The Federal Trade Commission Issues Final Ruling on Noncompete Agreements; What Will This Mean for Employers and Employees?

By: Michael P. Sawicki, Esq.

There has been a nationwide movement regarding the enforceability of employment-related noncompete agreements and certain restrictive covenants.  On April 23, 2024, the Federal Trade Commission (FTC) issued a final ruling that employers could no longer stop their employees from going to work for rival companies, effectively banning noncompete agreements in the future, as well as those currently in place. The final rule defines “noncompete clause” as a term or condition of employment that either “prohibits” a worker from, “penalizes” a worker for, or “functions to prevent” a worker from, “(i) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (ii) operating a business in the United States after the conclusion of the employment that includes the term or condition.” Thus, the definition in the Final Rule is clarified to go beyond express noncompetes to cover a broader range of provisions.

There are limited exceptions to the new rule for senior executives which are defined as employees “in policy-making positions” who make at least $151,164 annually. Existing noncompetes for senior executives can remain in force; however, employers are prohibited from entering into or enforcing new noncompetes with senior executives. Employers will be required to notify nonexecutive employees bound by an existing noncompete that it will no longer be enforceable. The FTC’s commentary on the final rule clarifies that “forfeiture-for-competition” clauses, where the agreement imposes adverse financial consequences on a former worker as a result of competition with the employer following termination of the employment relationship, is unlawful.

The FTC feels that this action will help create jobs, raise wages and increase competition among businesses. “The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business or bring a new idea to market,” the commission’s chair, Lina M. Khan stated. She estimated the decision would lead to the creation of 8,500 start-ups in a year and up to $488 billion in increased wages for workers over the next decade. The new ruling also has the support of President Biden.

In the final rule, the Commission has determined that a noncompete is an unfair method of competition, and therefore a violation of Section 5 of the FTC Act, for employers to even enter into noncompetes with workers and to enforce certain noncompetes. According to the Commission, employers have alternatives to noncompetes that still enable companies to protect their proprietary information, such as trade secret laws and non-disclosure agreements. The prohibition against noncompete clauses does not apply to a noncompete clause that is entered into pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.

The final rule will become law 120 days after it is published in the Federal Register, but legal challenges have already been filed which could delay or block the change.

More to follow regarding this final ruling and its impact on employers and employees as this important change in the law develops. In the meantime, employers can take certain actions to mitigate the impact of the final rule, including:

  • Auditing existing noncompetes to determine which workers are “senior executives” or otherwise exempt from the final rule’s prohibition on noncompete clauses.
  • Determining whether any “senior executives” are currently not subject to noncompetes and negotiating with such individuals to enter into noncompetes prior to the final rule’s effective date.
  • Considering alternative retention strategies with deferred compensation such as retention bonuses or adjusting equity vesting schedules to encourage long-term employment.
  • Reviewing other restrictive covenants, such as confidentiality agreements and nonsolicitation clauses.

Effective October 1, 2023, Maryland enacted a revised partial restriction on employment-related noncompete agreements under Senate Bill 591. This public policy change was designed to protect lower wage employees and allow unrestricted movement in the workforce, even if their employment competes with their prior employer. The change in Maryland law prohibits employers from imposing a noncompete, conflict of interest, or similar agreement on employees earning 150 percent of the minimum wage.

If you would like to get more information on the creation of a data security policy and speak to an attorney about your needs, please contact Batoff Associates, P.A. at 410-864-6211.

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Classification as an Employee or Independent Contractor: What Every Employer Needs To Know

By: Michael P. Sawicki, Esq.

Effective March 11, 2024, the Department of Labor’s (DOL) new rules become effective to provide additional information to employers regarding the proper classification of workers as independent contractors or employees under the Fair Labor Standards Act (FLSA). These new rules will rescind the rules established on January 7, 2021, under the Trump Administration which focused on two core factors: (i) the nature and degree of the worker’s control over the work; and (ii) the worker’s opportunity for profit or loss based on their initiative or investment.

The new rules under the Biden Administration will broaden the analysis based on an “economic reality” test which focuses on the extent to which a worker is economically dependent on the employer. This test evaluates seven multiple factors equally to determine the nature of the working relationship alongside the core factors set forth above:

  • The extent to which the services rendered are an integral part of the employer’s business;
  • The permanency of the relationship between the worker and the business;
  • The amount of the alleged contractor’s investment in facilities and equipment;
  • The nature and degree of control by the business;
  • The alleged contractor’s opportunities for profit and loss;
  • The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor; and
  • The degree of independent business organization and operation.

Now, employers will be required to weigh all the relevant factors equally based on a totality of the circumstances to determine whether a worker is an independent contractor or an employee. The rule provides guidance on proper classification and seeks to combat employee misclassification that impacts a workers’ rights to minimum wage and overtime pay which can affect competition.

 In withdrawing the prior rule, the DOL relied on over 1,000 comments received from state officials, members of Congress, labor unions, social justice organizations, worker advocacy groups, and individual commenters. The good news for employers is that the same test the DOL has been using remains in effect, but now additional factors come into play providing guidance to employers in making the classification of employee versus independent contractor.

Once the new rules come into effect, the courts will provide additional interpretation of the application of the rules to specific fact patterns which are challenged by litigants as they try to apply the new rules. Employers should keep an eye on any developments in such litigation that may result in another change in the independent contractor analysis.

If you have any questions or would like to get more information regarding the classification of employees versus independent contractors, please contact Batoff Associates, P.A. at 410-864-6211.

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Employment Trends for 2024

By: Michael P. Sawicki, Esq.

The biggest employment law trends for 2024 include more employers requiring employees to return to the office, the importance of workplace culture and the increasing use of artificial intelligence (AI) in the hiring process and human resources function.

Return to the Office

The COVID-19 heath pandemic changed the way most companies operated with liberal work from home policies. With the pandemic under control, employers may continue the trend of a modified work from home policy while instituting a mandatory return to work policy for at least a few days a week. A recent study found 90% of employers plan to implement a return to the office policy in 2024. Employers are balancing the complexities in a post-pandemic world of employee wellbeing, operational efficiency and the changing dynamics of the workplace. Most companies are leaning towards a hybrid policy mandating a certain number of days each week in the office.

Importance of Workplace Culture

Return to work policies are having an impact on workplace culture. Being in the office provides a better connection for employees, and fosters an environment for collaboration. It also decreases an employee’s autonomy of a home office environment and self-management of tasks, while adding a commute to the employee’s daily routine. The reviews are mixed. Some employees welcome a return to the office environment, at lease part of the week, while others claim more productivity working from home.

Employers should give thought to drafting a policy that is fair and that will be consistently applied to reduce the risk of claims that the policy is discriminatory or selectively enforced.  Employers should also pay careful attention to requests from employees for exemption or variation from a return-to-work policy as a reasonable accommodation for a disability. A healthy workplace culture reduces the risk of discrimination and harassment claims by ensuring all employees are treated equally and fairly.

Use of Artificial Intelligence

A third trend employers should be aware of is the expanded use of AI in the workplace through the hiring process and automation of certain HR functions. AI is being increasingly used in the hiring process to screen applications and resumes or for pre-screening questionnaires or automated interviews. Employers may face the risk of unrecognized racial and gender bias.

In order to minimize these risks, the Biden Administration created the AI Bill of Rights which provides a set of guidelines for the responsible design and use of AI. The AI Bill of Rights outlines five key principles to guide the development and deployment of AI systems, focusing on safety, fairness, privacy, transparency, and human alternatives:

  1. Ensuring Safe and Effective Systems
  2. Combating Algorithmic Discrimination
  3. Upholding Data Privacy
  4. Providing Notice and Explanation
  5. Prioritizing Human Alternatives and Fallbacks

The enactment of federal and state laws will be on the horizon in 2024 regarding the use of AI.

If you have any questions or would like to get more information regarding employment law, please contact Batoff Associates, P.A. at 410-864-6211.

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Maryland Law and Non-Compete Agreements: Are They Still Enforceable?

By: Michael P. Sawicki, Esq.

Non-compete agreements are contracts between employers and employees that prevent employees from competing with their employers for a specific period of time after termination of employment. These agreements are meant to protect the employer’s business interests, trade secrets, and confidential information. The enforceability of such agreements is usually tied to a duration and reasonableness standard.

There has been a nationwide movement, however, regarding the enforceability of employment-related non-complete agreements and certain restrictive covenants.  New York is poised to become the fifth state in the nation to impose a complete ban on employment-related noncompete agreements, joining California, Oklahoma, North Dakota, and Minnesota.

Maryland recently enacted a revised partial restriction on employment-related non-compete agreements with the enactment of Senate Bill 591, effective October 1, 2023. Maryland has linked the enforceability of an employment-related non-compete with an employee’s earnings tied to the minimum wage, thereby protecting employees who fall below the mandated criteria from employer mandated non-competes. This public policy is designed to protect lower wage employees and allow unrestricted movement in the workforce, even if their employment competes with their prior employer.

Maryland employers are now prohibited from imposing a non-compete, conflict of interest, or similar agreements on employees earning 150% of the minimum wage. With the recent increase of the minimum wage rate to $15.00 per hour effective January 1, 2024, this translates to $22.50 per hour, or an estimated annual income of approximately $46,800. Importantly, the new threshold will automatically increase with any future increments in the minimum wage.  (Under the prior law, employers were prohibited from entering a non-compete agreement with employees who earn $15.00 per hour or less, or $31,200 annually.)

This newly revised Maryland law can have detrimental effects to employers seeking to protect their carefully earned business and client relationships. Until there is court interpretation of the new law, the application to salaried employees could be subject to interpretation and debate. The new law does not, however, apply to the enforceability of non-solicitation agreements protecting client lists and other proprietary client information. A business still has enforceable rights to protect its confidential information.

If you would like to get more information on the creation of a data security policy and speak to an attorney about your needs, please contact Batoff Associates, P.A. at 410-864-6211.

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IRS Updates Contributions to 401(k) Plans and IRAs

By: Michael P. Sawicki. Esq.

On November 1, 2023, the Internal Revenue Service announced that that the amount individuals can contribute to their 401(k) plans has increased from $22,500 for 2023 to $23,000 for 2024.

The limit on annual contributions to an IRA increased to $7,000, up from $6,500. The IRA catch‑up contribution limit for individuals aged 50 and over was amended under the SECURE 2.0 Act of 2022 (SECURE 2.0) to include an annual cost‑of‑living adjustment of $1,000 for 2024.

The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), and most 457 plans, as well as the federal government’s Thrift Savings Plan remains $7,500 for 2024. Therefore, participants in such plans who are 50 and older can contribute up to $30,500, starting in 2024.

The income ranges for determining eligibility to make deductible contributions to traditional IRAs and Roth IRAs each increased for 2024. Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or the taxpayer’s spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. If neither the taxpayer nor the spouse is covered by a workplace retirement plan, the phase-outs of the deduction do not apply. The phase‑out ranges for 2024 are as follows:

  • For single taxpayers covered by a workplace retirement plan, the phase-out range is increased to $77,000 – $87,000, up from $73,000 – $83,000.
  • For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is increased to $123,000 – $143,000, up from $116,000 – $136,000.
  • For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the phase-out range is increased to $230,000 – $240,000, up from $218,000 – $228,000.
  • For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.

The deductible limit on charitable distributions for 2024 increased from $100,000 to $105,000.

Details on these and other retirement-related cost-of-living adjustments for 2024 can be found in Notice 2023-75, available on IRS.gov.

If you have any questions regarding these updates from the IRS, please contact Batoff Associates. P.A. at 410-864-6211.

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