Lower Bar for Discrimination Claims, New Overtime Rule and Non-Compete Agreements Banned

There have been major employment law developments over the last two weeks. First, on April 17, the U.S. Supreme Court unanimously ruled that an adverse employment action does not have to be “significant” to constitute discrimination under Title VII. Next, on April 23, the federal Department of Labor (DOL) published a final rule increasing the salary level required for an employee to be considered exempt from overtime. And, on the same day the federal DOL unveiled its overtime rule, the Federal Trade Commission (FTC) completed the trifecta by publishing a final rule that invalidates virtually all non-compete agreements.

Lower Bar for Discrimination Claims

In Muldrow v. City of St. Louis, Missouri, the Supreme Court granted certiorari to resolve a split among federal circuit courts on the level of harm a plaintiff must show to have suffered an “adverse employment action” under Title VII. It held that a plaintiff “need show only some injury” regarding the terms and conditions of employment. This decision is important in that it lowers the level of harm that employees must show to bring a Title VII claim. Employers should be aware of this increased risk and ensure that all job actions taken, no matter how minor, are not discriminatory.

The plaintiff in Muldrow v. City of St. Louis, Missouri was a female sergeant working for the St. Louis Police Department in the specialized Intelligence Division. After working in this position for approximately nine years, she was replaced by a male officer and transferred against her wishes to another position. Her rank and pay remained the same, but her responsibilities, perks, and schedule did not. The plaintiff no longer worked with high-ranking officials on the departmental priorities lodged in the Intelligence Division, but instead was relegated to supervising the day-to-day activities of neighborhood patrol officers. She also lost access to an unmarked take-home vehicle and had a less regular schedule involving weekend shifts. The plaintiff claims the job transfer constituted gender discrimination in violation of Title VII.

The Supreme Court rejected the position that a transferred employee must show that the harm incurred by a transfer is “significant” or “material,” holding instead that there needs to be only “some injury” to the terms and conditions of employment. Writing for the majority, Justice Kagan stated that, “[t]he transfer must have left [a plaintiff] worse off, but need not have left [them] significantly so.” Applying this standard, the Supreme Court held that the plaintiff’s allegations of lower prestige, changes in her work schedule, and loss of a take-home vehicle, if proven, would meet the standard, even if her rank and pay remained the same.

FTC’s Rule Banning Non-Compete Agreements

The FTC’s final rule provides that it is a violation of the Federal Trade Commission Act for employers to enter into non-compete clauses with workers on or after the rule’s effective date, which will be 120 days after the final rule is published in the Federal Register. With respect to non-compete clauses in existence before the final rule’s effective date, the FTC adopts a different approach for senior executives. Existing non-compete clauses with “senior executives” can remain in effect. In general, the term “senior executive” refers to workers earning more than $151,164 and who are in a “policy-making position” as defined in the final rule. Existing non-compete clauses for workers who are not senior executives are no longer enforceable after the effective date. In addition, employers must provide those workers with non-compete clauses notice that they are no longer enforceable. The final rule includes model language that employers may use to satisfy the notice requirement.

Employers should determine whether they are covered by the FTC’s rule. While most employers are covered, the rule does not apply to banks and certain non-profit organizations, for example, as they are not subject to the FTC’s jurisdiction.

The U.S. Chamber of Commerce has already filed a lawsuit in Texas challenging the legality of the rule. 

The rule does not apply to non-solicitation agreements and non-disclosure agreements unless they prevent a worker from working in the same field. The rule also permits non-competes for the “bona fide sale of a business” and does not prohibit so-called “garden leave” provisions. Under most garden leave arrangements, an individual agrees not to compete during a period of continued employment where the employee is paid their salary and eligible for benefits, but generally not required to perform any job duties. However, employers should note that the final rule extends to all “workers”, which the FTC defines broadly to include not only employees but also independent contractors, interns, volunteers, apprentices, and other workers.

While the rule’s fate remains uncertain, employers are well advised to determine: (a) what existing non-competes may be invalidated; (b) how current and former employees will be notified; (c) whether to enter into non-compete agreements for senior executives before the rule’s effective date; and (d) what other steps they can take to protect their business interests, such as implementing non-solicitation and confidentiality agreements, and taking additional security measures to prevent the improper disclosure and use of proprietary trade secret and business information.

The Department of Labor’s Overtime Rule

The new overtime rule increases the salary threshold for certain overtime exemptions under the Fair Labor Standard Act (FLSA). That is, for an employee to be considered exempt from overtime pay, one requirement is that the employee be paid a minimum weekly salary amount.

Currently, the salary threshold for executive, administrative, and professional employees is $684 per week, which annualizes to $35,568 per year. The threshold for highly compensated employees is currently $107,432 per year. Under the new rule, these salary thresholds will increase as follows:

• effective July 1, 2024, the salary threshold for bona fide executive, administrative, and professional employees will increase to $844 per week, which annualizes to $43,888 per year; and the annual compensation threshold for highly compensated employees will increase to $132,964 per year.
• effective January 1, 2025, the salary threshold for bona fide executive, administrative, and professional employees will increase to $1,128 per week, which annualizes to $58,656 per year; and the annual compensation threshold for highly compensated employees will increase to $151,164 per year.
• effective July 1, 2027, and every three years thereafter, the salary thresholds will automatically update, using the methodology in effect at the time of each update.

The final rule does not make any changes to the duties test or the salary basis test. 

Employers should identify all employees currently classified as exempt but whose weekly salary will be less than the new thresholds effective on July 1, 2024 or January 1, 2025. For impacted employees, employer should determine whether (a) to preserve the employee’s exempt status by raising their weekly salary or (b) reclassify the employee’s status to non-exempt and pay overtime when the employee works 40 hours or more.

If an employer decides to increase the employee’s weekly salary, the employer should be mindful of how an increase in pay for a particular job classification relates to the compensation levels for other jobs.  Employers should also be mindful that increases in pay may have other indirect costs such as increases to retirement plan contributions, severance amounts, etc.

If an employer decides to convert employees to hourly, it should consider how it will arrive at the hourly rate of pay. In other words, the employer could simply take the employee’s weekly salary and divide by the number of hours the employee is expected to work per week. This will increase costs to the employer if the employee works overtime. For a cost-neutral option, the employer could establish the hourly rate by taking into consideration the estimated number of overtime hours the employee would work.

For employees who are converted from exempt to non-exempt, employers should provide training/instruction on how to accurately record hours of work, including recording for travel time, training time, meal breaks, etc. It would also be prudent to remind supervisors of employees who are converted to non-exempt that they should be mindful about requiring such employees to work late and contacting them off hours as it could result in overtime pay.

Lastly, there should be a communication plan to explain any changes that are made based on the new rule.

For further information, please contact: