In the past few weeks, federal agencies have announced several new rules, regulations, and guidelines that will impact employers nationwide, including in California. WTK summarized the new regulations regarding the Pregnant Workers Fairness Act last week – you can read our full alert here. Today, we will provide key information about three additional new developments:

• Exempt Salary Threshold: Starting July 1, 2024, employers nationwide must pay employees at least $844 per week (or $43,888 per year) to qualify for the executive, professional, or administrative exemptions under federal law. On January 1, 2025, the salary requirements will increase to $1,128 per week (or $58,656 per year). Since these salary minimums are lower than the current salary threshold for the exemptions in California (which is currently $66,560 per year), this rule will not have a direct impact on California employees, but employers with employees outside the state should prepare to comply with the new federal rule by increasing the salaries of any exempt employees who fall below the new threshold or re-classifying those employees as non-exempt.
• Nationwide Ban on Non-Compete Agreements: As of September 4, 2024, nearly all employment non-compete agreements will be banned nationwide. A new Federal Trade Commission (FTC) rule prohibits employers from entering into new non-compete agreements, makes most existing non-compete agreements unenforceable, and requires employers to provide notice to current and former workers that non-compete agreements are no longer in effect before the effective date of the rule. The rule has already been challenged in multiple courts, and there is a chance that a court may delay implementation of the rule. However, in the meantime, employers should consider what the rule would mean for their businesses if it goes into effect. While the new rule is, in many ways, narrower than California’s ban on contracts that restrain trade, there are several ways in which the new rule is slightly broader, specifically with respect to notice of void non-compete agreements. Therefore, California employers should also consider the steps they must take to comply with the new rule.
• Federal Guidance on Harassment: The federal Equal Employment Opportunity Commission (EEOC) recently issued new enforcement guidance on harassment in the workplace with more than 70 specific examples of harassment the EEOC deems unlawful, including examples related to harassment in remote work environments and harassment related to outing, misgendering, and denying employees’ use of restrooms consistent with their gender identity.

For additional details on each of these new developments, continue reading below.

Exempt Salary Threshold

Both federal law (the Fair Labor Standards Act) and California state law require that employers must pay most employees a minimum wage and overtime. There are several exemptions from both state and federal law, including the executive, administrative, and professional exemptions. Employees may be exempt from the minimum wage and overtime requirements if they are paid a salary, if that salary exceeds a certain level, and if they meet the specific “duties” test for one of the exemptions.

On April 23, 2024, the federal Department of Labor (DOL) announced a new update to the regulations implementing the federal overtime pay requirements. The full new rule is available here, and the DOL has published updated FAQs about the proposed rule here.

The new regulations do not change the duties test, but they do increase the salary threshold for the federal executive, administrative, and professional exemptions and the highly compensated employee exemption, with two new effective dates: the first new salary threshold goes into effect July 1, 2024, and the second will be effective on January 1, 2025. The regulations also provide that the earnings thresholds will be automatically updated every 3 years based on then-current wage data.

Note that the salary threshold for the overtime exemption in California is still higher than the new federal salary threshold: as of January 1, 2024, an employee in California must earn at least $66,560 per year or $5,546.57 per month to qualify for the executive, administrative, or professional exemptions, and that number may increase on January 1, 2025 if the minimum wage increases due to inflation. Further, there is no “highly compensated employee exemption” in California. Therefore, the new federal rule should not affect employees in California.

However, employers with exempt employees outside California should review their exempt employees’ salary levels and consider either increasing salaries to meet the new thresholds or converting the employees to non-exempt status in advance of the July 1 and January 1 deadlines.

Nationwide Ban on Non-Compete Agreements

On April 23, 2024, the Federal Trade Commission (FTC) adopted a rule that will ban nearly all employment non-compete agreements nationwide. The new federal rule prohibits employers from entering into new non-compete agreements, makes most existing non-compete agreements unenforceable, and requires employers to provide notice to current and former workers that non-compete agreements are no longer in effect.

The final rule was published on May 7, 2024, and is set to go into effect on September 4, 2024. You can read the complete rule here. The FTC has also published a Fact Sheet and a Guide for Business and Small Entity Compliance that provide helpful information.

The rule has already been challenged in multiple courts, and there is a chance that a court may delay implementation of the rule. However, in the meantime, employers should consider what the rule would mean for their businesses if it goes into effect.

• Covered Employers

Some employers are outside the FTC’s jurisdiction and are not subject to the new rule. Employers outside the FTC’s jurisdiction include banks, savings and loan institutions, federal credit unions, common carriers, air carriers, and certain non-profits.

• Covered Workers

The new rule applies to “workers,” defined to mean natural persons who work or who previously worked (whether paid or unpaid), including employees, independent contractors, externs, interns, volunteers, apprentices, or a sole proprietor who provides a service to a person. The term “ worker” includes a natural person who works for a franchisee or franchisor, but does not include a franchisee in the context of a franchisee-franchisor relationship.

• Definition of “Non-Compete”

The new rule defines a “non-compete clause” as any term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from getting a different job or starting a business after leaving their employment. The rule does not apply to restraints on concurrent employment, and applies only to restrictions on accepting a new job or starting a business after the conclusion of employment.

Notably, the rule includes terms or conditions of employment – it is not limited to explicit written non-compete agreements. It could also apply to workplace policies, whether written or oral. Therefore, when analyzing and identifying terms or conditions of employment that will be affected by the rule, employers should review employee handbooks and oral or written policies in addition to formal contracts and written agreements.

The FTC explained that the new rule’s prohibition on non-competes that prohibit, penalize, or functionally prevent future employment as follows:

• Prohibits: Terms and conditions expressly saying that a worker can’t get another job, such as with a competitor, or start a business.
• Penalizes: Terms and conditions that require a worker to pay a penalty if they get another job or start a business.
• Functionally prevents: Terms and conditions that aren’t labeled as non-competes but are so restrictive that they effectively prevent a worker from getting a new job or starting a business.

The FTC did not explicitly include “de facto” non-competes such as non-solicitation agreements, non-disclosure agreements, or agreements that require employees to repay training costs within the scope of the rule, but noted that these agreements could constitute prohibited non-compete agreements if they are so broad or onerous that they functionally prevent an employee from taking a new job or starting a business. Thus, employers should carefully consider whether any terms and conditions of employment rise to this level, including overly broad confidentiality or non-disclosure agreements, inventions agreements, non-solicitation agreements, and agreements regarding repayment of training costs or bonuses upon termination of employment. There will undoubtedly be litigation regarding the precise scope of the rule’s impact on these types of agreements.

• Exception for Sale of a Business

The Final Rule does not apply to non-competes 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.

• What Must Employers Do To Comply with the New Rule?
  • No New Non-Compete Agreements After September 4, 2024

Employers should not enter into, or attempt to enter into prohibited non-compete agreements after the effective date of the new rule (September 4, 2024).

• No Enforcement of Existing Non-Compete Agreements After September 4, 2024, With Limited Exceptions

Employers should not enforce or attempt to enforce non-compete agreements or represent that a worker is subject to a non-compete agreement after the effective date of the new rule (September 4, 2024), except with respect to “Senior Executives” who entered into non-compete agreements prior to the effective date.

“Senior Executive” is defined to mean a “worker” who earns total annual compensation of at least $151,164 and is in a “policy-making position,” which means a business entity’s president, CEO, or the equivalent, any other officer of a business entity who has policy-making authority, or any other natural person who has policy-making authority similar to an officer with policy-making authority. “Policy-making authority” is defined to mean final authority to make policy decisions that control significant aspects of a business entity or common enterprise and does not include authority limited to advising or exerting influence over such policy decisions or having final authority to make policy decisions for only a subsidiary of or affiliate of a common enterprise. There is likely to be considerable litigation over the meaning of “policy-making authority” and the scope of the partial exemption for Senior Executives. Employers should note that under the new rule, they still may not enter new non-compete agreements with Senior Executives after September 4, 2024 – they may only continue to enforce pre-existing non-compete agreements with these workers.

Also, employers should note that the rule does not prohibit enforcement of non-compete clauses where the cause of action related to the non-compete clause accrued prior to the effective date of the rule.

• Provide Notice to Current and Former Workers Before September 4, 2024

If any workers are subject to existing non-compete clauses that would be prohibited by the new rule, employers must provide clear and conspicuous notice to those workers that the clause will not be – and cannot legally be – enforced against the worker. Because the word “worker” is defined to include people who previously worked for an employer, the notice requirement applies to all current and former workers who are subject to prohibited non-compete clauses; however, employers are not obligated to inform former workers if they no longer have contact information for those individuals.

The FTC has provided model language for the notice communication. Employers are not required to use this template, but it is an example of what the FTC deems sufficient. You can access the template here.

The notice may be sent via hand delivery, mail, email, or text message. The FTC has confirmed that the communication does not need to be individually addressed to each worker; instead, an all-staff email with the FTC’s model language meets the requirement for current workers (and an employer can send an all-staff email even if only some workers are subject to non-compete agreements). The notice must be sent by the effective date of the rule (September 4, 2024).

• Potential Consequences For Violation of the New Rule

The new rule finds that non-compete agreements are an unfair method of competition and a violation of Section 5 of the FTC Act. There is no private right of action for a violation of Section 5; thus, a worker could not sue an employer for violation of the new rule. Instead, the FTC can pursue an adjudication or seek an injunction in federal court. The FTC is not authorized to recover civil penalties or other monetary relief unless a party is ordered to cease and desist from a violation of Section 5 and fails to do so.

• Litigation Uncertainty

At least two lawsuits have already been filed challenging the new rule, including two whose claims have been consolidated in a single case that is pending in the Northern District of Texas. The plaintiffs in this case have filed motions for a preliminary injunction, asking the court to prohibit the new rule from being implemented while their challenge to the FTC’s authority to issue the rule is litigated. The federal district court is expected to rule on that motion in July. However, even if the court grants the preliminary injunction and stops enforcement of the new rule, that decision is likely to be appealed. Therefore, employers may not have certainty regarding the enforceability of the new rule for months. Employers may wish to begin identifying the terms and conditions of employment that may be prohibited under this new rule, considering whether any Senior Executives might be exempted, assessing how burdensome it will be to issue the required notice to affected workers, and analyzing how they can best achieve their business goals with agreements or policies that do not run afoul of the new rule (such as non-disclosure agreements and invention assignment agreement). Employers should also consider the costs and benefits of moving forward with compliance now versus waiting to learn more about the outcome of the litigation.

• What This Means for California Employers

In many ways, the new federal rule is narrower than California’s ban on contracts that restrain trade, which has been in place since the late nineteenth century and was just strengthened with amendments effective January 1, 2024. (See Cal. Bus. & Prof. Code §§ 16600-16607.) You can read more about California’s law in our Special Alert here.

However, there are several ways in which the new rule might be slightly broader, specifically with respect to notice of void non-compete agreements.

First, of course, the new federal rule would make it clear that California employers cannot enter into or enforce non-compete agreements with respect to their employees in other states (except as allowed under the federal rule).

Second, although California required employers to notify employees of void non-compete agreements by February 14, 2024, California’s notice requirement was limited to current employees and former employees who were employed at any point after January 1, 2022. Because there is no time limit on the federal rule’s notice requirement, it is possible that California employers would be obligated to issue a notice to former employees for whom they have contact information but who did not already receive a notice under California law.

Third, California’s notice requirement was limited to employees. The federal notice requirement applies to all workers, including independent contractors, volunteers, and interns. California employers should consider whether any additional workers must be notified of void non-compete agreements under the federal rule.

Federal Guidance on Harassment

The federal Equal Employment Opportunity Commission (EEOC) recently issued new enforcement guidance on harassment in the workplace. Employers are encouraged to review the complete guidance here. The EEOC has also published a summary of key provisions here. Federal law already bans workplace harassment based on protected characteristics, including race, color, religion, sex (including sexual orientation; gender identity; and pregnancy, childbirth, or related medical conditions), national origin, disability, age (40 or older), and genetic information (including family medical history). Existing law also makes it clear that to violate the law, harassment must either create a hostie work environment or involve a change to the victim’s employment (such as termination, demotion, etc.).

This new guidance provides more than 70 specific examples of harassment the EEOC deems unlawful. Among other things, the guidance explains a cause of action for harassment under federal law could be supported by intrusive questions about sexual orientation, gender identity, gender transition, or intimate body parts, as well as outing or repeatedly misgendering a co-worker or denying access to a bathroom consistent with their gender identity.

The guidance also provides examples of potential harassment in report work environments, including sexist comments made during a video meeting, racist imagery visible in an employee’s workspace when the employee participates in a video meeting, and sexual comments made during a video meeting about a bed being near an employee in the video image.

Employer are encouraged to review the complete guidance for helpful information about the types of behavior the EEOC considers to constitute unlawful harassment.

If you have questions about how these new regulations and guidance will affect your business or advice about how to implement these new requirements, please contact us.

• Katherine M. McCray (kmccray@wilsonturnerkosmo.com)
• Hubert Kim (hkim@wilsonturnerkosmo.com)
• Emily J. Fox (efox@wilsonturnerkosmo.com)

Wilson Turner Kosmo’s Special Alerts are intended to update our valued clients on significant employment law developments as they occur. This should not be considered legal advice.