andres Ferguson also voted against the rule, agreeing with Commissioner Holyoak, and adding  the FTC doesn’t have “the power to nullify tens of millions of existing contracts; to preempt the laws of forty-six States; to declare categorically unlawful a species of contract that was lawful when the Federal Trade Commission Act (FCT Act) was adopted in 1914.”

The U.S. Chamber of Commerce have already filed suit in the U.S. District Court for the Eastern District of Texas seeking a declaratory judgment and injunction that would prevent the implementation of the final rule based largely on the views of the Commissioners who opposed the passage of the rule.

In December, Governor Kathy Hochul vetoed a bill that would have imposed a near total ban on employee non-compete agreements in New York State. Hochul previously expressed her support for the ban for “low and middle-income” employees, but was uncomfortable with a blanket prohibition covering highly compensated professionals and executives.  The bill she vetoed would have banned future non-compete agreements for all employees, regardless of earnings level.

Hochul had supported exemption for employees earning $250,000 or more in total annual compensation.

Absent court intervention, the FTC rule is set to become effective on September 4, 2024. Aggrieved workers can report information about a suspected violation of the rule to the Bureau of Competition by emailing noncompete@ftc.gov.