For millions of American workers, the federal government took two actions this week that could bestow potentially far-reaching benefits.
In one move, the Federal Trade Commission voted to ban noncompete agreements, which bar millions of workers from leaving their employers for a specific period of time.
“Too often, lower-paid salaried workers are doing the same job as their hourly counterparts but are spending more time away from their families for no additional pay. That is unacceptable,” acting Secretary of Labor Julie Su said in a prepared statement.
The FTC’s move would mean that such employees could apply for jobs they were not previously eligible to seek.
“The rule is an important step toward correctly valuing one of the most precious resources workers have — their time,” EPI president Heidi Shierholz said Tuesday. “This rule is an essential milestone in creating a stronger, fairer economy.”
In a second move, the Biden administration finalized a rule that will make millions more salaried workers eligible for overtime pay.
“Noncompete clauses keep wages low, suppress new ideas and rob the American economy of dynamism,” FTC Chair Lina Khan said. “We heard from employees who, because of noncompetes, were stuck in abusive workplaces.”
The rule significantly raises the salary level that workers could earn and still qualify for overtime.
The new rules do not take effect immediately. And they will not benefit everyone. So what exactly would these rules mean for America’s workers?
WHAT IS A NONCOMPETE AGREEMENT?
Noncompete agreements, which employers have deployed with greater frequency in recent years, limit an employee’s ability to jump ship for a rival company or start a competing business for a stated period of time. The idea is to prevent employees from taking a company’s trade secrets, job leads or sales relationships to a direct competitor, who could immediately capitalize on them.
Many industries use noncompete agreements, often among their salespeople, said Paul Lopez, managing partner at Tripp Scott, a Florida law firm that has handled more than 100 cases involving noncompete clauses.
“They’re the ones out there generating leads and sales,” Lopez said. “The last thing you as a business will want is for that person to go over to your competition and do the same thing.”
A moving company that relied on its relationships with real estate agents to generate business, Lopez said, was surprised to learn that an employee was doing business on the side, including with a competitor, using client relationships he had made through his employer. That violated his noncompete agreement, so he was fired.
WHO IS TYPICALLY SUBJECT TO THESE AGREEMENTS?
People may assume that noncompete agreements apply only to high-level executives in the technology or finance industries. But many lower-level workers are subject to the restrictions as well. The rules vary by state.
In Florida, one medical sales worker was barred by his employer from joining a competitor for 10 years — and once he left his job, was unemployed for more than five years, said Stefanie Camfield, assistant general counsel with Engage PEO, a Florida company that handles human resources for small and medium-sized businesses.
“He was able to find another sales position in a completely different industry,” Camfield said. “But the learning curve was there, so he wasn’t making the same amount of money.”
In another case, a company in the optical industry that had hired a sales associate was informed by his former employer that it intended to enforce a noncompete agreement. So the optical company terminated the employee, Camfield said.
“They thought they had a qualified sales associate hired and ready to get to work, and all of a sudden now they’re back to square one.”
WHY BAN NONCOMPETE AGREEMENTS?
Some view noncompete agreements as harmful and unfair to workers by limiting their mobility. Career opportunities are often more attractive outside an employee’s current workplace. And with restrictions on the type of work they can do for a competitor, it can be hard to shift into a more suitable or lucrative position.
Many hiring managers, after all, most value job candidates who already have a certain level of experience in the same industry.
“A noncompete would unilaterally ban someone from getting exactly the kind of job that it’s reasonable to want,” said Jennifer Tosti-Kharas, a professor of organizational behavior at Babson College in Massachusetts. “To cut people off from that is overly paternalistic. It’s using a really blunt instrument to limit people’s mobility, when in reality there are other legal mechanisms to prevent trade secrets being disclosed.”
Noncompete agreements are banned in three states, including California, and some opponents of noncompetes argue that California’s ban has been a key contributor to that state’s innovative tech economy.
HOW DO I KNOW IF I AM SUBJECT TO A NONCOMPETE?
People are sometimes surprised to learn that they are bound by such an agreement. They might not even find out until after they have left for a new job, and their former employer intervenes and causes them to be fired.
“When you join a company, you’re so focused on the opportunity in front of you, you might not be thinking about what’s that next jump,” Tosti-Kharas said.
Experts suggest that employees consult their human resources department about any noncompete agreements that might exist. If a workplace does not have an HR department, an employee should ask a lawyer for the company.
ARE TRADE SECRETS NOW LIKELY TO BE SPILLED?
There are still laws on the books that protect companies’ trade secrets. The FTC decision does not change that.
And the U.S. Chamber of Commerce has already filed a lawsuit against the Federal Trade Commission, calling its decision a dangerous precedent for government micromanagement of business. Lawsuits could delay any implementation of the FTC’s new rule, potentially for years.
WHAT ABOUT THE NEW OVERTIME RULES?
Starting July 1, employers of all sizes will be required pay overtime — time and a half salary after 40 hours a week — to salaried workers who make less than $43,888 a year in certain executive, administrative and professional roles. That cap will then rise to $58,656 by the start of 2025. Previously, the cap was $35,568.
WHO QUALIFIES?
The Labor Department estimates that 4 million salaried workers who were not previously eligible will qualify. Some occupations, though, including teachers, doctors and lawyers are not eligible for overtime pay and thus are not affected by the change. And some states, like California and New York, already have salary thresholds that exceed the federal level.
WHAT IS THE REACTION SO FAR?
Predictably, groups that represent companies have lined up against the new rule. Conversely, worker groups are applauding it as a necessary and long-overdue change.
The National Retail Federation argued that the new rules “curtail retailers’ ability to offer the most flexible, generous and tailored benefits packages to lower-level exempt employees across the industry.”
It also asserted that the new rules do not give employers adequate time to make the changes needed. And it complained that the inclusion of automatic increases “exceeds the Department’s legal authority and oversteps longstanding Fair Labor Standards Act and Administrative Procedure Act principles.”
On the social media site X, the AFL-CIO labor organization said the rules will “restore and extend overtime protections for hard-working Americans.”
WILL THE CHANGES BE CHALLENGED IN COURT?
Almost certainly so. A 2016 effort by the Obama administration was scuttled in court just days before it was set to take effect. Because the new overtime rules will not take effect until July 1, groups have time to study the ruling before mounting a challenge.
“I would expect there will be some legal challenges,” said Ted Hollis, a partner at the law firm Quarles & Brady. “When the Obama administration published its proposed rule in 2016, that was almost immediately challenged in court.”
HOW SHOULD BUSINESSES PREPARE FOR THIS?
Companies of all sizes will have to reclassify workers who will now qualify for overtime pay — and make sure they track hours and pay them properly.
Another option is to raise employees’ salaries so they would remain exempt from overtime. But employers should keep in mind that two more increases are coming under the new timetable.
They will also have to determine how they will budget for the extra pay for overtime. Small businesses will have the toughest time.
“Some are going to have to cut workers,” Hollis said. “Others will have to cut hours from existing workers. Some are going to have to raise prices, and some probably won’t be able to figure out a way to make it economically work and wind up having to shut down, unfortunately.”
