What to Know About Recent Non-Compete and Salary Basis Changes in Light of Expected Legal Challenges

Two administrative agencies within the federal government have been busy lately publishing new rules that govern important aspects of employers’ relationships with their employees.  Read more below for further updates.

DOL Rolls Out Final Rule Increasing Minimum Salary For Exempt Employees

The U.S. Department of Labor (“DOL”) has rolled out its long-awaited update to the minimum salary requirements for employees who are exempt from the Fair Labor Standards Act’s (“FLSA”) overtime and minimum wage requirements under the so-called “white collar” exemptions (administrative employees, executive employees, professional employees, and computer employees).  Here is what you need to know about what the new rule requires:

1. Assuming there are no successful legal challenges (see below), the new rule will go into effect on July 1, 2024, and will increase the required minimum salary to $844 per week ($43,888 per year).  This figure is pegged to the standard salary level at the 20th percentile of weekly earnings for full-time salaried employees in the southeastern portion of the United States.  (Per an analysis conducted by the DOL, employees in the Southeast earn less than employees in any other area of the country.) 
2. Effective January 1, 2025, the required minimum salary will increase to $1,128 per week ($58,656 per year).  The January 1, 2025, increase is pegged to the 35th percentile of weekly earnings for salaried employees in the southeastern United States. 
3. Effective July 1, 2027, the required minimum salary will update every three years based on the up-to-date wage developed by the DOL’s Bureau of Labor Statistics. 
4. The new rule also made changes to the required minimum salary for “highly compensated employees,” which is a separate (and less common) category of white-collar exemption that shares elements of the administrative, executive, and professional exemptions.  Effective July 1, 2024, the required minimum salary for the highly compensated employee exemption increases to $132,964 per year.  Effective January 1, 2025, the required minimum salary increases to $151,164 per year. 
5. The new rule does not change the “duties” tests required to establish the applicability of the “white collar” exemption.

Here are some additional important points to keep in mind about the new rule:

1. It is reasonably likely that business groups or other organizations opposed to the higher salary requirement will initiate litigation against the DOL seeking to stop the implementation of the new rule.  It is not clear yet whether such litigation would be successful in derailing the new rule completely or perhaps in simply delaying it.  However, some commentators have noted that the new rule’s reliance on salary percentiles is similar to the reasoning the DOL applied in its attempted update to the salary threshold in 2016, which was enjoined by the courts before it took effect. 
2. In anticipation of the new rule going into effect, we recommend employers assess whether any of their exempt employees earn less than what the new rule requires.  If so, and the rule goes into effect, employers will have to decide whether to increase employees’ salaries or to reclassify them as non-exempt.  Employers may wish to delay announcing any such changes until closer to July 1, when we have more information about how legal challenges will impact the new rule.
3. The new rule only addresses the minimum salary for exemptions under the FLSA, which is a federal law.  Many states, including Oregon, Washington, and California, impose their own salary requirements for exempt employees.  Employers must comply with whichever standard (state or federal) is higher.  For example, for large employers (those with 51+ employees) in Washington, the annual salary requirement is $67,724.80 for 2024 and is projected to increase to $78,249.60 in 2025.  In California, the current minimum is $66,560 under state law.  Oregon’s minimum salary (which is tied to the state’s minimum wage for non-exempt employees) is lower than the current federal minimum salary. 

Please stay tuned for more updates about the DOL’s new rule. In the meantime, please reach out to us with questions.

FTC Rolls Out New Rule Barring Most Non-Competes Effective September 4, 2024

The Federal Trade Commission (“FTC”) recently published a final rule banning virtually all new non-compete agreements and, with limited exceptions, requiring employers to notify employees that their current non-compete agreements are no longer enforceable.  The new rule is scheduled to go into effect on September 4, 2024.  However, because of several pending lawsuits in which businesses and business groups have contended that the FTC lacked the legal authority to issue the new rule, it is questionable whether it will go into effect at all or, if so, when. 

Section 5 of the Federal Trade Commission Act prohibits “unfair or deceptive acts or practices in or affecting commerce.”  Traditionally, the FTC, which has the authority enforce the FTC Act, has relied on Section 5 to enforce consumer-protection standards and anti-competitive standards under other federal antitrust laws.  However, in January 2023, the FTC announced its intent to regulate employee non-compete agreements under the auspices of Section 5 and published a proposed rule that largely outlawed them on a nation-wide basis.

The final rule largely tracks with the proposed rule.  There are three main parts of the final rule. 

First, the rule defines a “non-compete clause” as a requirement that a “worker” (including both employees and independent contractors) refrain from “[s]eeking or accepting work in the United States with a different person” or “[o]perating a business in the United States” after the worker’s employment concludes.  Other restrictive covenants, such as confidentiality, or non-solicitation agreements, are still permitted despite the final rule.  However, such restrictive covenants could nevertheless be prohibited under the final rule if they are so broad in scope that they function as non-competes. 

Second, the final rule bars all employers that are subject to the FTC’s jurisdiction from entering into new non-compete agreements.  The only exception is for non-competes that a worker agrees to as a condition of the “bona fide” sale of a business.  However, this exception is somewhat limited because (per the FTC’s comments accompanying the final rule) it only applies when there has been a legitimate, arms-length transaction between unrelated buyers and sellers in which the seller exchanges its business good will as part of the sale. 

Third, the final rule requires employers to provide workers who are subject to current non-compete clauses “clear and conspicuous notice” in writing by September 4, 2024, that the non-compete clauses will not and cannot be legally enforced.  To be clear, this means that the new rule is retroactive.  Subject to the following three exceptions, the new rule reaches all current non-competes even if they were entered into long before the final rule goes into effect.  The first exception is for non-competes agreed to as part of “bona fide” sales of a business, as described above.  The second exception is for non-competes with so-called “senior executives,” who are defined as workers earning more than $151,164 annually who serve in a policy-making position.  Employers may enforce current non-competes with senior executives, but may not enter into any new non-competes with them.  Finally, the third exception is for non-competes that are the subject of current litigation, or where a cause of action, for the violation of the non-compete that accrues prior to September 4, 2024 may be enforced by the court hearing the matter. 

Next Steps:

Whether the final rule takes effect in September remains to be seen.  Three lawsuits have been filed in an effort to enjoin enforcement of the final rule.  It is possible (some think likely) that a court will take action to block the final rule from taking effect, and will ultimately strike it down as unlawful. 

For now, employers should consider taking the following action:

• Consider whether your business interests can be protected with properly tailored non-solicitation or confidentiality clauses.  Please consult your legal counsel for further advice on this and to draft restrictive covenants that comply with state law (even if the FTC rule does not take effect).
• Establish and reinforce limitations on trade secret access so that trade secrets can only be accessed by those employees who need to access them.
• Identify employees with non-compete agreements and determine whether they are “senior executives” whose agreements will be grandfathered into compliance even if the final rule goes into effect.  Non-senior executives should be identified for notification if the final rule takes effect.
• Revisit all restrictive covenants to ensure compliance with the new rule should it take effect.  Please consult your legal counsel to help with this analysis.
• Create a plan for providing notice to current and former workers with non-compete clauses that their non-competes are no longer valid.  The FTC has prepared a model notice that employers may use.  Written notice must go out upon the effective date of September 4, 2024.

Please contact us with any questions about the FTC’s new rule and what to do next.