By Robert A. Vernon, Esq. 

The more things (try to) change, the more they stay the same. Earlier this year, the Department of Labor’s Wage and Hour Division revised its regulations regarding the Fair Labor Standards Act’s definition of “salary-exempt” employees under the FLSA’s executive, administrative, and professional (“EAP”) overtime exemption. This proposed Rule increased the minimum salary for employees exempt from federal overtime pay requirements under EAP criteria from $684 per week ($35,568 per year) to $844 per week ($43,888 per year) effective July 1st of this year, set a greater increase to $1,128 per week ($58,656) starting January 1, 2025, and established a framework for regular additional increases every three years starting July 2027. The Rule contained similar changes for employees exempt under the “highly compensated employee” (“HCE”) exemption, for which there is a less intense duties analysis, in exchange for a much higher salary. In recent months, employers have been scrambling to either re-classify employees as eligible for overtime or increase salaries to meet these new standards.

Now, it appears that all has been for naught. Late last week, a federal judge in the Eastern District of Texas, in the case Texas v. Department of Labor, struck down the Department of Labor’s increases to the minimum salary requirement, finding that the Department’s changes exceeded its statutory authority. The Court specifically looked at the exclusionary effect these salary increases would have on employees who would otherwise meet the duties requirements for an EAP exemption, but who were not being paid at the new salary levels. The Court found that the new Rule placed an unreasonable focus on salary (as opposed to the actual duties performed by the employee), and held that this was contrary to the intention of the FLSA.

Surprisingly, the Court set aside the entire new FLSA Rule, including the minimum salary increases to $844 per week that have already come into effect as of July 1st. The Department of Labor’s application of the Fair Labor Standards Act has included a minimum salary level for exempt employees from its inception over eighty years ago. That minimum salary has been periodically increased over the years to account for factors such as inflation and average wages nationwide. The last such increase in minimum salary (to $684 per week) occurred in 2019. The July 1, 2024 increase was explained by the DOL to essentially be an adjustment on these same lines. The Eastern District of Texas Court ruled, however, that even this increase was made with too short an interval from the last increase (generally, increases occurred every ten to fifteen years), and struck down this portion of the Rule as well.

What’s Next?

The Department of Labor has not yet made a decision on whether or not to appeal the Eastern District of Texas decision. Any appeal would be made to the Fifth Circuit Court of Appeals, which is generally considered one of, if not the most, conservative federal appeals courts. The Fifth Circuit, however, issued its own decision in late September of this year with regard to the 2019 salary increases, in the case Mayfield v. Department of Labor, finding that the Department of Labor had the authority to set salary minimums as a part of its exemption criteria. This could signal that the Fifth Circuit may overturn some or all of the District Court’s ruling.

There is some question as to whether the Department of Labor will appeal. With the new Presidential Administration taking office in January, the DOL’s focus may shift away from support of the salary increases. Even if an appeal was filed in the next few weeks, it could be withdrawn once the new Administration takes office.

Even if there were an appeal, there is no guarantee that the District Court’s ruling would be overturned, or that such a ruling would happen in the near future. The Appeals Court could, however, issue a stay of all or part of the District Court’s ruling while the appeal is pending, meaning that some or all of the salary increases would go back into effect while the appeal was pending. The labor and employment attorneys at Peacock Keller will closely monitor any developments and will be available to advise you on how to navigate these changes.

What this means for employers

The Texas District Court’s ruling fully set aside the Department of Labor’s Rule in its entirety, and has nationwide effect. This means that (for the time being) the increased salary numbers are no longer required for an employee to qualify for overtime-exempt status under the EAP exemption.

So, for now, the previous salary level, $684 per week ($35,568 per year) is again the minimum salary for an employee’s qualification for an exemption under the executive, administrative, or professional standards.

For employers who have already increased salaries or reclassified employees based on the July 1st salary level, or in anticipation of the January 1, 2025 increase, there may be questions on how to roll back their changes. Depending on the nature of this roll back, there may be potential liabilities and generally aggrieved employees. Employers should exercise caution with any changes to employee classification, and work closely with experienced labor and employment counsel to minimize risk.

Employers should remember that regardless of salary, employees are also required to satisfy certain duties criteria to meet EAP or highly compensated employee status. This element of FLSA overtime exemption continues to be the DOL’s primary focus in determining whether an employee should be exempt from overtime requirements, and those duties tests should continue to be an employer’s focus in classifying their employees.

The labor and employment attorneys at Peacock Keller are experienced in Fair Labor Standards Act matters and advising employers of all sizes on how to comply with federal and state wage regulations. We are happy to assist with any questions you may have regarding these rapidly changing regulations.

Can you please put a pop up on our website for our Thanksgiving hours?

Wednesday 11/27- 8:00am- 2:00pm

Thursday 11/28- Closed

Friday 11/29- Closed

By Robert A. Vernon, Esq. 

There was big news last week out of two federal rulemaking bodies that will have a substantial impact on how businesses operate.  

On Tuesday, April 23, 2024, the Federal Trade Commission voted to finalize a Rule prohibiting companies from entering into non-compete agreements with their employees and from enforcing existing agreements with most employees.  This Rule will go into effect 120 days after its final publication, likely in the coming months.

The same day, the Department of Labor’s Wage and Hour Division revised its rules regarding the Fair Labor Standards Act’s definition of “Salary-Exempt” employees, increasing the minimum salary for employees exempted from federal overtime pay requirements to $43,888 per year ($844 per week) effective July 1, 2024, and again to $58,656 per year ($1,128 per week) effective January 1, 2025.

FTC Prohibition of Non-Compete Agreements

The new Federal Trade Commission Final Rule bans employers from entering into any new non-compete agreements with all “workers,” which includes employees, independent contractors, interns, volunteers, and apprentices (among others).  The Rule further requires that existing non-competes with most workers are unenforceable after the Rule takes effect.  

Non-compete agreements are defined by the FTC to include not only explicit agreements prohibiting an employee from working for a competitor or operating their own business in competition with a prior employer after the conclusion of employment, but to also include agreements that financially penalize an employee for competing with their former employer, such as agreements requiring an employee to forfeit deferred compensation or bonuses or to pay a penalty.  The FTC has also stated that it will closely analyze other agreements, such as non-disclosure, confidentiality, trade-secret, and non-solicitation agreements to determine whether those agreements are so broad or encompassing that they have the same effect as a non-compete.  Employers should carefully review the terms of any of these agreements currently being used to ensure that they are narrow enough in scope to not fall under the prohibitions of the new Rule.

The FTC has carved out limited exceptions to the Rule:

• Existing non-compete agreements with senior executives of a company may continue to be enforced after the Rule takes effect.  The FTC defines a senior executive as an employee with “policy making authority” for the entire business whose total compensation is at least $151,464 per year, excluding fringe benefits.  A “policy making position” is extremely limited under the FTC’s definition to include a company’s president, CEO, or an equivalent position.  New non-compete agreements with senior executives will still be prohibited.  

• A non-compete agreement may be permissible where it is agreed upon in connection with the sale of a business, a worker’s ownership interest in a business, or all or substantially all of a business’s operating assets.  The FTC’s guidance cautions, however, that this exception only applies to the sale of a business in a bona fide arms-length transaction, and that arrangements such as stock buybacks and redemptions or sales between subsidiaries would not qualify for this exception.

The FTC Rule requires employers to provide written notice to each worker that had previously entered into a non-compete clause or agreement that the agreement is no longer enforceable, and that the employer will not attempt to enforce the non-compete agreement against the worker.  The FTC has provided model language, found here, that it considers appropriate notice.  

There is some good news for those employers who are already seeking to enforce a non-compete agreement against a former employee: the new Rule specifically states that actions to enforce an agreement that was violated prior to the Rule’s effective date are excluded from the non-enforcement language.  This means that if a former employee becomes employed by a competitor or otherwise violates an existing non-compete prior to the Rule’s effective date, the employer is permitted to take action to enforce the non-compete and seek damages for the employee’s violation of the agreement.

The FTC Final Rule will go into effect 120 days after its publication in the Federal Register.  The date of publication has not been determined at this time.  

We anticipate substantial litigation on the FTC’s authority to enact and enforce this Rule in the coming months.  Two groups, one led by the United States Chamber of Commerce, have already filed lawsuits seeking Court intervention to declare the Rule in violation of the FTC’s authority under the U.S. Constitution and other federal law and to prevent the FTC from enforcing the Rule.  The attorneys at Peacock Keller, LLP will continue to closely monitor any new developments in these regulations and stand ready to assist you in answering any concerns and developing effective and enforceable agreements and policies in line with these new regulations and other relevant laws.

FLSA Salary Basis Increase for Overtime Exempt Workers

The Fair Labor Standards Act permits employers to employ certain employees on a salary basis, not subject to overtime pay, provided that certain limited exceptions apply.  Most commonly, employees must satisfy certain duties requirements, commonly called the “white collar” overtime exemptions (executive, administrative, professional, computer) and satisfy a minimum salary requirement.  That requirement was last updated in 2020, when it was increased to $684 per week ($35,568 per year).

An employee can also qualify for exempt status as a highly compensated employee if he or she meets a less stringent version of the duties test and earns at least $107,432 per year.

On April 23, 2024, the Wage and Hour Division issued its own Final Rule increasing the minimum salary requirements for the overtime exemption.  Effective July 1, 2024, an exempt employee under the more stringent white-collar exemptions must receive a minimum salary of $844 per week ($42,888 per year).  The minimum salary requirement will again increase on January 1, 2025 to $1,128 per week ($58,656 per year).

An employee classified as exempt under the highly compensated employee classification will see similar increases, to $132,964 per week beginning on July 1, 2024, and to $151,164 per week beginning on January 1, 2025.

The Rule provides for additional increases every three years, beginning July 1, 2027, based on current earnings data.  The Department of Labor will publish any salary basis increase at least 150 days prior to that increase taking effect.

As with the FTC Rule, we are likely to see attempts to block these changes to the FLSA overtime-exempt requirements through the Courts.  The Department of Labor attempted to increase the salary basis requirements in 2016 coupled with automatic increase language similar to this new Rule but was blocked by the Courts.  Ultimately, the Department of Labor rescinded those increases in favor of the more modest salary basis requirements currently in effect.

At this point, employers should prepare for the salary basis increase to take effect in a few short months.  Employers should work with their labor and employment counsel to carefully evaluate the current salaries of their exempt employees.  If any exempt employee falls below the minimum salary requirements, the employer should consider whether it would be better to increase that employee’s salary or re-classify that position as non-exempt and subject to overtime laws.  Employers should act quickly in making this determination, to allow for time to adequately notify affected employees and provide appropriate training on timekeeping and overtime policies.

The attorneys at Peacock Keller are experienced in wage and hour matters and advising employers of all sizes on how to comply with federal and state wage regulations.  We are happy to assist with any questions you may have regarding these rapidly changing regulations.