Non-compete agreements risk being banned, but legal battle begins

Supporters defend the agreements as a way to protect employers from losing a competitive advantage when workers leave. Opponents say the deals unfairly restrict workers’ mobility and earning capacity and stifle innovation.

The debate has reached a fever pitch, with the Federal Trade Commission voting 3-2 last month to ban almost all non-compete agreements. But the legal fight has only just begun.

The U.S. Chamber of Commerce has filed suit against the FTC over the change, which could slow down — and perhaps ultimately block — the ban’s taking effect. Non-compete agreements prevent workers who leave a company from going to work for a competitor, or starting a competing business, for a set period of time.

The agreements can cover a wide range of workers, said Ryan Lema, a partner at Phillips Lytle.

“In New York, the idea is: Which employees do you have a reasonable interest in restricting their post-employment activities?” said Lema. Classic examples include senior executives, people with special technical knowledge and employees in key sales positions, he added.

Opponents argue that noncompete agreements are too broad, sometimes covering even the lowest-paid workers, such as fast-food restaurant managers.

If the FTC rule goes into effect, existing non-compete agreements could also no longer be enforced, Lema said. The exception would be non-compete agreements with top executives, who the FTC says make up 0.75% of workers.

In New York state, Gov. Kathy Hochul vetoed a law late last year that would have banned employers from requiring employees to sign noncompete agreements. Hochul said she would support a version of the law that would limit noncompete agreements to executives earning at least $250,000 a year. But that idea failed to advance in the legislature.

The FTC’s ban on noncompete agreements would contain some exceptions, including cases where an owner sells a business and agrees not to compete with it.

The ban is expected to take effect in September, depending on when the rule is published in the Federal Register. But legal challenges are expected to push back the deadline. The House in its lawsuit argues that the FTC exceeded its constitutional and legal authority.

Another workplace change involving overtime for employees is brewing at the federal level, with some implications for New York state employees.

Millions more workers are expected to become eligible for overtime pay starting July 1, under a new federal rule finalized by the Biden administration.

“Too often, the lowest paid salaried workers do the same work as their hourly counterparts, but spend more time away from their families without additional pay,” Acting Labor Secretary Julie Su said in a statement. “This is unacceptable”

Federal law generally requires all employees to be paid time and a half for hours they work in excess of 40 hours per week. Certain workers are exempt from this rule, notably managerial, administrative and professional employees.

The impact of the new rule in New York state would be “significantly muted” because of standards already in place for overtime pay for employees, said John Godwin, a partner at Hodgson Russ.

To qualify for the exemption, Godwin said these employees must generally meet three criteria: They must be paid on a salary basis, not an hourly basis; they must perform certain exempt tasks; and they must receive a minimum wage.

The Biden administration’s finalized rule focuses on raising the minimum wage. Currently, salaried workers earning a salary of $35,568 or less are eligible for overtime; this threshold is expected to increase to $43,888 on July 1 and to $58,656 on January 1.

The impact in New York State would be limited. In New York, the threshold for salaried overtime for upstate workers is $58,458 and is expected to increase to $60,405 in early 2025 and $62,353 in early 2026. But the thresholds apply to managerial employees and administrative, not professional employees, says Godwin.

The new rule would expand the number of New York state professional employees – including engineers, registered nurses and accountants – who could receive overtime, as that threshold increases.

An overtime exemption for “highly compensated employees” is also expected to change at the federal level. Currently, the threshold is $107,432, which will increase to $132,964 on July 1, then to $151,164 on January 1.

The National Retail Federation said it was concerned the new overtime pay rule would “reduce retailers’ ability to provide the most flexible, generous, and responsive benefits to lower-level exempt employees in the entire sector”.

Impending changes from the federal government will force employers to review how they manage their employees’ job classifications and pay levels, Godwin said. “It’s a really difficult puzzle for many employers to piece together the right approach, and there’s not a lot of time.”

At the same time, Godwin said, the new rule is expected to face a legal challenge, which could affect its implementation.

Want to know more? Three stories to catch you up:

• Non-competition, elections, reparations: Hochul will have to make decisions by the end of the year

• Where the hiring takes place

• Local unemployment rate declines after hitting 2 1/2 year high in February

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The Buffalo Next team gives you insight into the region’s economic revitalization. Email tips to [email protected] or contact Buffalo Next editor David Robinson at 716-849-4435.