Employers were hit with a DC double whammy this week, as regulators announced two major changes. First, the Federal Trade Commission announced on Tuesday, April 23, 2024, that it voted to issue a Final Rule that bans nearly all non-compete clauses and agreements between employers and employees. Second, on the same day, the Department of Labor announced its Final Rule that will increase the salary threshold for exempt employees, resulting in a near 65% increase in the minimum salary required for “white-collar” exemptions.
Here is the breakdown in the final rules…but read this entire update before you do anything!
Banning Non-Compete Agreements
Increasing Fair Labor Standards Act Salary Threshold
What it Means and What to Do Next
Non-compete Agreement Ban
The FTC’s rule will ban most employment related non-compete agreements, with the exception of some senior executives who currently have a non-compete. Under the rule, they claim non-compete agreements are an unfair method of competition and restrict opportunities and wages of employees. The rule would be retroactive and require employers to notify most employees currently under a non-compete “that the worker’s non-compete clause will not, and cannot legally be, enforced against the worker.” The only exception to the retroactive clause are senior executives in a “policy-making position” earning more than $151,164 in total compensation. However, new non-competes with senior executives are not allowed. The rule goes into effect 120 days after publication in the Federal Register, which is expected any day – so potentially the end of the August.
Fair Labor Standards Act Overtime Update
The Department of Labor’s long-anticipated final rule changes the minimum salary required under the Executive, Professional and Administrative exemptions in the FLSA. Currently an employee must earn the equivalent of $35,568 a year to meet the salary threshold of the exemption. (Note that in addition to the salary calculation, a duties test must also be met in order to classify an employee as exempt from overtime and minimum wage.) The new rule would increase the minimum salary amount to $43,888 on July 1, 2024, and again increase it to $58,656 January 1, 2025. The resulting increase is nearly 65% over the current rate. There are also changes in the salary test for highly compensated employees. Additionally, for the first time, the DOL is enacting an automatic increase in the salary thresholds every three years, beginning on July 1, 2027. The result of the revised overtime rule will make millions more employees eligible for overtime. The rule has yet to be published in the Federal Register but is also expected in the coming days.
Adaptive HR Solutions’ Analysis
We are a firm believer in adjusting the salary needed for exempt status, however such drastic changes proposed in 2016 and again this week can have a substantial negative impact on employers.
There is a common belief that both the FTC and DOL rules will be challenged in court. Because of the probability of a delay in the implementation of the rules, our recommendation is to analyze and prepare, but not to make any changes yet.
The FTC has reached beyond their normal limits into setting employment regulations for businesses across the country. Employers and trade associations argue that this rule will hurt businesses by putting investments into employees (training and development) and current business relationships (long-term customers) at risk. Lina Khan, the chair of the FTC, stated in an interview that the “average income for a US worker will increase by $529 a year”…equivalent to just a quarter an hour.
The FLSA rule change would impact businesses who have exempt employees who are paid less than $58,656 a year. These employees would have to be converted to non-exempt status and paid overtime for all hours worked over 40 in a workweek, or have their salary increased to the minimum amount required. For exempt employees working more than 40 hours a week, a conversion to non-exempt would require a rate of 1.5 times their regular rate for the hours worked over 40 in the week. In either case, employers will have increased labor costs as well as the challenge of dealing with employees who may feel negatively affected by reverting to punching a time clock after years of an exempt salary status.
The DOL put forth a similar salary increase in 2016 where they recommended doubling the salary threshold. Three days prior to the implementation of the 2016 rule, a federal court in Texas put a stay on the rule, which was eventually retracted, rewritten and implemented at a more reasonable increase in 2019.
What to Do Next?
Employers should analyze which parts of their business or which employees may be impacted by these recent announcements. This analysis should include looking at options to make the changes announced, and how to implement them. However, no changes should be made at this time.
The rules haven't been published and because of the expected lawsuits to stop or change them, there is no guarantee that the rules, as announced, will ever go into effect.
Additionally, should an employee ask about the changes that took place, my recommendation is to say, "while announced, the rules do not go into effect until later this year, and we are currently analyzing their impact on our employees and business."
Adaptive HR Solutions is available to help employers review current agreements and exempt/non-exempt determinations to identify changes that may be necessary in the near future. As always, if you have questions, please let us know!