The Legal Challenges to New Labor and FTC Rules

Advisors should be aware of recent developments related to, first, the Department of Labor (DOL) regulation of the overtime/minimum wage exemption for employees who are employed in a bona fide executive, administrative, or professional (EAP) capacity, and, second, Federal Trade Commission (FTC) regulations recently adopted to ban most non-compete clauses in employment relationships.

Legal Status of the New DOL Rule on Exempt Employees

The new DOL rule updates the wage levels that exempt certain employees from the overtime/minimum wage rules that normally apply to workers. The new rule is scheduled to take effect on July 1, 2024. It would increase the threshold salary from $684 per week to $844 per week (equivalent to $43,888 per year) to qualify a worker as an exempt EAP worker. For highly compensated employees the annual compensation level to be exempt will increase from $107,432 to $132,964. DOL estimated that the new thresholds would affect about one million workers.

Additional increases are provided for January 1, 2025, when the salary threshold will be $1,128 per week (equivalent to $58,656 per year). For highly compensated employees, the compensation level will be set at the annualized weekly earnings of the 85th percentile of full-time salaried workers nationally, resulting in a compensation level of $151,164.

The next three-year update will take place on July 1, 2027.

The lawsuit challenging the rule was filed in a federal court in Texas, seeking to enjoin the new rule. The history of DOL’s rules on the salary threshold is troubled, although the threshold has been increased many times over the years since it was first established. In 2016 a similar rule was enjoined by a federal judge in Texas, but in 2019 another judge upheld an updated rule. The 2019 decision was appealed and is pending.

The federal District Court in Texas, in an opinion issued June 28, 2024, enjoined the DOL rule governing the salary level DOL used to define “exempt” employees, but only as regards the State of Texas as an employer. This limitation was based on the limited evidence presented by Texas as to the scope of harm it claimed would result from the new rules for determining which employees were exempt. Other lawsuits with potentially broader effects are still pending in federal courts in Texas and may yet result in additional restrictions on enforcement of the new DOL rules. The timing of those decisions is uncertain.

Legal Status of the New FTC Rule Banning Non-Compete Clauses

We wrote about the FTC rule on non-competes last month. If not delayed by legal action, the ban will take effect on September 4, 2024. The U.S. Chamber of Commerce and others argue that the FTC lacks legal authority to issue a rule like this one.

In a decision like the one in the DOL exempt-employment rule case, a federal judge in Texas has enjoined temporarily the FTC’s non-compete ban. The decision only applies to the five entities that filed the suit. A similar challenge has been filed in Philadelphia but has not been decided.

Arguably, these decisions increase the chances that the FTC rule will be enjoined as to all affected entities before it becomes effective, but there are no assurances about that result being sustained on appeal.

What should advisors affected by these rules do now?

The uncertainty created by these cases is unfortunate but not uncommon. The best way forward remains for each potentially affected business to consult with legal counsel about options and follow that advice. The DOL rule relates to which employees must be paid overtime, so contingency planning is relatively straightforward. There are also techniques available to achieve some of the protections afforded by non-compete clauses that are not covered by the FTC ban. These can only be established in conjunction with legal advice from counsel.