Don’t Stop, Drop and Roll Yet – Non-Competes are About to be Banned (FTC) and Exempt Employee Salary Levels are Increasing (DOL)
NOTE: The requirements and timeline for the ban on Non-Competes by the FTC may be affected by pending litigation. Until we learn otherwise, the current effective date is September 4, 2024.
April was a busy month for both the Federal Trade Commission and the Department of Labor. The FTC rolled out a long-anticipated ban on non-competes between employers and employees. The DOL also had a long-awaited rule published increasing the salary threshold for “white-collar” exempt employees. Both changes may affect you and your team so here are the highlights and implications:
FTC’s Intent to Ban Non-competes
The FTC argues that non-compete agreements have been overused by employers preventing employees from being able to leave a position to work for a competitor or start a competing business. Originally, non-compete agreements and clause language were used to deter executive-level employees from leaving an organization to work for a direct competitor or start a business that would be considered a direct competitor. Over time, companies expanded their non-compete agreements to the rest of the employee population with fewer exceptions than before.
The ban will affect all businesses that use non-compete language in their employment agreements with employees. Now that the Final Rule has been published in the Federal Register on May 5, 2024, companies will have 120 days (until September 4, 2024) to notify employees that the non-competes they once agreed to are now unenforceable. Some Senior Executives may still have non-compete agreements that will remain enforceable, but that is only the case if they made no less than $151,164 in the preceding year and have policymaking powers within their role at the company (this if fewer than 0.75% of all workers). Going forward no new non-competes are allowed to be written and enforced between employers and employees, even if the employees are Senior Executives as defined by the Final Rule.
DOL’s Phasing Approach to Increasing White Collar Exempt Salary Thresholds
The DOL announced that income thresholds for the 5 recognized “white collar” exempt classifications will be increased in two phases. On July 1, 2024, the minimum salary will increase from $35,568 annually to $43,888 annually. On January 1, 2025, the minimum salary threshold will increase a second time to $58,656 annually.
What is next for employers is to take a closer look at the pay practices to ensure compliance with these changes. Generally speaking, to qualify for these exemptions employees must (1) be paid on a salary basis, (2) be paid at least the designated minimum weekly salary, and (3) perform certain duties.
There are a few ways employers can adjust to remain compliant without simply increasing wages.
For starters, it is a much easier shift to make when reclassifying an exempt employee as a non-exempt employee. This would mean the only “threshold” the employer would need to meet would be paying the individual at least minimum wage. That said, should the individual work any hours over 40 within a given work week, they should be paid a premium of 1.5 times their wage per hour for those hours in excess of 40. Lastly, when making that adjustment, employers can decide to pay that person a set salary assuming for at least 40 hours worked in a given workweek or they can require the employee to begin tracking their time to only be paid for hours worked.
Other facts to note per the DOL’s announcement pertaining to the salary threshold increase:
- Starting on July 1, 2027, the salary threshold will be automatically updated every three years.
- The Highly Compensated Employee (HCE) exemption annual salary will increase from $107,432 to $132,964 on July 1, 2024, and then to $151,164 on January 1, 2025.
- Employees exempt from overtime as they serve as bona fide teachers or outside sales representatives remain unaffected by these increased salary levels.
Servant HR is here to serve you and your team!
Leading up to these announcements, Servant HR has already begun the process of evaluating who will be affected by both of these major changes. For clients who have non-compete language involved at all in the employment relationship, Servant HR is reviewing the agreements that have been made up to now and will provide affected clients with recommendations on how to move forward that is compliant with the requirements set forth by the FTC. As the FTC’s Final Rule was published on May 7, 2024, we have 120 days, or up until September 4, 2024, to set a new pathway forward and execute on notifying affected employees, pending further litigation as mentioned above.
For clients who have employees currently classified as exempt, Servant HR will inform clients of the affected employees and chart potential paths forward. This will also be an excellent opportunity to revisit the FLSA’s duties and responsibilities tests to make sure that employees have been properly classified as exempt aside from the salary threshold increases.