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Smart Summary

• Effective July 1, 2024, the DOL has increased the salary threshold required to classify an employee as exempt from overtime to $43,888 per year (or $844 per week), with a second increase (to $1,128 monthly) set for January 1, 2025.
• Employers should audit their salaried employees and consider implementing changes outlined in this article.
• Additionally, a new FTC rule prohibits employers from entering into new non-competes with any employee.
• We expect the FTC rule to be challenged before the end of the week and that, while those legal battles play out, the rule will be blocked from going into effect.
• Review current non-compete agreements to ensure they are as tailored and reasonable as possible, even if the rule never takes effect.
• Consider non-compete alternatives, such as non-disclosure agreements, non-solicitation agreements, and training repayment agreements.

Apparently, the government was concerned that employers may not have strong-enough relationships with their favorite employment lawyers, because, on April 23, 2024, two government agencies, the FTC and the DOL, served a double helping of new rules on employers throughout the nation.

While employers were largely aware these rules may be coming, they’re not a welcome change. First, the DOL issued its new rule increasing the salary threshold for salaried/exempt employees. Next, the FTC announced its final rule declaring non-competes an “unfair method of competition—and therefore a violation of section 5” of the FTC Act. Below, we discuss the requirements of both rules and practical next steps for employers.

1. DOL Salary Threshold Increase + Possible Strategies for Employers

Effective July 1, 2024, the DOL has increased the salary threshold required to classify an employee as exempt from overtime to $43,888 per year (or $844 per week). Any employees making less than that amount will be eligible for overtime pay for hours worked over 40 in a week. The new regulations also set forth a second increase to the salary threshold, this time to $58,656 ($1,128 per week), which will become effective on January 1, 2025.

The DOL’s action is similar to the action it took in 2019 when it raised the threshold to the current rate of $684 per week. Employers are likely to have to perform the same analysis many conducted in advance of the 2019 increase, auditing their salaried exempt employees to determine if changes need to be made. To do this, employers should review their payroll to determine who among their workforce earns between $684 and $1,128 per week. Within this range, employees will typically fall into three categories:

• employees who should be converted to hourly employees;
• employees whose salaries are below exempt status, but who are very unlikely to work overtime; and
• employees whose salaries are close to the threshold, whose duties qualify them as exempt, and for whom an increase to or above the new threshold makes sense.

Each category is briefly analyzed below.

Employees whose current salaries are close to the current threshold of $684 per week, whose duties qualify them for exemption and who work more than 40 hours per week would have their salaries nearly doubled to be in compliance in January of 2025. For many employers, this is simply not a viable option. In that case, the employee should be converted to hourly, with the employer determining the hourly rate by estimating the actual hours worked per week and determining an hourly rate that, when multiplied by the hours worked (including the premium for overtime hours), produces an amount similar to the current salary.

Employees whose duties qualify them for exemption, whose current salaries are significantly below the new thresholds, but who do not or rarely work overtime, may be able to be converted to salaried non-exempt employees, where they are paid a salary for hours worked up to 40 and 1.5 times the hourly rate (salary divided by 40) for hours worked over 40. This would provide consistency to the employees, with minimal risk to the employer because the employees rarely work overtime. Note that there are alternative methods to pay a salaried non-exempt employee overtime, such as the fluctuating workweek method, but those should be closely analyzed and thoughtfully considered before implementation.

Finally, employers may find that they have employees who are above the current threshold, but slightly below the new threshold(s). In that case, if an employee frequently works more than 40 hours, it likely makes sense to adjust the employee’s salary to above the threshold and continue to classify the employee as a salaried exempt employee.

Employers would be wise to use this new regulation as an opportunity to review the job duties of their exempt employees and ensure that they meet the duties test for the exemption being utilized to support their classification. If an employer is uncertain as to whether the employee would meet the duties requirements, that should be considered when determining the proper adjustment to make for that individual circumstance.

2. FTC Rule on Non-Competes + Possible Strategies for Employers

The FTC’s rule prohibits employers from entering into new non-competes with any employee, including executives. That said, the rule does not prohibit new non-competes between the buyer and seller of a business or between franchisor and franchisee. The rule also does not prohibit non-compete agreements or policies that restrict an employee’s work only during employment.

As for existing non-competes, the FTC rule will make them void and unenforceable, except against senior executives.

The rule applies to non-competes not only with employees, but also contractors, volunteers, and more.

The rule goes into effect 120 days after the rule is published in the Federal Register (which has not occurred as of the publication of this article). Before the effective date, employers are required to provide notice to all current and former individuals with non-competes that such agreements will not and cannot be enforced (notice is not required if the non-compete is expired). The rule provides model language for the notice, which can be accessed here.

Notably, the rule does not per se prohibit NDAs, non-solicitation agreements, or training repayment arrangements, but does caution employers against using these as a tool to sidestep these new obligations. To that end, the rule also prohibits agreements that “are so broadly written that, for practical purposes, they function to prevent a worker from working for another employer in the same field and are therefore non-competes.”

For example, the FTC stated that an NDA that purports to restrict an employee from disclosing any information that is “useable in or relates” to an industry would be unenforceable. Another example given by the FTC of an agreement that would function as a non-compete is a training repayment agreement that requires minimum wage employees to repay $20,000 if they don’t complete a certain number of hours.

We expect the rule to be challenged before the end of the week, and while those legal battles play out, we anticipate that the rule will be blocked from going into effect. So, practically speaking, there is nothing employers need to do right now. That said, the rule tracks a long-standing shift in how courts have viewed non-compete clauses in recent years. Due to decades of overuse and overbroad terms, judges today review non-competes with significant scrutiny. So even if the FTC’s rule never sees the light of day, we encourage employers to review their current agreements to ensure they are as tailored and reasonable as possible. You may also want to start considering non-compete alternatives, such as non-disclosure agreements, non-solicitation agreements, and training repayment agreements.