FLSA & Noncompete Changes – What to Know

Looming Changes to FLSA Requirements and Noncompete Agreements – The Big Picture for Your Business

Two imminent changes in employment regulations could significantly impact your business operations and compliance status. Legal objections have been filed that will impact implementation dates and possibly final form. While the final fate and ultimate form of these proposed changes are yet to be entirely determined, it is highly recommended that you take a proactive approach to assessing the depth and breadth of their potential impact on your business.

Below, we break down details of the proposed changes to Federal Labor Standards Act (FLSA) requirements and non-competes, how to assess and address their potential impact, and the ripple effect that makes this a prime time for a broader check of your company’s employment practices.

A Higher Bar in FLSA

The headline for expected changes to FLSA requirements is that effective July 1, 2024, the legislation’s salary threshold will increase to $43,888 annually. An additional increase is scheduled to go into effect January 1, 2025 to $58,656, and once again every three years thereafter on a continuing basis. For many companies, this rise could carry significant implications for salary structures and employee classifications, plus create a possible ripple effect across employees not directly affected by the change. Questions that employers will need to answer include:

• How many of our employees’ salaries fall short of the new threshold?
• What is the magnitude of salary adjustments we would need to make to bring all employees up to this new minimum?
• Would it make sense to move some exempt roles to non-exempt status?
• What are the potential broader consequences of these changes on our business, employees, and overall salary structure?

Correctly classifying employees as exempt or non-exempt is very important. The FLSA provided several exemptions to overtime laws, such as the executive professional, administrative exemptions. Simply bumping up an employee’s salary to meet the new threshold required for a full-time exempt employee does not necessarily make your business FLSA-compliant if that employee is already in a position that would qualify as non-exempt and therefore eligible for overtime. Salaries below the FLSA threshold bring into question whether the employees receiving them meet the criteria for exempt status in the first place. Several states such as California, Colorado, New York, and Washington have minimum salary requirements for exempt employees that exceed FLSA requirements.

Additionally, consider how an increase in the minimum salary threshold may affect pay ranges for existing and posted positions. For example, a tenured employee who has worked hard and cleared hurdles to get to the top of their pay range is likely to be disheartened if a somewhat new employee in the same or similar role is now making close to what they do without having had to earn it meritoriously. This is called wage compression, where compensation converges between some employees regardless of their skills, experience, and contributions.

In considering the financial implications of bringing all full-time exempt employees to the new FLSA, consider the necessary additional expense of addressing wage compression.

No More Noncompetes?

Many businesses and millions of Americans could be affected by the Federal Trade Commission’s recent vote in favor of banning non-compete clauses in employment agreements. In essence, this change will make it easier for employees to sign on with an employer’s competitors or start a competing business upon leaving their current employer. Furthermore, the current draft of the rule stipulates that employers would not only be expected to remove noncompete language from their employment agreements, but also to notify employees in writing of this change means. Numerous legal challenges have been filed to prevent this change from taking effect, making the implementation date and final wording uncertain.

Historically, employers and employees have been left to themselves to determine whether a noncompete agreement is warranted, the details of the agreement’s terms and conditions, and how the agreement would be enforced. This legislative change, as presently worded, would basically prohibit the presence of blanket noncompete agreements except in specific situations. While noncompete agreements may be going to the wayside, employers still have options to protect their propriety information and trade secrets through nondisclosure agreements.

No matter where this legislation ultimately lands, employers would be wise to take inventory of who in their organization has a noncompete in place, what their noncompete standard is, and what actions they need to be prepared to take in order to protect the company’s intellectual property in the event the non-compete changes are implemented. Actions could include adjustments to the employee handbook, how intellectual property and sensitive information is managed, and reviewing other employment policies such as nondisclosure agreements.

Take Time Now to Check Your Business Vitals

Ensuring compliance with ever-evolving regulations is crucial for every business. While the basics of the expected and fast-approaching changes to FLSA salary requirements and the use of noncompete agreements may seem straightforward, each carries broader impacts that need to be considered when determining how to handle them. Each also carries connectivity to a wider set of employment practices inherent in your overarching compensation strategy and talent management approach. Take time now to weigh not only the expected impact and potential actions warranted by these near-term updates but also to check the general health of all your employment practices and processes.

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Is your business ready for the FLSA salary threshold and noncompete changes headed your way? Is it time for a checkup of your HR and employment practices? Request a Free Consultation with a vcfo expert who can help. We’ve partnered with leaders from more than 6,000 businesses in our 28-year history and are ready to put our experience to work for you.