Employers across the country are preparing for two new government rulings about to go into effect that will have major implications for how HR teams engage with employees. First, the Federal Trade Commission (FTC) issued a ruling on non-competes in April 2024. The ruling bans non-compete clauses in contracts nationwide. It is currently being challenged in two courts, the United States District Court for the Northern District of Texas and the United States District Court for the Eastern District of Texas. Neither case has been decided, and the ruling is still set to go into effect in early September.
The second ruling comes from the Department of Labor (DOL). They issued an updated ruling on overtime exemptions in April 2024 that changes the salary exemption thresholds for executive, administrative, and professional employees under the Fair Labor Standards Act (FLSA). This ruling is similarly being challenged twice in the United States District Court for the Eastern District of Texas. Depending on the outcomes of the cases, the ruling will go into effect on July 1. While employers wait to see whether the challenges will be successful, companies need to understand the rules and prepare accordingly.
Understanding the FTC Ruling
The FTC’s ruling is an almost complete ban on non-compete clauses in contracts nationwide. When it comes into effect, non-compete clauses in the majority of workers’ contracts would no longer be enforceable. The only clauses that would remain enforceable are those for senior executives (0.75% of workers). The FTC defines a senior executive as someone earning more than $151,164 in the preceding year and who is in a “policy-making position.” Employers will also be banned from entering into new non-compete contracts with all workers, including senior executives.
The FTC has claimed that this ruling will have many long-lasting, positive effects on the economy and workers. According to their latest press release, non-competes inhibit competition, keep wages low, and suppress innovation. Thanks to their non-compete ban, the FTC claims workers will be empowered to start new businesses, resulting in more than 8,500 additional new start-ups being created each year. The increased innovation will also lead to an estimated average increase of 17,000 to 29,000 more patents filed each year for the next ten years. Workers will have more negotiation power and can earn higher wages, with the average worker earning an additional $524 per year.
Understanding the DOL Ruling
The Department of Labor’s ruling updates an existing salary level test for executive, administrative, and professional (EAP) employees to more effectively identify these employees and to ensure that the FLSA’s intended overtime protections are fully implemented. Under the FLSA, employees generally must be paid an overtime premium of 1.5 times their regular hourly pay for any time worked in addition to 40 hours per week. The FLSA has previously exempted individuals employed in a “bona fide executive, administrative, or professional capacity” who earn $684 per week (equivalent to $35,568 annual salary) from being paid overtime. The threshold is now set to increase to $844 per week (equivalent to $43,888 annual salary). Other employees, even if they are not classified as EAP employees, can still be exempt if considered a Highly Compensated Employee (HCE). The HCE threshold was previously classified as employees with an annual salary of $107,432, but it will be increased to $132,964.
The DOL’s ruling is meant to protect and help workers. They expect it to reduce the risk of misclassification, increase worker productivity, reduce employee turnover, and increase personal time for workers. The DOL estimates that in one year following the ruling going into effect, over $1.5 billion will be transferred from employers to workers.
Preparing for New Overtime Salary Thresholds
The DOL and FTC rulings will go into effect in July and September, respectively. With little runway left, employers need to begin preparing for how to make and communicate the changes. Let’s look first at the DOL ruling. HR teams need to assess which employees are affected by the new salary threshold. Do certain employees move from exempt to eligible for overtime based on their current salary? If so, employers can choose to raise the salaries of those employees to keep them exempt or to maintain the salaries and reclassify them as non-exempt. If certain employees will now accrue significant overtime, some employers may opt to reduce hourly wages to minimize the impact on costs.
For employees who are now eligible for overtime, they are required to track their time per the DOL’s orders. Make sure you have the proper tracking systems in place, and that employees are trained in how to use them. The tracking system will also help your HR and finance teams analyze the impact of the ruling on your company’s costs and profits. Since the DOL has announced that the salary exemption thresholds will continue to rise every three years, now is the time to see whether raising salaries or reclassifying employees is more beneficial to your bottom line.
Whatever strategy your team decides to act on, make sure you prepare thoughtful communications to explain the decisions to your full team. Explain what changes are being made and how it will impact the organization as a whole as well as the individuals who are experiencing compensation changes.
Preparing to Eliminate Non-Competes
Shortly after the DOL ruling goes into effect, organizations will have to again adapt policies to meet the new requirements from the FTC. Similar to the DOL preparation, start by determining which employees currently have non-competes that will no longer be valid come September.
Work with your legal team to carefully review non-solicitation and non-disclosure agreements to determine whether they would be classified as non-competes or if they can remain in contracts as well. If part of a worker’s employment agreement is no longer enforceable, employers are required to inform those team members. The FTC has prepared a model notice to help employers with that process. You can also clarify with any non-exempt senior executives that their non-competes are still enforceable. Moving forward, your team needs to update your standard employment contracts to include language that is permissible by the FTC.
Start Your Preparations Today
Both rulings will go into effect soon, unless any of the court challenges delay or halt their roll out. Keep an eye on the litigation but it’s critical to still be actively preparing your teams to implement these changes. At ITAC Solutions, we know this can feel like a daunting task. When you work with our team of staffing specialists, we can help your team strategize and understand compensation and contract implications for new workers. Contact us today to start working together.
