Sweeping Regulations Affecting Employers Recently Announced

Two federal government agencies have announced significant new regulations in the last week that will affect how many employers will conduct business moving forward.  A description of these changes and suggestions for how to respond are below.

Salary Increases are Coming
The Department of Labor (DOL) has issued new salary thresholds for salaried employees.

As a brief reminder of requirements: employers who wish to pay an employee on a salaried basis (known as an “exempt employee”) must meet three qualifications:

1. The position must meet the job requirements for exempt duties. Most of these duties require advanced levels of education or involve the exercise of independent judgment, management of personnel, and/or the ability to make decisions on significant matters of importance to the business.  For a more thorough description of exempt qualifications, please see Fact Sheet #17A on the Department of Labor.

2. The position must be paid a fixed salary each pay period. This salary may not be subject to deductions with few exceptions, including legally required (garnishments) and voluntary deductions (insurance premiums, 401(k) contributions).

3. The employee must be paid a minimum of $684 per week ($35,568 annually).

It is this last requirement that will be changing, and the change will be substantial. As of July 1, 2024, all exempt employees must make a minimum of $844 per week ($43,888 annually). The minimum salary requirement will increase again to $1128 per week ($58,656 annually) on January 1, 2025. The law now also requires an adjustment to the wage every three years on July 1.

For those salaried workers whose pay includes commissions or bonuses (variable pay), the law allows employers to attribute 10% of the salary requirement to bonuses and commissions. Furthermore, it allows employers to make a lump sum “corrective” payment on the first payroll after December 31 of each year, should an employee not meet the minimum salary requirement due to bonus or commission shortfalls.

What actions should employers take?
Employers should review their list of exempt (salaried) employees, determining which individuals fall below the new salary thresholds. Once that group is determined, employers have two options: Raise the wages of salaried individuals to meet the new thresholds OR Change the employees’ status to nonexempt (hourly), which allows them to be eligible for overtime pay. Whether option one or two is the better choice will no doubt be based primarily on the financial impact of the decision. However, there are other issues employers will need to consider and address as well:

Morale: Employees often attach status and job satisfaction to being a “salaried” employee.  If they are changed to a nonexempt (hourly) status, they may see this as a demotion even if their responsibilities and authority have not changed. Some employers choose to address this by designating people as salaried nonexempt (paid a fixed salary but eligible for overtime pay after 40 hours a week). Others, choose to emphasize the positives of being able to earn overtime. How employers choose to address this issue will depend on the specifics of their workforce and culture. They should be prepared with a response for those who are unhappy with their change in status.

Benefits: Some companies attach benefits to specific categories of employees. If premiums or eligibility for benefits are tied to hourly or salaried status, employers will need to notify affected employees of these changes if they are being moved to hourly status.

Pay Equity: If employers decide to raise the salaries of exempt employees to the new thresholds, this may create discontent among longer-service employees who now may make only a small amount more than their lower-experienced colleagues. Since the overtime law has been widely publicized in the media, employees will know that others are at least earning the minimum salary required by the regulations, and if they have more experience and tenure, they are likely to approach their managers for raises, appealing to fairness and equity. Companies should anticipate and have a plan for addressing those concerns.

Recordkeeping: Employers will need to consider how new hourly staff members will record their time for the company. Will they be required to use a time, submit time sheets, or use some other method for documenting time worked?

What about the courts?
As has happened with other regulations (including a similar overtime wage increase proposed in 2016), this rule is likely to be challenged in the courts. However, employers should not wait until the courts have ruled on this matter. A court would have to issue a stay in every circuit in which an employer is located to stop this rule from going into effect. Even if those stays were issued, the stays may not occur before the July or January effective dates. Employers should make plans to address the change to the rule and defer implementation of the changes until closer to the July and January effective dates (in the event a stay is issued by the courts beforehand). To put it simply: prepare for the worst and hope for the best. But the “preparation” part is key!
Say Goodbye to Non-Competes
The Federal Trade Commission (FTC) issued a regulation that effectively bans the use of non-compete agreements in for-profit businesses.

The rule is scheduled to go into effect 120 days after it is officially published (estimate: late August). After the effective date, any non-competes (whether new or already in existence) will not be enforceable in the courts, with two exceptions:

1. Any non-compete agreements for executives signed before the effective date of the rule (restricted to president, CEO, and similar level positions)
2. Non-compete agreements obtained as part of a sale of a business or ownership interest.

As the FTC has no authority over nonprofit organizations, it may be assumed that this rule does not apply to nonprofit entities. The FTC has indicated, however, that certain nonprofits (for example, in healthcare) may also be covered by the new rules. These employers should contact legal counsel to determine the applicability of this rule to their organizations.

In addition to the above, the law also requires that companies notify current and former employees with existing non-compete agreements in writing that these agreements will no longer be enforced.
What agreements are affected?
The regulations define a non-compete as an agreement signed as a term or condition of employment that effectively prohibits, penalizes, or functions to prevent a worker from seeking or accepting work with another business or operating a business.

If you note in the above definition, the new regulations do not currently ban any of the following types of agreements: Non-solicitation agreements Non-servicing agreements Non-disclosure/confidentiality agreements Non-recruiting (“poaching”) agreements As a result, companies may wish to work with their legal counsel to revise their current non-compete agreements to ensure the above issues are addressed while still complying with the new regulations.

What are the next steps?
As with all major shifts in the law, employers must prepare to comply well before the deadline. Companies should consider the following matters:

Notices – develop the required notice to employees who currently are subject to non-compete agreements. While the government plans to issue a model notice, some employers may not want to wait until the last minute for it to be released. If not using the FTC model notice, please consult legal counsel for appropriate notice language.

New Hires – companies should decide whether they wish to continue the practice of having new hires sign non-competes up to the law’s effective date. Some employers may do so, hoping that courts will overrule current regulations and thereby ensuring all hires continue to be covered by a non-compete agreement. 

Revise Agreements – Contact legal counsel to revise your current agreements, keeping in mind the restrictions still allowed under the regulations.

Trade secrets/confidential information – Companies should examine those items they consider trade secrets or confidential information. They should make sure these are properly marked as confidential and have restricted access. Failure to take these steps may make any breach of confidentiality difficult to enforce in court.

Create talking points – As with the overtime regulation changes, this new regulation has been widely publicized in the media. Employees are likely to approach HR and other management staff, asking whether their agreements are still in force. The company should have standard talking points available to managers who may be approached on this matter to ensure communications are consistent and accurate for all employees affected.

Again – What About Lawsuits?
While it is true that the Chamber of Commerce and others are already challenging this new regulation in court, employers should not hide their heads in the sand, hoping that the courts issue a stay to this ruling. Everyone should be preparing for the law to go into effect, while delaying implementation until just prior to the effective date. 
The information and suggestions contained in this material have been developed from sources believed to be reliable. However, OVD Insurance Agency accepts no legal responsibility for correctness or completeness of this material, or its application to specific factual situations.