Updates to Department of Labor Exempt Salary Status Threshold under the Fair Labor Standards Act

Pursuant to a final rule issued by the United States Department of Labor (“DOL”) on April 26, 2024, specific changes regarding minimum wage and overtime exemptions under the Fair Labor Standards Act (“FLSA”) will be going into effect on January 1, 2024.

Currently, certain executive, administrative, and professional workers are exempt from minimum wage and overtime pay requirements under the FLSA if they (1) are paid on a salary basis at a rate of not less than $884 per week and (2) perform specific duties that are exempt under the FLSA and corresponding regulations. Employees of companies who are subject to the FLSA and are not exempt under this test are required to be paid time-and-a-half for any hours worked more than forty hours in a week unless they are exempt under other regulations under the FLSA.

The weekly salary rate of $844 equates to an annual salary of $43,888. This threshold has been in effect since July 1, 2024. However, effective January 1, 2025, the threshold will increase to $1,128 per week (equivalent to a $58,656 annual salary).

The rule also increases the salary threshold for the highly compensated employees exemption from $132,964 per year (including at least $844 per week paid on a salary or fee basis) to $151,164 per year (including at least $1,128 per week paid on a salary or fee basis), effective January 1, 2025.

These thresholds will then be updated every three years, with the next update set for July 1, 2027, barring any changes to the rule in the interim.

It is important to note that these salary thresholds do not apply to all employees, including doctors, lawyers, teachers, and outside sales employees.

In preparation for setting 2025 employee compensation, employers should begin developing a plan to address these changes if they have employees who will be impacted by these threshold adjustments and perform specific duties that are exempt under the FLSA. The attorneys at Erickson Sederstrom can assist in determining how these changes will impact your business and how to address these changes when they go into effect. Employers can also stay up to date by visiting the Department of Labor website’s Wage and Hour Division Section for articles regarding rule changes, explanations, and other guidance to help employers remain compliant with the ever-changing landscape of federal regulations.

FTC Issues Rule Banning Non-Competes Nationwide – Now Subject to Pending Challenge in Lawsuit

On April 23, 2024, the Federal Trade Commission (“FTC”) issued a final rule prohibiting specific non-competition clauses (the “Rule”), which is located here. The Rule goes into effect September 4, 2024, but enforcement could be delayed pending legal challenges to the Rule.

Who does the Rule apply to?

The Rule applies to “workers,” which is defined broadly to include an “employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor.” “Worker” also consists of a person who works for a franchisee or franchisor but expressly excludes a franchisee in its relationship with a franchisor.

However, there is a crucial difference between “workers” and “senior executives.” “Senior executives” are defined as a worker who:

1. Was in a policy-making position; and

2. Received from a person for employment:

a. Total annual compensation of at least $151,164 in the preceding year; or

b. Total compensation of at least $151,164 when annualized in the preceding year before the worker’s departure if the worker left their employment before the preceding year and is subject to a non-competition clause.

The Rule defines “policy-making position” to specifically include a president, chief executive officer or equivalent, or anyone with policy-making authority.

What does the Rule prohibit?

The Rule prohibits employers from entering into, attempting to enter into, enforcing or attempting to enforce a non-compete clause, or representing that a worker is subject to a non-compete clause.

A “non-compete clause” is broadly defined to include a term that “prohibits a worker from, penalizes a worker for, or functions to prevent a worker from” working in the United States with a different employer post termination of prior employment or operating a business in the United States post termination of previous employment.

For “senior executives” enforceable non-compete clauses that were entered into before the Rule’s effective date (which is currently set for September 4, 2024), will remain in effect and the Rule will apply only to new non-compete clauses entered into after the effective date.

What if you have existing clauses that will violate the Rule upon the effective date?

Suppose you currently have workers who are subject to non-compete clauses that will not be enforceable upon the Rule’s effective date. In that case, you will be required to provide notice to such workers. Such notice must be clear, conspicuous, and delivered to the worker by the effective date, stating that the non-compete clause will not and cannot be enforced. The FTC has provided model notices in various languages, which can be located here.

Are there exceptions to the Rule?

The Rule is not a blanket ban on non-competes. The Rule does not apply in the context of a bona fide sale of a business, existing causes of action, or if there is a good faith basis to believe the Rule is inapplicable.

What about non-solicitation clauses?

Commentary on the Rule indicates that non-solicitation clauses generally are not considered non-compete clauses since they do not prevent workers from seeking or accepting other employment or starting a business following termination of their prior employment. However, if a non-solicitation clause is so broad that it “functions to prevent a worker from” seeking or accepting work or operating a business, it would satisfy the definition of a “non-compete clause” under, and thus be subject to, the Rule.

What should employers do?

Employers should monitor the status of pending legal challenges to the Rule to determine whether such challenges will succeed in reversing it. In the meantime, Employers should review their current restrictive covenants and prepare policies and procedures in case the Rule does go into effect while continuing to comply with state law. Existing restrictive covenants that are enforceable under the laws of a particular state may already be compliant with the Rule, especially if state law is more restrictive than the Rule.

Where can you get more information? For more information regarding the Rule, businesses can review the Fact Sheet and Compliance Guide for Businesses and Small Entities provided by the FTC. These helpful resources provided information regarding the Rule and ways employers can comply.

What Makes an Independent Contractor?

The United States Department of Labor (the “Department”) has published a final rule regarding the analysis of who constitutes an employee or independent contractor under the Fair Labor Standards Act (“FLSA”), which goes into effect on March 11, 2024 (the “Rule”). The Rule rescinds the Department’s 2021 rule titled “Independent Contractor Status Under the Fair Labor Standards Act” (the “2021 Rule”).

Background

Generally, the FLSA establishes standards for the treatment of employees, including wage requirements, overtime pay, recordkeeping, prohibitions against retaliation, and youth employment standards. The protections of the FLSA do not apply to independent contractors and its requirements only apply to “covered employers.” For more information on the FLSA, you can visit the Department’s website here.

The main inquiry in analyzing whether a worker is an employee or an independent contractor is one of economic dependence, which means that a worker is an independent contractor if that worker is in business for themselves as a matter of economic reality. The Rule provides six factors to be weighed in making that determination: (1) opportunity for profit or loss depending on managerial skill; (2) investments by the worker and the potential employer; (3) the degree of permanence of the work relationship; (4) the nature and degree of control; (5) the extent to which the work performed is an integral part of the potential employer’s business; and (6) skill and initiative. As opposed to the 2021 Rule, which gave certain factors more weight than others, the Rule provides for a totality-of-the-circumstances analysis, which means that all factors are given full consideration.

 Analysis of the Factors

1.  Opportunity for profit or loss depending on managerial skill

   • The Rule provides that the following facts are relevant in analyzing this factor:

whether the worker determines or can meaningfully negotiate the charge or pay for the work provided; whether the worker accepts or declines jobs or chooses the order and/or time in which the jobs are performed; whether the worker engages in marketing, advertising, or other efforts to expand their business or secure more work; and whether the worker makes decisions to hire others, purchase materials and equipment, and/or rent space.

If a worker does not have an opportunity for a profit or loss dependent on managerial skill, then this factor would lean towards a finding that the worker is an employee.

• Investments by the worker and the potential employer

The overarching inquiry under this factor is whether the worker’s investments are capital or entrepreneurial in nature. Investments that are capital or entrepreneurial in nature include investments that “support a business-like function, such as increasing the worker’s ability to do different types of or more work, reducing costs, or extending market reach.”

The analysis under this factor includes determining whether the investments by the worker generally support an independent business, such as a worker supplying their own tools, renting space, and spending money on marketing their services. Facts such as these would weigh in favor of an independent contractor relationship because they allow the worker to do more work and find new clients.

• The degree of permanence of the work relationship

 The Rule provides that if the nature of the relationship between the worker and potential employee is “indefinite in duration, continuous, or exclusive of work for other employers,” then this factor will weigh in favor of the worker being an employer. However, this factor will generally weigh in favor of determining whether the worker is an independent contractor if the relationship is “definite in duration, non-exclusive, project-based, or sporadic based on the worker being in business for themselves and marketing their services or labor to multiple entities.”

• Nature of degree of control

  • The Rule provides the following facts to consider under this factor:

whether the potential employer sets the worker's schedule, supervises the performance of the work, or explicitly limits the worker's ability to work for others . . . whether the potential employer uses technological means to supervise the performance of the work (such as by means of a device or electronically), reserves the right to supervise or discipline workers, or places demands or restrictions on workers that do not allow them to work for others or work when they choose. Whether the potential employer controls economic aspects of the working relationship . . . including control over prices or rates for services and the marketing of the services or products provided by the worker.

The more control exhibited by the potential employer, the more likely this factor will weigh in favor of a determination that the worker is an employee and the more control exhibited by the worker, the more likely this factor will weigh in favor of a determination that the worker is an independent contractor.

• The extent to which the work performed is an integral part of the potential employer’s business

     This factor hinges on whether the work performed by the worker is “critical, necessary, or central” to the principal business of the potential employer. If it is, this factor will weigh in favor of a finding that the worker is an employee, and if not, it will weigh in favor of a finding that the worker is an independent contractor.

• Skill and initiative

If a worker does not utilize specialized skills in providing the services to the potential employer, this factor will weigh in favor of a finding of an employment relationship. However, merely utilizing specialized skills does not necessarily mean that this factor will weigh in favor of a finding of an independent contractor relationship. These specialized skills must contribute to “business-like initiative,” including marketing these skills to generate new business for the worker.

These factors are not an exhaustive list, and additional factors may be considered when analyzing whether a worker is an employee or independent contractor and determining whether the worker is protected under the FLSA.

What should Businesses do?

Businesses that rely on the services of independent contractors should review their relationships with current independent contractors and their policies and procedures going forward for new independent contractors, including a review of their independent contractor agreements, to ensure that their relationships with their workers are truly independent contractor relations.

Additional Resources

For more information regarding the Rule, businesses and workers can visit the Frequently Asked Questions and Small Entity Compliance Guide pages of the Department’s website. These helpful resources provide guidance regarding the new Rule, including examples of the factors addressed herein.

Department of Labor Proposed Changes to Exempt Salary Status Threshold

On August 30, 2023, the United States Department of Labor (the “DOL”) announced a notice of proposed rulemaking to increase the minimum salary requirements for executive, administrative, and professional workers from the minimum wage and overtime pay requirements under the Fair Labor Standards Act (the “FLSA”).

Currently, certain executive, administrative, and professional workers are exempt from minimum wage and overtime pay requirements under the FLSA if they (1) are paid on a salary basis at a rate of not less than $684 per week and (2) perform specific duties that are exempt under the FLSA and corresponding regulations. Employees who are not exempt under this test are required to be paid time-and-a-half for any hours worked more than forty hours in a week.

The proposed rule raises the salary basis threshold from $684 per week, an annual salary of approximately $35,500, to $1,059 per week, an annual salary of $55,068. The proposed rule also increases the salary threshold for the highly compensated employees exemption to $143,988 annually. Further, the rule proposes an automatic update of the salary thresholds every three years in an effort to reflect current earnings statistics.

According to the news release issued by the DOL, this change would extend overtime protections to an additional 3.6 million salaried workers.

Employers should review the salaries of their current employees and begin developing a plan to address these changes if they have employees whom this rule change will impact. The attorneys at Erickson Sederstrom can assist in determining how these rules will impact your business and how to address this new rule when it goes into effect.