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Assuming they survive certain legal challenges, new rules issued by the Federal Trade Commission (FTC) and the U.S. Department of Labor (DOL) could dramatically impact the relationship between employers and employees in the United States. The FTC has passed a rule banning non-compete agreements and prohibiting enforcement of non-compete agreements against most workers. The DOL rule significantly increases the salary threshold to qualify for an overtime exemption as an executive, administrative, or professional employee.
The FTC Rule on Non-Compete Clauses
On a party-line vote, on April 23, the FTC approved a rule that will prohibit future non-compete clauses and make most existing non-compete clauses unenforceable. The rule will take effect 120 days after publication in the Federal Register. We anticipate publication in the coming days.
Under the new rule, with the exception of “senior executives,” a person may not (a) enter into or attempt to enter into a non-compete clause; (b) enforce or attempt to enforce a non-compete clause; or (c) represent that a worker is subject to a non-compete clause. With respect to “senior executives,” a person may not enter into or attempt to enter into a non-compete clause, enforce or attempt to enforce a non-compete clause entered into after the rule’s effective date, or represent that the senior executive is subject to a non-compete clause, where the non-compete clause was entered into after the rule’s effective date. In other words, for senior executives, you can enforce a non-compete clause entered into before the effective date but there can be no non-compete agreements entered into after the effective date.
A “non-compete clause” means (a) 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. Presumably, a carefully crafted clause prohibiting solicitation of employees or customers’ post-termination of employment and a carefully crafted non-disclosure clause are not non-compete clauses and would still be permitted and enforceable.
A “senior executive” is a worker in a policy making position whose total compensation in the preceding year was at least $151,164 or whose total compensation would exceed that figure when annualized.
The FTC rule requires businesses to provide workers – not senior executives – with notice that the non-compete clause will not be and cannot be enforced against the worker. The FTC provides a sample notice in the rule.
The new rule makes an exception in the case of a sale of a business. The rule also exempts existing causes of action and where there is good faith belief that the rule’s prohibition does not apply.
The DOL’s Overtime Rule
On April 23, the DOL announced a final rule revising the salary threshold for executive, administrative, and professional (EAP) exemptions from overtime. The rule takes effect on July 1. The rule leaves in place the duties tests to qualify for exemption but significantly increases the salary required for exemption.
The current salary threshold for an EAP exemption is $684 per week, which equates to $35,568 per year.
On July 1, the salary threshold for an EAP exemption will increase to $844 per week, equivalent to $43,888 per year.
By January 1, 2025, the EAP exemption salary threshold will increase to $1,128 per week, equivalent to $58,656 per year. For computer professionals, compensation at an hourly rate of at least $27.63 per hour will also satisfy the compensation requirement. (Under the professional exemption, there are also exceptions for teachers, lawyers, and doctors, including residents and interns.)
The rule also increases the annual compensation threshold to apply the highly compensated employee abbreviated test for EAP exemption:
- Current: $107,432 per year, including at least $684 per week paid on a salary or fee basis.
- July 1, 2024: $132,964 per year, including at least $844 per week paid on a salary or fee basis.
- January 1, 2025: $151,164 per year, including at least $1,128 per week paid on a salary or fee basis.
The rule also includes a mechanism to increase the salary threshold every three years, beginning on July 1, 2027. The Department of Labor will provide at least 150 days advance notice of the updated salary requirement.
As stated above, we anticipate legal challenges to both rules, including efforts to enjoin the rules from taking effect. Nonetheless, employers and businesses should start preparing now for what could be dramatic changes in how they classify employees and control post-employment competitive conduct.