05.01.2024 | Client Alerts | In The News

Noncompete Ban and Overtime Eligibility

Employment Law Update:

Last week marked significant changes in employment law, with the Federal Trade Commission (the “FTC”) passing a new rule banning noncompete agreements (the “FTC Rule”). Promptly after that, the Chamber of Commerce and prominent business groups filed a lawsuit in Texas federal court challenging the FTC Rule. The Labor Department also adopted a new rule to expand employee eligibility for federal overtime pay (the “OT Rule”).

Noncompete Agreements and the FTC Rule:

Noncompete agreements are commonly entered between employers and their employees to restrict an employee from entering into employment with a competing employer for a specified duration after employment ceases. Approximately 33 million, or one in five, U.S. employees are bound by a noncompete agreement. The FTC Rule bans all noncompete agreements, including those explicitly called a “noncompete agreement” and those that function as a noncompete agreement. The FTC predicts that the FTC Rule will:

  • Lead to a 2.7% growth in business formation—about 8,500 new businesses per year;
  • Increase the average employee’s yearly pay by about $524;
  • Decrease health care costs by up to $194 billion within the next ten years; and
  • Make space for innovation, resulting in 17,000 to 29,000 more patents annually.

As the landscape of employment law evolves with these significant rule changes, stakeholders are closely watching the outcomes of the broader impacts on the workforce and economy.

Looking Forward: How Might the FTC Rule Affect You?

The FTC Rule is set to become effective September 4, 2024, subject to the pending lawsuit and potentially more to come.

On the Effective Date, employers will be banned from entering into new noncompete agreements with any type of worker. The enforceability of a noncompete agreement entered into prior to the Effective Date is contingent upon the worker’s classification, summarized below:

  • Noncompete agreements binding senior executives will still be enforceable. A “senior executive” is defined as an employee in a policy-making position earning more than $151,164 per year.
  • Noncompete agreements binding workers who are not considered a senior executive will no longer be enforceable. Employers will be required to provide notice to these workers that the agreement cannot and will not be enforced against them in the future. Model language is included in the FTC Rule to assist employers with giving the notice.

The FTC Rule includes a few notable exceptions—it will not apply to noncompete clauses entered into pursuant to a bona fide sale of a business entity or ownership interest therein, nor where a cause of action related to a noncompete clause accrued prior to the Effective Date.

The OT Rule:

On the same day of the FTC Rule announcement, the Labor Department adopted the OT Rule, expanding the pool of salaried employees eligible for federal overtime pay. Currently, only employees making $35,568 or less annually are eligible for overtime pay. Below is a timeline illustrating the OT Rule:

  • July 1, 2024 – the rule becomes effective; the salary threshold will increase to the equivalent of an annual salary of $43,888
  • January 1, 2025 – the salary threshold will increase to $58,656
  • July 1, 2027 – the salary threshold will be updated and will continue to be updated every three years

The FTC’s ban on noncompete agreements and the Department of Labor’s expansion of federal overtime eligibility signal a transformative shift in the regulatory landscape that affects both employers and employees across the United States. These changes are designed to increase workforce mobility and enhance wage equity, potentially leading to significant economic and social benefits. Employers must now navigate these new rules with a clear understanding of their implications and prepare for compliance by adapting their practices and policies accordingly. Bernkopf is here to help employers stay informed and proactive in addressing upcoming changes.

Eric R. Allon may be reached by email at eallon@bernkopflegal.com or by phone at 617.790.3415.

David L. Hansen may be reached by email at dhansen@bernkopflegal.com or by phone at 617.790.3440.

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ABOUT THE AUTHOR

Eric R. Allon

Partner

ABOUT THE AUTHOR

David L. Hansen

Partner