How US changes to ‘noncompete’ agreements and overtime pay could affect workers
NEW YORK — For millions of American workers, the federal government took two actions this week that could potentially deliver far-reaching benefits.
In one step, the Federal Trade Commission voted to ban non-compete agreements, which prevent millions of workers from leaving their employers for a period of time. The FTC’s move, which is already being challenged in court, would mean such workers could apply for jobs for which they were previously ineligible.
In a second step, the Biden administration has finalized a rule that would make millions of additional workers eligible for overtime pay. The rule significantly increases the salary level that employees can earn and still qualify for overtime pay.
The new rules do not take effect immediately. And they won’t benefit everyone. What exactly would these rules mean for American workers?
Non-compete agreements, which employers have introduced more frequently in recent years, limit an employee’s ability to move to a rival company or start a competing business for a certain period of time. The idea is to prevent employees from passing on a company’s trade secrets, job offers or sales relationships to a direct competitor, who could immediately take advantage of them.
Many industries use non-compete agreements, often among their salespeople, says Paul Lopez, managing partner at Tripp Scott, a Florida law firm that has handled more than 100 cases involving non-compete agreements.
“They are the ones generating leads and sales,” Lopez said. “The last thing you want as a company is for that person to go over to the competition and do the same thing.”
A moving company that relied on its relationships with brokers to generate business was surprised, according to Lopez, to learn that an employee was doing business on the side, including with a competitor, using customer relationships he had built through his employer. That violated his non-compete agreement and so he was fired.
People may assume that non-compete agreements only apply to high-level executives in the technology or financial industries. But many lower-level employees are also subject to the restrictions. The rules vary by state.
In Florida, a medical sales executive was barred from a job at a competitor by his employer for 10 years — and when he left his job, he was unemployed for more than five years, says Stefanie Camfield, assistant general counsel at Engage PEO, a Florida company that provides 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.”
In another case, an optical company that had hired a sales associate was informed by his former employer that it intended to enforce a non-compete agreement. So the optical company fired the employee, Camfield said.
“They thought they had hired a qualified sales associate who was ready to hit the ground running, and now suddenly they’re back to square one.”
Some view non-compete agreements as harmful and unfair to employees because they limit 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 difficult to move on to a more suitable or lucrative job.
After all, many hiring managers value most applicants who already have some level of experience in the same industry.
“A non-compete agreement would unilaterally prohibit someone from getting exactly the kind of job that is reasonably desired,” says Jennifer Tosti-Kharas, a professor of organizational behavior at Babson College in Massachusetts. “Preventing people from that is overly paternalistic. A very blunt instrument is being used to restrict people’s mobility, when in reality there are other legal mechanisms in place to prevent trade secrets from being made public.”
People are sometimes surprised when they hear that they are bound by such an agreement. They may only find out after they leave for a new job and their former employer steps in and gets them fired.
“When you join a company, you’re so focused on the opportunities in front of you that you may not think about what the next step is,” says Tosti-Kharas.
Experts recommend that employees consult their human resources department about any non-compete agreements. If a workplace does not have an HR department, an employee should ask a company attorney.
Laws that protect companies’ trade secrets still exist. 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 businesses. Lawsuits could potentially delay implementation of the FTC’s new rule for years.
Starting July 1, employers of all sizes will have to pay overtime pay — time and a half pay after 40 hours per week — to employees who make less than $43,888 a year in certain executive, administrative and professional positions. That limit will then rise to $58,656 in early 2025. Previously the limit was $35,568.
The Department of Labor estimates that 4 million previously ineligible workers will become eligible. However, some professions, including teachers, doctors and lawyers, are not eligible for overtime and so are not affected by the change. And some states, such as California and New York, already have salary thresholds higher than the federal level.
Predictably, groups representing companies have lined up against the new rule. Conversely, labor groups are welcoming it as a necessary and long-awaited change.
The National Retail Federation argued that the new rules “limit retailers’ ability to offer the most flexible, generous and customized benefits packages to lower-level exempt employees across the industry.”
It also stated that the new rules do not give employers sufficient time to implement the necessary changes. And it complained that including automatic raises “exceeds the Department’s statutory authority and violates the long-standing principles of the Fair Labor Standards Act and the Administrative Procedure Act.”
On the social media site
That is almost certainly the case. A 2016 effort by the Obama administration was rejected in court just days before it was set to take effect. Because the new overtime rules don’t go into effect until July 1, groups have time to study the ruling before issuing a challenge.
“I expect there will be some legal challenges,” said Ted Hollis, a partner at law firm Quarles & Brady. “When the Obama administration published its proposed rule in 2016, it was almost immediately challenged in court.”
Companies of all sizes will need to reclassify employees who are now eligible for overtime and ensure they track hours and pay them correctly.
Another option is to increase employees’ salaries so that they remain exempt from overtime. But employers should note that there are two more increases under the new timetable.
They will also need to determine how to budget the additional overtime pay. Small businesses will have the hardest time.
“Some will have to cut employees,” Hollis said. “Others will have to cut hours from existing employees.
“Some will have to raise prices, and some will probably not be able to figure out a way to make it work economically and will unfortunately have to close down.”