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What Employers Need to Know About New Overtime Pay and Noncompete Agreement Requirements

Overtime, Office Binder on Wooden Desk. On the table colored pen

The U.S. Department of Labor (DOL) has announced a new final rule concerning the salary threshold used to determine exemptions from federal overtime pay requirements. The threshold will jump 65 percent from its current level by 2025, potentially making an additional four million workers eligible for overtime pay.


On the same day the overtime pay rule was announced, the Federal Trade Commission (FTC) approved a final rule prohibiting most noncompete agreements with employees. These regulations carry significant implications for numerous employers. Although court challenges could potentially alter them, it is crucial to understand their current implications.


The Overtime Pay Rule

According to the Fair Labor Standards Act (FLSA), employees categorized as nonexempt are eligible for overtime pay at a rate of 1.5 times their regular pay rate for any hours worked beyond 40 per week. However, certain employees are exempt from these overtime requirements if they meet three specific criteria:

  1. Salary Basis Test: The employee receives a predetermined and fixed salary that remains constant, regardless of variations in the quality or quantity of their work.

  2. Salary Level Test: The salary is not less than a specific amount or threshold, currently $684 per week or $35,568 per year.

  3. Duties Test: The employee primarily performs executive, administrative, or professional duties.


The new rule focuses on the salary level test and will implement the threshold increase in two phases. Beginning July 1, 2024, most salaried workers earning less than $844 per week will become eligible for overtime pay. On January 1, 2025, this threshold will increase to $1,128. 


Additionally, the rule will raise the total compensation requirement for highly compensated employees (HCEs). Unlike employees earning less, HCEs are subject to a more lenient duties test, where they are only required to “customarily and regularly” perform at least one duty of an exempt executive, administrative, or professional employee rather than primarily performing such duties.

The relaxed test currently applies to HCEs engaged in office or nonmanual work, with a total compensation threshold, including bonuses, commissions, and specified benefits, of at least $107,432 per year. On July 1, 2024, this threshold will rise to $132,964 annually and again increase to $151,164 on January 1, 2025. 


Furthermore, the final rule incorporates a mechanism to adjust the salary thresholds every three years. These updates will reflect current earnings data from the most recent four quarters available from the U.S. Bureau of Labor Statistics. The rule empowers the DOL to temporarily delay a scheduled update in the event of unforeseen economic or other circumstances. Any revised thresholds will be published at least 150 days before taking effect.


Plan Your Approach

Employers should carefully review employee salaries to determine those impacted, particularly those whose salaries meet or exceed the current level but fall short of the new thresholds. Employers may want to increase some salaries to retain exempt status for employees hovering near the new thresholds. Alternatively, employers could reduce or eliminate overtime hours or ensure proper compensation for overtime work. Another option is to decrease an employee's salary to offset the additional overtime pay. Each approach warrants careful consideration to align with legal requirements and maintain a fair and compliant work environment.


Meeting the salary threshold alone does not guarantee exemption from overtime pay. Exempt employees must also satisfy the applicable duties test, which varies depending on whether the exemption pertains to an executive, professional, or administrative role. An employee whose salary exceeds the threshold but does not primarily perform the applicable duties is not exempt.


Depending on the selected approach, budget adjustments may be necessary. If certain employees undergo reclassification as nonexempt, employers may need to provide training sessions on updated timekeeping requirements and place restrictions on off-the-clock work to ensure compliance with overtime regulations.


Be aware that businesses have promised to file lawsuits to block the new rule, as they successfully did with a similar regulation enacted in 2016. Furthermore, recent years have seen the U.S. Supreme Court adopting a critical stance toward administrative rulemaking. Certain employers may also be subject to state and local wage and hour laws, which might impose stricter criteria for exempt status.


Noncompete Agreement Ban

The new rule issued by the FTC prohibits the majority of noncompete agreements across the nation, potentially conflicting with existing state laws. Moreover, existing noncompetes for most workers will no longer be enforceable after 120 days. This change may impact approximately 30 million workers. However, it does not apply to certain noncompete agreements related to the sale of a business.


The rule includes an exception for existing noncompetes agreements involving senior executives, defined as workers earning more than $151,164 annually and holding policy-making positions. These policy-making positions include president, chief executive officer, any other officer with authority over company policies, or individuals with similar authority to an officer with policy-making authority. 


Under the new rule, employers cannot implement new noncompete agreements with senior executives.


Unlike the proposed rule issued for public comment in January 2023, the final rule does not mandate employers to legally modify existing noncompetes by formally rescinding them. Instead, employers must provide notice to workers bound by existing agreements, excluding senior executives. This notice must convey that the employer will not enforce these agreements against the workers. The rule includes model language that employers can use to provide notice.


A lawsuit was filed in a Texas federal court shortly after the FTC voted on the final rule, arguing the FTC does not have the statutory authority to issue the rule. The U.S. Chamber of Commerce subsequently filed a court challenge blocking the ban on noncompete agreements.


Here to Help

The fate of both these rules in their current form remains uncertain. Judicial intervention or potential shifts in federal political dynamics could result in these rules being sidelined before implementation or shortly after. Rest assured, Berman Hopkins CPAs & Associates will continue to provide you with the latest updates on developments concerning these regulations. We build value-added relationships with each client to understand their business structure and provide solid solutions. Our innovative cross-functional services help businesses address the challenges ahead. Contact us to let us know how we can best support you.


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