What Happened?

On November 15, 2024, a federal judge in Texas struck down the U.S. Dept of Labor’s Final Rule that raised the minimum salary threshold to qualify for the “White Collar” (executive, administrative, professional) and Highly Compensated Employee overtime exemptions on a nationwide basis, finding the rule exceeded the DOL’s statutory authority.

What Does That Mean?

The court’s ruling invalidated the DOL annual salary increase threshold that went into effect 7/1/2024 ($43,888) and the increases that were scheduled to take effect 1/1/2025 ($58,656) and every three years thereafter.  As a result, the “White Collar” exemption salary threshold reverts back to the DOL’s 2019 rule, which set it at $684 per week or $35,568 annually. The Highly Compensated Employee exemption remains at $107,732.

What Next?

The DOL may appeal the ruling, but given the impending change in administration, it may elect not to do so. 

As we wait to see how this plays out, your organization can pause moving forward with salary increases scheduled to take effect on 1/1/2025.  As to salary increases that already went into effect, you should carefully weigh the pros/cons of reducing the salary for those employees who benefited from the 7/1/2024 increase and/or how you plan to pay newly-hired or promoted employees who fill these same positions.    

I have an important update on my April 28, 2024 email below. On August 20, 2024, the U.S. District Court for the Northern District of Texas invalidated the FTC’s non-compete rule, and ordered that the rule shall not take effect on September 4, 2024, or thereafter. This ruling prevents the FTC from enforcing the rule against any employer nationwide.

While this ruling may be reversed on appeal, at this time, employee non-compete agreements are not banned under the FTC’s final rule (although they may be banned or heavily restricted under state law).  Accordingly, employers are no longer required to issue a notice to current and former employees that their existing non-compete restriction is null and void.       

On April 23, 2024, the FTC, by a 3-2 vote, announced a Final Rule that has the effect of invalidating post-employment noncompetes on a nation-wide basis for the vast majority of workers.  The term worker includes employees, independent contractors, volunteers, interns, and externs.  The Rule reflects the Commission’s determination that it is an unfair method of competition, and therefore a violation of Section 5 of the FTC Act, for businesses to enter into or seek to enforce certain noncompetes with workers. As touted by the FTC, the Fina Rule “will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.” Absent a successful legal challenge, the Rule becomes effective 120 days after its publication in the Federal Register (on September 4, 2024). 

 Summary of Final Rule

 At a high level, the FTC’s Final Rule: 

• Bans entering into, or seeking to enforce, new noncompetes with all workers, including senior executives, after the effective date.
• For existing noncompetes, bans entering into, or seeking to enforce, them against all workers, except senior executives, after the effective date.  For senior executives, existing noncompetes can remain in force.
• Defines the term “senior executive” to refer to workers earning more than $151,164 in total annual compensation during the preceding year who are in a “policy-making position.” 
• Total annual compensation may include salary, commissions, nondiscretionary bonuses, and other nondiscretionary compensation.
• The Rule defines “policy-making position” as a business entity’s president, CEO or the equivalent, and any other officer of a business entity who has policy-making authority. It defines “policy-making authority” as final authority to make policy decisions that control significant aspects of a business entity or a common enterprise. The Rule explains that an individual who is an officer of an affiliated or subsidiary company who only has policy-making authority with respect to the subsidiary or affiliate or a division/department of the entity, but not the overall common enterprises, would not qualify as a “senior executive.”
• Requires businesses to provide notice to current and former workers subject to the ban, no later than the Rule’s effective date, that they will not be enforcing any noncompetes against them. The FTC has published a model notice for this purpose.

Exceptions to the Ban

• Existing noncompetes with senior executives.

• Existing noncompetes with any worker for the purpose of pursuing a cause of action that accrued before the Rule’s effective date.

• Non-competes entered into by a person “pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.”

• Noncompetes that apply to competitive activities outside the U.S.

• Noncompetes between franchisors and franchisees.

• Noncompetes that ban concurrent employment, i.e., working for two businesses at the same time.

• Noncompetes issued by entities that are not subject to the FTC Act, including certain financial institutions, common carriers, and nonprofit entities.

Alternatives to Noncompetes

The Commission found that employers have several alternatives to noncompetes that still enable firms to protect their investments without having to enforce a noncompete, including trade secret and patent laws, invention assignment and non-disclosure agreements (NDAs), and non-solicitation and no-hire restrictions.  However, the Commission cautioned that if any of these restrictions are sufficiently broad to have the “functional equivalent” of a non-compete, they may fall under the Rule and thereby be prohibited. Additionally, commentary to the Rule suggests that forfeiture-for-competition provisions, where a worker sacrifices money or equity benefits if they compete against their former employer, or liquidated damages provisions where a worker must pay a business money if they compete, are covered by the Rule and would thus be prohibited moving forward.

State Law Preemption

The Final Rule takes the position that it preempts all state laws “inconsistent with” the Rule, but not those state laws that offer greater protection than the Rule. 

Next Steps

Lawsuits have already been filed challenging the enforceability of the Final Rule.  It is possible an injunction could be issued in the coming days or weeks that will stay the Rule from taking effect until there is a hearing on the merits of the challenge. As these lawsuits play out, it would be wise to take the following preliminary steps to prepare for the Rule’s implementation in case it goes into effect as scheduled.

• Identify current and former workers who have active noncompetes that are banned by the Final Rule.

• Create a contact list for these individuals in case it becomes necessary to issue them a notice of non-enforcement required by the Final Rule.

• Identify current and former workers who the business believes qualify as senior executives.  Review that list with counsel to ensure they meet the definition.

• For senior executives who do not have a noncompete, consider issuing them one before the effective date of the Final Rule.

• Consider modifying your organization’s template restrictive covenant agreement to conform the Final Rule.

Summary of Final Rule

On April 24, 2024, the DOL announced its Final Rule raising the current minimum annual salary threshold ($35,568) to qualify as an exempt executive, administrative, professional (i.e., “white-collar”) employee under the FLSA.  The DOL also raised the current salary threshold ($107,432) to qualify under the highly compensated employee (“HCE”) exemption.  Specifically:  

• On July 1, 2024, the minimum salary threshold for white-collar workers will increase to $844 per week ($43,888 per year). For HCEs, the minimum annual compensation level will increase to $132,964.
• On January 1, 2025, the DOL will implement a new salary methodology, setting the standard salary level for white-collar workers at the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region, resulting in a salary level of $1,128 per week (equivalent to $58,656 per year). For HCEs, the compensation level will be set at the annualized weekly earnings of the 85th percentile of full-time salaried workers nationally, resulting in a compensation level of $151,164.
• Future updates to the salary and compensation levels will occur every 3 years and will apply up-to-date wage data to determine new salary levels. The 3-year update will take place on July 1, 2027.

*Up to 10% of the required salary amounts may be satisfied by nondiscretionary bonuses, incentive payments and/or commissions, if these payments are made at least annually.

What this Means

If employees who are currently classified as executive, administrative or professional exempt earn less than this new threshold, they will need to be paid an OT premium for any hours worked beyond 40 in a workweek. Even if an employee meets the new salary threshold, to qualify as exempt, an employee must also satisfy the “duties” test that applies to the applicable exemption. The final rule does not change the existing “duties” tests.   

Higher State/Local Pay Requirements Control 

The FLSA sets a national floor on wages and a premium for excess work. Some states and cities have stronger wage and hour protections, e.g., CA currently has a $66,560 salary threshold. In that case, the more protective standard applies to workers who reside in that state or city.

Next Steps

Absent a successful legal challenge, your business must be prepared to adjust its pay practices to comply with the Final Rule. Here are recommended next steps:  

• Identify all employees currently classified as exempt executive, administrative and professional employees. Confirm they meet the applicable “duties test.”  If they don’t, they fail the exemption and they need to be reclassified.
• If they do pass the duties test, identify those on the list who are earning below the new salary threshold.
• For those employees, assess the cost of increasing their salaries to the new minimum and compare that to the cost of converting them to hourly and paying them OT at the 1.5x OT (or keeping them salaried at the same or reduced salary level and paying OT at the .5x OT rate).
• If you decide to reclassify employees to OT-eligible (either hourly or salaried), implement training and update policies to clarify the rules for properly counting and tracking OT.
• Avoid the common pitfalls of trying to skirt compliance by misclassifying current W-2 employees as 1099 contractors or offering “comp time” in lieu of paying OT.

If your organization uses independent contractors (“IC”), it’s time, once again, to assess whether they are properly classified due to the March 11, 2024 effective date for the Department of Labor’s (“DOL”) “Final Rule on Classifying Workers as Employees or Independent Contractors Under the Fair Labor Standards Act.”   

At a high level, the final rule represents an intentional shift by the DOL to a narrower interpretation of IC status under the “economic reality” test used by courts and government agencies to determine whether a worker is an employee or IC.  In effect, the new rule makes it harder for workers to qualify as ICs. 

The final rule applies the following six factors in making this analysis:  (1) opportunity for profit or loss depending on managerial skill; (2) investments by the worker and the potential employer; (3) degree of permanence of the work relationship; (4) nature and degree of control; (5) extent to which the work performed is an integral part of the potential employer’s business; and (6) skill and initiative.  This test relies on the totality of the circumstances where no one factor is determinative.  The DOL’s summary of how it interprets each of these factors  can be found here:  DOL FAQs.

States have adopted their own version of this test in analyzing misclassification cases under state law.   

The consequences for misclassifying a worker as an IC can be high in terms of financial penalties and business disruption.  Now is the time to conduct a compliance audit.  Please let me know if I can assist.