The Federal Trade Commission and The Department of Labor Announce Final Rules that Impact Employers

Employers Hit With Double April Whammy!

On a day that may be remembered as Armageddon Tuesday by Employers, the Federal Trade Commission (FTC) and The Department of Labor (DOL) both announced final rules on Tuesday, April 23, 2024, that will have major implications for virtually every employer. The Federal Trade Commission rule bans almost all non-compete agreements while the Department of Labor rule significantly increases the minimum amount that has to be paid to salaried employees. Each rule is hundreds of pages long and it is impractical to explore every nuance in this format. As a result, here are the highlights of each.

FTC Rule Regarding Non-Compete Agreements

The basic rule is simple. It bans non-compete agreements for all private sector employers except for existing agreements with senior executives. The rule defines “senior executives” as workers earning more than $151,164 annually and who are in a policy-making position.

The Policy-making position is limited. As stated in the rule: “Policy-making authority means final authority to make policy decisions that control significant aspects of a business entity or common enterprise and does not include authority limited to advising or exerting influence over such policy decisions or having final authority to make policy decisions for only a subsidiary of or affiliate of a common enterprise.”

“Policy-making position 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.”

Importantly, once the rule goes into effect, no new non-competes can be entered with senior executives. The rule provides that employers that have non-competes in place will have to notify non-senior executive employees subject to non-competes that the agreements will not be enforced against them in the future. The rule contains model language for the notice.

The rule has a major loophole in the fact it does not apply to non-profit entities such as hospitals and health care systems. The rule does not set aside non-disclosure, confidentiality, or trade secret agreements. The rule also does not apply to individuals selling their business to a third party who can, as part of the transaction, agree not to compete with the business they just sold.

Employers can enforce existing non-competes up to a point. The rule does not apply where a cause of action related to a non-compete violation accrued before the effective date of the rule. In other words, violations between now and the effective date can still be prosecuted by employers.

The rule goes into effect 120 days after it is published in the Federal Register which, as of this writing has not yet occurred.

What to do next if you have non-competes for your employees?

First, do not panic! It is extremely likely that litigation will be filed almost immediately seeking to preclude the rule from taking effect. The U.S. Chamber of Commerce has been up-front about its intention to challenge the rule from the time it was first announced. The decision to implement the rule was based on a 3 to 2 vote within the FTC. The dissenters were very clear in their view that the FTC had exceeded its authority in passing the rule. Any litigation will surely utilize the rationale of the dissent in challenging the rule. We will report any legal developments that impact the implementation of the rule.

Second, for those without non-competes for existing Senior Executives, consider putting them in place now so that they are not precluded later if the rule goes into effect.

Third, consider having employees sign Non-disclosure, Trade Secret, and Confidentiality Agreements that are separate from existing non-compete agreements so that you have a “clean” agreement in place in the event you need to take action to enforce the protection of trade secrets and other confidential information.

Fourth, watch for updates as we digest the full rule and are in a position to offer more guidance.

The DOL Rule Changes the Salary Floor Effective July 1, 2024

Employers have faced an increase in the minimum base salary several times in recent years. The minimum salary is required to be paid to those exempt from overtime and minimum wage because they are in a bona fide executive, administrative, or professional capacity within the employer’s workforce. There is also an overtime exemption for certain highly compensated employees who are paid a salary, earn above a higher total annual compensation level, and satisfy a minimal duties test. The changes are significant. Here’s a simple chart:

Since virtually all employers have salaried employees and the rule takes effect July 1, 2024, it will have a significant impact on business plans and budgets.

What to do next?

First, do not panic! As with the non-compete issue, it is expected that litigation will be initiated to stop the implementation of this rule, as was done at the first major increase in salary levels during the Obama Administration. That said, given the early implementation date, careful attention must be paid to developments on this issue as there is certainly a chance that those challenging it will not have the same success as earlier challenges since the DOL presumably learned from its earlier mistakes that allowed for a successful challenge. We will report any legal developments that impact the implementation of the rule.

Second, some preliminary planning should be undertaken to deal with the rule if it does take effect as scheduled.  The salary-exempt rules require that salaried employees meet both the salary and duties tests. While there are a lot of benefits to both employers and employees of payment based on a salary (no need to keep track of time, work assignments that cannot be accomplished in 40 hours, a certain prestige within the organization, etc.) it may be that it makes more economic sense to recategorize some employees as non-exempt hourly workers with overtime paid for work over 40 hours. If your salaried workforce regularly works in the 40-hour and under range, you can pay a lot of overtime for the difference between their current salary and the new base rates.

Third, watch for additional suggestions for addressing the rule should it go into effect as scheduled.

The Employment Law Team at Rhoades McKee monitors breaking developments that impact our Employer Clients. Please reach out to our team in the event you need further information regarding the FTC and DOL rules or other issues involving your workplace.