What Employers Need to Know About The Recent Three Big Changes to Federal Employment Law and New Rules

This week saw significant expansion to employee protections under federal standards as a result of three groundbreaking developments. These developments effectively do the following: (1) render employee non-compete agreements invalid, (2) widen the pool of employees eligible for overtime pay, and (3) lessen the burden for employees to establish discrimination claims arising out of workplace transfers that impact the conditions of their employment. Some of these changes will impact employers sooner than others, so it is important for all employers to review their policies and employment contracts and consult with employment counsel.

1.     Virtually all non-compete agreements will soon be unenforceable under a new FTC Rule.

On April 23, 2024, the Federal Trade Commission adopted a final rule that renders virtually all non-compete agreements invalid. As most employers know, these contractual provisions protect organizations by preventing employees from jumping ship and taking clients and confidential information to work for a competitive company.

The final rule defines non-compete agreements as any condition barring a worker from "(A) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (B) operating a business in the United States after the conclusion of the employment that includes the term or condition."

The new rule, which is scheduled to go into effect 120 days after it is published in the Federal Register, prohibits new non-competes and invalidates existing non-compete provisions in otherwise enforceable agreements. The rule, as adopted, does have an exception: existing non-compete provisions covering senior executives can remain in place. The FTC defined “senior executives” as employees who make more than $151,164 a year and are in a "policy-making position" for the employer. The final rule prohibits all future non-compete agreements, including for such senior executives.

The final rule also includes a sale of business exception, which was modified from the proposed rule in response to concerns about an ownership percentage threshold. The final rule will not apply to “a noncompete clause that is entered into by a person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.”

Legal challenges to the newly adopted rule have already been filed, but employers must be aware of this prospective rule. If the challenges fail and the rule goes into effect, employers will be required to provide written notice to employees (other than senior executives) that their non-compete is no longer enforceable.

Bottom Line: Although the legality of the FTC’s ban on non-competes is already being challenged, employers with non-compete agreements in place should consult with employment counsel to discuss modifications to prospective employment agreements, and potentially prepare a letter to employees informing them of the agreements’ nullification in the event the rule ultimately goes into effect.

2. More salaried employees will be eligible for overtime pay.

The federal Fair Labor Standards Act (“FLSA”) requires employers to pay salaried employees (that is, employees who are not paid on an hourly basis) overtime pay if those employees (1) earn less than a threshold amount (currently $35,568) or (2) their work duties do not meet one of the recognized exemptions (e.g., executive, administrative, outside sales, learned professionals, creative professionals, certain computer employees, or highly compensated employees). Employees who do earn more than that threshold amount, and their work duties meet one of the stated exemptions can be classified as “exempt.” That is, they are not eligible for “overtime pay”—compensation at a rate not less than 1.5 times their regular rate of pay when they work more than 40 hours on a given work week.

 

A new rule promulgated by the U.S. Department of Labor (“USDOL”) on April 23, 2024, expands the pool of employees covered by the FLSA’s overtime protections by raising the threshold annual amount that employees covered by the FLSA must earn in order to meet the salary part of the exemption test. The new rule provides that:

 

• Beginning on July 1, 2024, employers will have to pay overtime to salaried workers who earn less than $43,888 per year.
• Beginning on January 1, 2025, employers will have to pay overtime to salaried workers who earn less than $58,656 per year.
• Beginning July 1, 2027, and every three years thereafter, there will be an increase to the salary threshold applicable to the executive, administrative and professional exemptions.

 

Thus, the USDOL’s new rule greatly increases the amount that salaried employees must earn on an annual basis from the current $35,568 annual salary threshold.

Bottom Line: Although the USDOL’s new rule is expected to be subject to a legal challenge, employers should reevaluate the exemption status of their salaried employees now to be ready for this upcoming change in the event the rule goes into effect.

3. Employment transfers can now be ripe for discrimination claims under Title VII.

The U.S Supreme Court (“SCOTUS”) has just issued an opinion that makes it easier for employees to pursue suits alleging that a job transfer violates federal employment discrimination law. The opinion, issued in Muldrow v. City of St. Louis, Missouri, holds that an employee alleging that an employment decision violated Title VII of the Civil Rights Act of 1964 must allege that the decision at issue caused the employee to suffer some harm. The Court clarified that the employee need not establish “substantial harm” to sustain the claim.

The plaintiff in the case, claimed the St. Louis Police Department transferred her to a less desirable job within the department because she is a woman. She sued the department for violations of state law and Title VII of the Civil Rights Act of 1964, which prohibits discrimination impacting an employee’s "compensation, terms, conditions, or privileges of employment because of such individual's race, color, religion, sex, or national origin."

A Title VII plaintiff must show that the subject employment decision resulted in a “disadvantageous” change to a term or condition of employment. In Muldrow, SCOTUS explained a plaintiff “need show only some injury respecting her employment terms or conditions,” and, in that case, a showing that “[t]he transfer left her worse off” was sufficient, without imputing the need to demonstrate that it “left her significantly so.”

In Muldrow, SCOTUS summarized the relevant allegations as follows: the department moved the female officer “from a plainclothes job in a prestigious specialized division giving her substantial responsibility over priority investigations and frequent opportunity to work with police commanders. . . to a uniformed job supervising one district’s patrol officers, in which she was less involved in high-visibility matters and primarily performed administrative work. Her schedule became less regular, often requiring her to work weekends; and she lost her take-home car.”

This, on its face and if proven, appeared to be a sufficient showing of disadvantageous reassignment, even without allegations of a change in salary or title.

The Court clarified that, if the officer’s allegations are proved, she was “left worse off several times over.”

SCOTUS explained, “It does not matter, as the courts below thought, that her rank and pay remained the same, or that she still could advance to other jobs.” This decision settles a circuit split on an important issue: whether Title VII creates a right of action for lateral job transfers.

Bottom Line: In light of SCOTUS’ opinion in the Muldrow case, employers should update the anti-discrimination policy in their employee handbooks to require prompt investigations of an employee’s internal discrimination complaint pertaining to all types of adverse employment decisions, including a job transfer, changes to an employee’s visibility, dress code requirements, schedule, or vehicle access.

The Muldrow opinion also reinforces the need for employers to train and require supervisors to have legitimate business reasons for their employment decisions, including employee job reassignments, which are documented.

 

Please contact a member of our employment law practice group in furtherance of your organization’s employment law compliance efforts.