Noncompete, Overtime Rules Change, But Legal Challenges Remain

April 23, 2024, was a big day for the Biden Administration, as the U.S. Department of Labor (“DOL”) and Federal Trade Commission (“FTC”) almost simultaneously launched new revamped rules which will affect millions of employers and employees nationwide. There are important items and deadlines for both rules which employers will have to comply with absent successful challenges in the court (filings started last night).

What the FTC’s Rule Means for Noncompetes

The Commission voted 3-2 to approve the issuance of the final rule, which will move forward with some slight revisions to the prior rule. Once published in the Federal Register, the rule will become effective after 120 days. The FTC has already set up a specific reporting mechanism for violations with a dedicated noncompete e-mail address.

The final rule bans new noncompetes and, for most employees, renders existing noncompetes unenforceable after the effective date of the rule. Employers may still enforce current noncompetes against senior executives, which are classified under the rule as those employees making more than $151,164 annually and who are in policy-making positions.[1] For purposes of the rule, this “means a business entity’s president, chief executive officer or the equivalent, any other officer of a business entity who has policy-making authority, or any other natural person who has policy-making authority for the business entity similar to an officer with policy-making authority.”[2]

In lieu of executing new contracts or amendments following the effective date of the rule, employers will now only have to notify employees with noncompetes that the employer will not enforce them against the employees in the future. It should be noted that this rule would ban all noncompetes other than those related the sale of a business, as “worker” under the rule is defined as:

a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person[3]

Due to the wide-spanning definition, businesses should take time to review all independent contractor and vendor agreements currently in place to ensure notices are sent to all required parties when, or if, the final rule becomes effective. While the rule does not impact the enforceability of nondisclosures or trade secrets protections, its effect on non-solicitation clauses is yet to be determined. The rule itself defines a noncompete 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.”[4] The FTC declined to make a bright-line rule, but has stated that whether a non-solicitation provision would be classified as a noncompete under the rule would require a fact-specific inquiry. Further, the FTC has also stated that training-repayment agreements could also be classified as unlawful noncompetes depending on the circumstances.

DOL Raises the Exemption Threshold

On the same day that the FTC announced its approved final rule, the DOL issued its final rule raising the exemption threshold for salaried employees under the Fair Labor Standards Act. Effective July 1, 2024, the DOL will raise the exemption threshold for white-collar workers to $43,888 annually. Effective January 1, 2025, this threshold will rise to $58,656 annually. For reference, the current threshold is $35,568 annually. For the highly compensated employee exemption, the rule will raise the threshold from $107,432 to $132,964 annually on July 1, 2024 and to $151,164 on January 1, 2025.

As a refresher, the FLSA requires, among other things, the payment of overtime to employees working more than 40 hours in one week. The FLSA creates certain exemptions for specifically classified employees, many falling under one of several white-collar exemptions as an administrative, executive, or professional employee. In addition to the performance of specific duties, the FLSA requires, in most circumstances, that an employee classified as exempt meet a specific salary threshold (currently $35,568 annually). This rule would raise those salary thresholds effective July 1, 2024, absent any successful legal challenges. The DOL has also proposed reevaluating the salary thresholds every three years utilizing available earnings data.

Conclusion

Whether either of these rules will ultimately go into effect will likely be decided by the Supreme Court. However, all businesses should be prepared in case the rules survive legal challenges. As the FTC’s rule only requires the notice of nonenforcement post-effective date, businesses should carefully assess enforcement options under both eventualities as well as reassessing their methods of protecting intellectual property and confidential information in ways which would not be classified as noncompetes under the rule. Additionally, now may be the time for a wage and budget analysis on the potential implications of the new overtime rule should it become effective on July 1. As always, businesses should discuss all scenarios with experienced noncompete and employment counsel as to current and future contracts.

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[1] https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes

[2] 16 CFR Part 910.10

[3] Id.

[4] Id.