May 16, 2024

On Tuesday, April 23, the U.S. Department of Labor (DOL) and the Federal Trade Commission (FTC) issued separate final rules on two major issues: Increases to Overtime Salary Thresholds (DOL) and Nullification of Noncompete Provisions (FTC). Attorneys at Lane & Waterman LLP provided this video and written update to help guide your next steps as we prepare for these rules to be implemented. Please note that ongoing litigation may stall or stop these rules from being implemented, however we recommend preparing with the assumption they will take effect.

If you'd like to inquire about the services the attorneys with Lane & Waterman provide, you can find them here:

• Jason J. O’Rourke
• Maegan M. Gorham 
• Grace E. Mangieri 

Changes to the Department of Labor's overtime salary thresholds 

What are the FLSA overtime threshold rules and why do they exist? 

Generally, FLSA requires employers to pay employees minimum wage for all hours worked and to pay 1.5 times the employee’s regular rate of pay for all hours over 40 hours. To protect employees and ensure lower-paid salaried workers receive overtime pay or regain additional time with their families outside of work, the Department of Labor establishes rules to limit exceptions to the general requirement to pay overtime. The Biden-Harris administration recently announced a final rule that expands overtime protections for lower-paid salary workers by increasing the previously established salary thresholds for certain employees exempt from federal overtime pay requirements.  

Only certain categories of salary employees qualify as exempt from federal overtime pay requirements, and an employee must meet three tests to qualify for an exemption:

1. Earn a predetermined, fixed salary that is not subject to reduction due to quality or quantity of work;
2. Earn at least a specified weekly salary level; and
3. Primarily perform executive, administrative, professional, or computer duties, as defined in the DOL regulations (“duties test”).

Additionally, there is an alternative test for “highly compensated employees” who are paid a salary, are paid a total annual compensation exceeding a certain threshold, and satisfy a minimal duties test.  

What are the thresholds now, and what will the new rule change? 

• The threshold for salaried employees currently is $684 per week ($35,568 per year). 
• The new rule expands overtime protections to salaried employees earning $844 per week ($43,888 per year) or more on July 1, 2024. The threshold for a “highly compensated employee” will increase from $107,432 to $132,964 per year on July 1, 2024. 
• A second increase of the salary threshold will occur on January 1, 2025, when the minimum salary will increase to $1,128 per week ($58,656 per year). On Jan. 1 2025, the “highly compensated employee” will increase again to $151,164 per year. 
• Beginning July 1, 2027, the salary threshold will update every 3 years. The goal of periodic updates is to ensure predictability and protect against future erosions of overtime protections. 

The Department of Labor provides the helpful chart below: 

Date	Standard Salary Level	Highly Compensated Employee Total Annual Compensation Threshold
Before July 1, 2024	$684 per week (equivalent to $35,568 per year)	$107,432 per year, including at least $684 per week paid on a salary or fee basis.
July 1, 2024	$844 per week (equivalent to $43,888 per year)	$132,964 per year, including at least $844 per week paid on a salary or fee basis.
January 1, 2025	$1,128 per week (equivalent to $58,656 per year)	$151,164 per year, including at least $1,128 per week paid on a salary or fee basis.
July 1, 2027, and every 3 years thereafter	To be determined by applying to available data the methodology used to set the salary level in effect at the time of the update.	To be determined by applying to available data the methodology used to set the salary level in effect at the time of the update.

What types of employees are impacted? 

Exempt employees who meet the “duties test” but earn less than $43,888 must be reclassified as nonexempt and paid overtime or their salary must be increased. Highly compensated employees earning less than $132,964 in total annual compensation must also be reclassified as nonexempt and paid overtime or their salary must be increased. 

When will the new rule go into effect?  

Barring any legal challenges to the rule, it will go into effect July 1, 2024, with a second update to go into effect January 1, 2025, and subsequent updates every three years beginning July 1, 2027. 

How will employers need to adapt employee compensation structure to meet these new thresholds: 

Should employers increase pay to exceed these thresholds? 

Employers should immediately examine their current exempt workforce and understand how an immediate increase in pay will impact the company. For employees who should remain exempt from overtime requirements, employers must increase their salaries to meet the new thresholds and ensure the employee still meets the duties and/or highly compensated individual duties test.  

Will employers need to switch salaried employees to hourly to track hours worked and overtime? 

It is possible that employees will need to be reclassified to a nonexempt status in order to track their hours and keep track of overtime effectively. Employers should examine both the duties assigned and the rate of pay to determine proper classification. 

Are there workarounds for the thresholds (Ex. comp extra hours towards vacation/time off) 

The DOL does not permit private-sector employers to use compensatory time off for nonexempt employees (this practice is only permitted in the public sector). No viable workarounds appear to be available – the rule does not fundamentally change the duties tests for exempt employees; therefore, there are limited opportunities to avoid an increase in salary while also maintaining the employee’s exempt status. 

Can any portion of a nondiscretionary bonus be used towards the minimum salary? 

The new rule makes no change to the current rule allowing employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to ten percent of the standard or special salary level for the exemptions. The DOL provides the following explanation regarding nondiscretionary bonuses: 

Some employers have different benefit packages for exempt/nonexempt employees or hourly/salaried employees; should employers reevaluate their handbooks and benefit structure? 

Yes, it is best practice to evaluate current policies and handbooks when a significant change in law occurs regarding employment matters. Employers should examine their policies regarding benefits and should consider if they will need to restructure employees as exempt or nonexempt moving forward. 

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The Federal Trade Commission's final Noncompete Rule: Eviscerating noncompete clauses across the country

What did the FTC rule actually do, and does it impact all noncompete clauses? 

The FTC has added subchapter J, part 910, to Chapter 1 of Title 16 of the Code of Federal Regulations. This subchapter contains Sections 910.01-910.910.6, which effectively ban noncompetition agreements. The final rule is a result of a July 9, 2021 Biden Administration Executive Order, purportedly signed to “curtail the unfair use of noncompete clauses and other clauses or agreements that may unfairly limit work mobility.”  

Section 910.2 prohibits employers from requiring and using noncompete clauses with “workers,” which is broadly defined to include employees, independent contractors, externs, interns, volunteers, apprentices, and sole proprietors who provide a service to a person. Absent court action, the final rule will become effective September 4, 2024. Section 910.2 specifically makes it an “unfair method of competition” for a person to:

1. Enter into or attempt to enter into a noncompete clause;
2. Enforce or attempt to enforce a noncompete clause; or
3. Represent to a worker that he or she is subject to a noncompete clause. 

As discussed below, the only exception is for senior executives who already have a noncompete in place.  

Notably, the final rule does not prohibit nonsolicitation or confidentiality agreements. If, however, such an agreement would effectively preclude the worker from obtaining other employment, it would likely be prohibited. The prohibition does not apply to nonprofit corporations, banks, savings and loans institutions, credit unions, common carriers, unions, air carriers, or meat packers. Nor does the ban prohibit a noncompete clause between a buyer and seller as part of a bona fide sale of a business. Those clauses will continue to be governed by state law. Additionally, the final rule does not prohibit enforcement of an existing agreement where a cause of action accrues before September 4, 2024. 

More details on the noncompete rule can be found at the Federal Trade Commission. 

Does the noncompete rule invalidate existing contracts? 

Yes. As of September 4, 2024, existing noncompete clauses will become unenforceable unless one of the exceptions discussed above apply. And, as noted above, the final rule does not prohibit enforcement of an existing agreement where a cause of action accrues before September 4, 2024.

Do employers need to notify employees that have noncompetes regarding the change? 

Yes. Employers must notify all current employees, and former employees for whom they have contact information, who are or were subject to a noncompete. The notice must be sent no later than September 4, 2024 and must identify the person/entity who entered into the noncompete clause with the worker, and be on paper delivered by hand to the worker, or by mail at the worker’s last known personal address, or by email at an email address belonging to the worker, including worker’s current work email address or last known personal email, or by text message at mobile number belonging to the worker.  

The Federal Trade Commission (FTC) has provided model language for the notice, which should be used.  

What are other ways that employers can protect trade secrets and other sensitive information? 

Employers may still require confidentiality, nondisclosure, and nonsolicitation agreements. However, if they are so stringent that they would effectively preclude other employment, the FTC could determine it to be a violation. Employers should work with their attorneys to craft appropriate language. 

What does the rule say about executive level noncompete clauses? 

Existing agreements with “senior executives” are enforceable if the executive is in a “policy making” position and receives annual compensation of $158,164. Although existing agreements remain enforceable, new agreements cannot be entered into after September 4, 2024.    

How should employers prepare now?  

As there are currently three pending lawsuits challenging the FTC’s rule, it is unclear whether the rule will actually go into effect.  Thus, immediate action is not necessary.  That being said, September 4 will be upon us quickly, and employers should start considering their options. For instance, if an employer presently has only noncompete agreements with its employees, it should consider working with its attorneys to modify those agreements to include confidentiality and nonsolicitation clauses that would be enforceable. Additionally, if you do not currently have noncompete clauses with senior executives, consider whether requesting that they sign one now is feasible. Finally, to be ready to send the required notices if the court challenges fail, you should review which “workers” currently have noncompete clauses so you can be prepared to send out the required notices. 

Should employers wait to plan until legal action is finalized? 

No. As discussed above, September 4 will be upon us quicker than you think, and there are a number of planning steps that can and should be taken in advance.