What Employers Need to Know About The USDOL Final Overtime Salary Test Rule and The FTC Non-Competition Agreement Ban

By Michael Morea on May 7, 2024

On April 23, 2024, the federal agencies issued two significant final rules that will affect many businesses. The first of these rules was issued by the United States Department of Labor (USDOL), and significantly increases the salary level requirement for overtime exemptions under the Fair Labor Standards Act (FLSA). The Federal Trade Commission (FTC) issued the second rule broadly banning employee non-competition agreements nationwide.

A lawsuit has already been filed challenging the FTC rule and litigation is also expected to be filed challenging the USDOL rule. Thus, although both rules may never become effective, business should begin planning on how they will address the rules in case one or both of them survive legal challenges.

The DOL Fair Labor Standards Act Salary Basis Rule

What does the FLSA currently provide?

The FLSA requires that employees, unless they qualify for an exemption, receive overtime pay for any hours worked over 40 hours in a workweek. The FLSA provides for limited exemptions from overtime. The most common exemptions are the “white-collar exemptions” for executive, administrative, and professional employees.

To qualify for an exemption from overtime, an employee must be paid a minimum salary – known as the salary basis or salary level test. The current salary basis test requires that an exempt employee receive a weekly salary of at least $684 ($35,568 per year) to qualify for exempt status. Employers in some states, such as New York, have a higher state mandated salary basis, so will not be affected by the final rule.

In addition to satisfying the salary basis test, exempt employees must satisfy job duties tests. For example, to qualify for the executive exemption, an employee must:

Be paid a salary of at least $684 per week;
Have the primary duty of managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;
Customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and
Have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to hiring, firing, advancement, promotion, or other change of status of other employees must be given particular weight.

To qualify for the administrative exemption, an employee must be paid a salary of at least $684 per week and:

The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

To qualify for an exemption, employees job duties must satisfy all of the criteria. It is important to note that it is actual job duties, and not an employee’s job title that are used to determine exempt status.

The FLSA also provides for a “highly compensated employee” exemption. To qualify for that exemption, an employee must perform office or non-manual work, be paid a total annual compensation of at least $107,431, and customarily and regularly perform at least one of the duties for the executive, administrative, or professional employee exemption tests.

What does the final rule change about the exempt employee tests?

The final rule will significantly increase the salary basis requirement of the exemption tests. According to the final rule:

Effective July 1, 2024, employees who are exempt from overtime must earn a year salary of $43,888 (up from the current yearly salary threshold of $35,568) to qualify for most overtime exemptions.
Effective January 1, 2025, the salary threshold will increase again to $58,656 per year.
The salary threshold for highly compensated employees will increase from $107,432 to $132,964 per year, effective July 1, 2024.
The highly compensated employee salary threshold increases again to $151,164 per year, effective January 1, 2025.
The salary threshold will also automatically increase every three years.

What should employers do now to ensure exempt status for eligible workers?

Even though litigation is expected challenging the USDOL rule, given the short time before it becomes effective, businesses should start reviewing their payrolls to check which employees are classified as exempt and confirm whether those employees’ current salaries will satisfy the increased salary basis test for them to qualify as exempt under the increased salary basis test. Unless the rule is stayed, employers may need to increase the salary of some workers, or convert workers to hourly pay, with eligibility for overtime pay to comply with the rule.

The FTC Non-Compete Ban

The same day that the USDOL issued the rule increasing the salary basis requirement under the FLSA, the FTC issued a final rule broadly banning post-employment noncompete agreements finding them to constitute an “unfair method of competition.”

What does the FTC final rule provide?

The FTC rule prospectively bans new noncompetes for most workers and retroactively invalidates existing noncompetes. The only exception from this ban is for senior executives, which the rule defines as workers in policy making positions earning at least $151,164 per year. After the effective date of the rule, employers must inform employees with existing non-competes r that the non-competition provisions are no longer valid.

The rule still allows employers to use non-solicitation agreements. Non-competition agreements entered into in connection with the sale of a business are unaffected by the FTC rule.

When does the FTC Non-Compete Ban become effective?

The FTC will become effective 120 days after publication in the Federal Register. That has not yet happened, and it is unclear how long publication will take. If the final rule is deemed “significant” (due to its economic impact or policy implications), the rule is required to undergo presidential-level review. Congress and the Government Accountability Office (GAO) also have the opportunity to review the rule.

Litigation has already been filed by the U.S. Chamber of Commerce challenging the rule. The Chamber has argued that the FTC does not have the authority to enact the rule and lacks a clear Congressional authorization as the United States Supreme Court has ruled is required for Executive Branch rule making.

What should employers do now?

While there is a reasonable likelihood that the rule will be struck down in the pending litigation, there is never a guaranty in a lawsuit. Thus, businesses should start consulting with experienced counsel to review their current post-employment restrictive covenant agreements to determine whether any of them would be invalidated if the FTC rule does take effect whether the permitted provisions of such agreements (e.g., confidentiality and non-solicitation provisions) are reasonably drafted to protect legitimate interests of the business.

Now would also be a good time for businesses to assess whether their non-competition agreements are overbroad. Even if the FTC rule is stuck down, we are seeing a trend in which court’s give greater scrutiny to non-competition agreements than they did in the past. To survive a judicial challenge, even in the absence of the of the FTC rule, non-competition clauses should be narrowly tailored to protect a legitimate and definable interest of a business.

If you are unsure about how these rules may impact your business, please schedule a complimentary consultation with us through our online scheduling system.

Information contained in this blog is provided for informational purposes and does not constitute legal advice or opinion. You should consult with an attorney about the specifics of your matter or legal issue.