Federal agencies hit
employers hard

Two federal agencies, the Federal Trade Commission and the Department of Labor, recently announced final rules that may significantly affect how employers do business.

The FTC bans noncompetes

The Federal Trade Commission, or FTC, released its final rule banning most noncompetition agreements, with several exceptions. The rule becomes effective 120 days after the FTC publishes it in the Federal Register. The new rule is broad and covers all types of workers, including employees, independent contractors, externs, interns, volunteers, apprentices, or sole proprietors who provide a service to a person or entity. About 30 million U.S. workers will be affected.

Under the new rule, a noncompetition agreement means:

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.

Exceptions to the new rule

There are six exceptions to the new rule:

  1. Existing noncompetition agreements with senior executives, defined as those in policy-making positions earning more than $152,164 per year, will continue to be enforceable. However, new agreements after the effective date of the rule will be banned.

    A “policy-making position” is defined as:

    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. An officer of a subsidiary or affiliate of a business entity that is part of a common enterprise who has policy-making authority for the common enterprise may be deemed to have a policy-making position for purposes of this paragraph. A natural person who does not have policy-making authority over a common enterprise may not be deemed to have a policy-making position even if the person has policy-making authority over a subsidiary or affiliate of a business entity that is part of the common enterprise.

    “Policy-making authority” is defined as:

    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.

  2. Noncompetition agreements made in connection with the bona-fide sale of a business will continue to be allowed. However, noncompetition agreements tied to repurchase rights under equity incentive plans or other similar arrangements will not be permitted.
  3. Garden-leave noncompetition agreements – that is, agreements that keep a non-working employee on payroll earning the same compensation and benefits for a certain time period while restricting them from competing during that same time period – will continue to be permitted.
  4. Franchisor/franchisee noncompetition agreements also will be allowed under the new rule.
  5. If a cause of action related to a noncompetition agreement accrued before the final rule’s effective date, the agreement will be enforceable.
  6. The new rule does not apply to banks, insurance companies, airlines and nonprofits, since the FTC does not regulate these employers.

Employers must clearly and conspicuously notify current and former workers subject to noncompetition agreements that they will not be enforceable by the effective date. The notification may be by paper, mail, email or text message. Here’s the FTC’s sample notice.

Challenges to the new rule

Several entities already have challenged the new rule in court. The U.S. Chamber of Commerce has requested a federal court in Texas to issue an injunction, that is, to stop enforcement of the rule, claiming that the FTC does not have the authority to issue such a rule. A tax services firm filed a similar challenge in a different federal court, also in Texas, and at least three business associations have joined in the Chamber of Commerce lawsuit.

How can employers protect themselves?

Although these challenges most likely will delay implementation of the new rule, employers should understand the rule and take certain steps now to protect themselves should it eventually become effective, even if altered.

First, check your state law to be sure it doesn’t already ban noncompetition agreements. New York, New Jersey, and Pennsylvania do not – at least, not yet. New York Gov. Kathy Hochul vetoed a bill that would have banned noncompetition agreements in that state.  New Jersey’s similar bill, although reintroduced this year, has not yet passed.

Second, prepare for alternatives to protect your confidential, proprietary information and to prevent employees who leave your company from poaching your employees and customers. Keep in mind that a nondisclosure or non-solicitation agreement will remain enforceable, but only so long as it is not “so broad or onerous that it has the same functional effect as a term or condition prohibiting or penalizing a worker from seeking or accepting other work or starting a business after their employment ends.”

Therefore, employers would be wise to revisit their existing nondisclosure, non-solicitation and noncompetition agreements with employment counsel to ensure they are reasonable and narrowly tailored to what they aim to protect. Since there is no private right of action under the rule, only the FTC can file suit against a company for violating it. Thus, the FTC will likely go after the most egregious noncompetition agreements first.

In addition, employers should ensure that any worker with a noncompetition agreement also has a nondisclosure and non-solicitation agreement, as these are likely to remain enforceable if narrowly tailored.

If you need help evaluating your existing nondisclosure and non-solicitation agreements or drafting new ones to be sure they will be enforceable, call us at 973.787.8442 or email us at legaladmin@alixrubinlaw.com.

 

The DOL increases the salary threshold for exempt employees

The U.S. Department of Labor, or DOL, has issued a new rule that increases the salary threshold for “white collar” or executive, administrative and professional employees who are otherwise exempt from overtime in two stages. On July 1, 2024, the threshold will increase to $844 per week, or $43,888 per year. The second increase will become effective on January 1, 2025, increasing the threshold to $1,128 per week, or $58,656 per year. This second increase represents a nearly 65 percent increase from the current threshold, which has been in effect since 2020.

However, keep in mind that the salary threshold for exempt employees in New York City is currently $62,400 per year, already higher than the new national threshold effective January 1, 2025. Thresholds vary by locale throughout New York State and also in other states and cities.

In addition, the federal threshold for highly compensated employees exempt from overtime will increase to $2,557 per week, or $132,964 per year on July 1, 2024, and to $2,907 per week, or $151,164 per year on January 1, 2025.

The rule also includes a three-year automatic adjustment mechanism to ensure that earnings thresholds are updated to reflect the standard salary level at the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage census region, and the standard salary level at the 85th percentile of full-time salaried workers nationally for highly compensated employees.

A refresher on the overtime rules

The federal Fair Labor Standards Act, or FLSA, mandates that employees be paid one and-a-half times their regular hourly pay rate for all hours worked more than 40 hours in a given work week. Employees are exempt from this overtime requirement only if they:

  1. primarily perform executive, administrative, or professional duties, as provided in the DOL’s regulations;
  2. are paid on a salary basis, that is, a predetermined and fixed amount not subject to reduction due to variations in the quality or quantity of work performed; and
  3. are paid a specified minimum weekly salary.

The employer bears the burden of establishing the applicability of the exemption. Job titles and job descriptions do not determine exemption status, only actual job tasks performed do. Merely paying an employee a salary also does not mean the employee is exempt from overtime pay.

All three requirements must be met for the exemption to apply. The first two requirements have not changed; only the third requirement, that the employee be paid a specified minimum weekly salary, has changed. 

What can employers do to minimize the financial impact?

Classifying employees as exempt or non-exempt from overtime is a time-consuming, fact-specific endeavor. We recommend using the new DOL rule as an opportunity to review current classifications with respect to all three criteria and adjust them as necessary to avoid future problems.

As for the new rule, employers first must determine which exempt employees will be affected and when, since it will be implemented in two stages with different increased salary thresholds. Then, companies will need to decide whether to give those employees a pay raise or reclassify them as nonexempt and pay them overtime if they work more than 40 hours in any given work week. This will largely depend on how many hours, on the average, these employees currently work per week.

Managers also may want to reduce or eliminate overtime hours by shifting workloads. If this is not feasible, then, as a last resort, regular wages may have to be reduced – but certainly not below minimum wage – to compensate for the additional overtime pay that must be provided. Regardless, record-keeping and monitoring systems will need to be adjusted. Benefits also may need to be changed.

Employers must be careful to implement a communication strategy that explains to employees why management made certain decisions, that being non-exempt is not a demotion, and that it does not imply that they are “less” of an employee. Likewise, some exempt employees might be resentful if management asks them to take on additional duties as workloads are shifted. Employers also must be mindful that any additional duties they require of exempt employees do not negate their exempt status with respect to the duties tests.

Finally, employers should review their overtime policies to ensure they are clear that, absent exigent circumstances, non-exempt employees will be subject to discipline if they work overtime without prior management authorization.

While the new overtime rule may be challenged in court, this is not an excuse to be unprepared if and when it goes into effect. Keep in mind that employers may be found to have violated the FLSA and its state counterparts and incur hefty penalties if they:

  • delay payment of wages;
  • make improper deductions to employees’ wages;
  • misclassify employees;
  • overlook or encourage off-the-clock work;
  • fail to pay authorized overtime;
  • do not track work breaks properly; 
  • keep inaccurate or incomplete records; 
  • refuse to produce records or cooperate in a DOL investigation; and
  • retaliate against employees who complain about the failure to pay wages.

If you need help determining whose salary to increase and who should be reclassified as non-exempt and implementing your decisions, or you need a robust overtime policy that will help protect your bottom line, call us at 973.787.8442 or email us at legaladmin@alixrubinlaw.com.

This blog is for informational purposes only. It is not offered as legal advice, nor is it intended to create an attorney-client relationship with any reader. Consult with competent local employment counsel to determine how the matters addressed here may affect you.

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