DOL SERVED A LOSS: U.S. Court of Appeals Vacates DOL 80/20/30 Tip Rule

By Michele L. Jakubs*

The Fifth Circuit Court of Appeals, in a 3-0 decision, vacated the Department of Labor’s (“DOL”) 2021 Final Rule that restricted when an employer could apply a tip credit, finding it arbitrary and capricious. Under the Fair Labor Standards Act (“FLSA”), an employer may take a tip credit, paying tipped employees at a rate below the applicable minimum wage in anticipation of tips making up the difference. In 2021, the DOL issued a Final Rule limiting when an employer could utilize the tip credit to time for work that directly produced tips (i.e., work that directly supported tips provided that work did not exceed 20% of the work time and did not exceed thirty consecutive minutes). The Fifth Circuit found that the “Final Rule is attempting to answer a question that DOL itself, not the FLSA has posed. … The FLSA does not ask whether duties composing that given occupation are themselves each individually tip-producing.”

The Fifth Circuit stated that the “Final Rule replaces the Congressionally chosen touchstone of the tip-credit analysis – the occupation – with one of DOL’s making – the timesheet,” seemingly recognizing the insurmountable burden placed on employers of parsing each minute of time worked by a tipped employee to determine its applicable category. The issue is “only whether the employee is engaged in an occupation in which he receives tips.”

The Fifth Circuit’s decision vacating the Final Rule allows employers to apply the tip credit as intended by Congress – to employees engaged in an occupation in which the employee receives tips. If the employee is performing duties unrelated to that occupation, such as a server fixing the plumbing in a restaurant, however, the employee must receive at least the full minimum wage.

*If you have questions relating to the DOL’s new rule, or any other labor and employment law issues, please contact Zashin & Rich’s Wage and Hour Practice Leader, Michele L. Jakubs (mlj@zrlaw.com) at (216) 696-4441.

UPDATE: Texas Court Prohibits Enforcement of FTC’s Non-Compete Ban Rule Nationwide

By Ami J. Patel and Kimana A. Bowen*

As you know based on our prior Alerts, the Federal Trade Commission issued a purported Rule banning employers from enforcing non-competes against “workers” with some limited exceptions. The FTC Rule was set to go into effect on September 4, 2024. However, there have been several court challenges to the FTC’s authority and the validity of the Rule.

The Texas Court Prohibits Enforcement of the Rule

On August 20, 2024, the United States District Court for the Northern District of Texas issued a decision against the FTC, prohibiting the enforcement of the FTC’s Rule—nationwide. The court agreed with the Plaintiffs in Ryan LLC, et al v. Federal Trade Commission, finding that Plaintiffs are entitled judgment on their claims under the Administrative Procedure Act (“APA”) and the Declaratory Judgment Act because: (1) the FTC lacks authority to create substantive rules; and (2) the FTC’s rule is arbitrary and capricious since it is overbroad, a one-size-fits-all, with no end date and fails to consider alternatives and the benefits of non-competes.

Because the Texas Court concluded that the FTC exceeded its statutory authority and that the FTC Rule is arbitrary and capricious, under APA § 706(2)(A)–(C), the Texas Court must “hold unlawful” and “set aside” the FTC’s Rule. According to the Texas Court, the APA has nationwide effect because it is “not party-restricted,” and “affects persons in all judicial districts equally.” As such, the Texas Court’s decision applies nationwide and is not limited to just the Plaintiffs in the Texas case.

While the September 4, 2024 effective date for the FTC Rule is set aside, we anticipate that the FTC will challenge this decision.

Florida’s Recent Ruling on the FTC Non-Compete Ban Rule

The Texas court ruling comes just days after a Florida Federal District Court also preliminarily enjoined the FTC from enforcing its Rule on non-competes against a real estate broker. The Florida Court found that the FTC will not face substantial harm if the status quo is maintained until a final decision on the Rule’s validity is made and that there was a substantial likelihood of success based on the “major questions doctrine.”

The major questions doctrine asserts that when an agency claims authority to issue rules of extraordinary economic and political significance, it must point to “clear congressional authorization” for such power. The court concluded that, given the Rule’s extensive application, including its purported application to existing contracts, it is “substantially likely that the rule presents a major question as defined by the Supreme Court.”

What Now for Employers

Sit Tight. For now, employers have a good-faith basis that the Rule will not go into effect on September 4, 2024. However, employers should use this issue as an opportunity to assess whether their current agreements protect their business, information, and interests as desired. Employers should work with experienced trade secret and non-compete lawyers to evaluate whether their workers have well-drafted agreements in place and to revise stale ones.

*Please contact Z&R’s Practice Leader of its Non-Compete/Trade Secret practice, Ami J. Patel (ajp@zrlaw.com) at 216-696-4441 or Kimana A. Bowen (kab@zrlaw.com), if you have any questions about the effect of these decisions on the FTC’s purported Non-Compete Rule or need assistance with review of your existing documents or how to draft new agreements.

A Checklist Guide for Employers on How to Prepare for the Potential Non-Compete Ban Rule by the FTC

By Ami J. Patel and Kimana Bowen*

Understand the Texas and Pennsylvania Courts’ Rulings and Their Potential Impact

• The Texas Court
  On July 3, 2024, the U.S. District Court for the Northern District of Texas granted a stay and preliminary injunction against the Federal Trade Commission’s (“FTC”) Rule banning non-competes. The court found that Ryan LLC (“Ryan”) and the Chamber of Commerce of the United States of America, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce (collectively the “Chamber”)are likely to succeed on the merits, face irreparable harm without the injunction, and that the balance of harms and public interest favor the injunction.
  
  While the FTC’s Rule is stayed for Ryan and the Chamber, the court has not blocked the Rule nationwide. A final decision on the merits is expected by August 30,2024, which may affect the scope of the injunction.
  
  Be on the lookout for our Alert on the Texas Court’s August 30thruling as it may modify this checklist.

• The Pennsylvania Court
  On July 23, 2024, the United States District Court for the Eastern District of Pennsylvania declined to issue a preliminary injunction enjoining the Federal Trade Commission (“FTC”) from enforcing its Rule banning non-competes. The court found that ATS Tree Services, LLC failed to prove irreparable harm or likelihood of success on the merits.

Know What the Final Rule Requires

The final Rule will invalidate all non-compete clauses for workers who are not senior executives. Existing non-competes for senior executives will remain in effect, but employers cannot require new non-competes for senior executives after the Rule’s effective date. The Rule prohibits:

1. Entering into or attempting to require an employee to enter into a non-compete clause.
2. Enforcing or attempting to enforce a non-compete clause.
3. Representing that a worker is subject to a non-compete clause.

• Non-Compete Clause
  The Rule defines a “non-compete clause” as “a term or condition of employment that prohibits worker from, penalizes a worker for, or functions to prevent a worker from:

1. 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
2. operating a business in the United States after the conclusion of the employment that includes the term or condition.”

A “term or condition of employment” includes, but is not limited to, a contractual term or workplace policy, whether written or oral.

The final Rule defines “worker” as “a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status” under any other state or federal law.

Accordingly, “worker” includes employees, independent contractors, externs, interns, volunteers, apprentices, or sole proprietors who provide services to a person.

Know the Exceptions to the Rule

The FTC Rule has the following exceptions:

Bona fide sales of business. The Rule (ban) does not apply to a noncompete clause that is “entered into by a person 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.”

Existing causes of action. The Rule (ban) does not apply “where a cause of action related to a non-compete clause accrued prior to the effective date.”

Good faith. The Rule (ban) does not apply “where a person has a good-faith basis to believe that the Rule is inapplicable.”

Review your contracts with non-competes and the existing status of the cases to determine if any of these exceptions apply.

Continue to Enforce Existing Non-Competes with Senior Executives

Even if enforced, the FTC Rule permits enforcement of current non-competes with senior executives. The final Rule defines “senior executive” as “a worker who:

• Was in a policy-making position; and
• Received for employment:

1. a total annual compensation of at least $151,164 in the preceding year; or
2. a total compensation of at least $151,154 when annualized if the worker was employed during only part of the preceding year; or
3. a total compensation of at least $151,164 when annualized in the preceding year prior to the worker’s departure if the worker departed from employment prior to the preceding year and the worker is subject to a non-compete clause.”

Consider Non-Solicitation and Non-Disclosure/Confidentiality Agreements

As the FTC’s Rule is litigated and set to take effect on September 4, 2024, employers should review their employee contracts and consider the benefits of using or revising non-solicitation and confidentiality provisions to protect their legitimate business interests and their confidential, proprietary and trade secret business information.

• Non-Solicitation Agreements
  An effectively drafted non-solicitation agreement can successfully prevent former employees from soliciting current employees and customers after leaving the company. Such agreements must be reasonable and narrowly tailored to protect legitimate business interests. Review your current agreements to determine if they remain valid under the new Rule and to ensure that they effectively protect your business.
  
  
• Non-Disclosure/Confidentiality Agreements
  Non-Disclosure/Confidentiality Agreements are contracts or provisions where a current or former employees agree not to disclose certain types of valuable business information. Review your current agreements to determine if they remain valid under the new Rule and to ensure that they effectively protect your confidential and valuable business information.
  
  

Consider Drafting Notices (but hold off on sending them out)

The Rule requires employers to notify non-senior executive workers with existing non-competes that their non-competes are no longer enforceable.

The final Rule includes a model for employers to use to draft compliant notices. The model notice from the FTC advises employers to inform employees of the following: (1) they may seek or accept a job with any company or any person - even if they compete with the employer; (2) they may run their own business - even if it competes with the employer; and, (3) they may compete with the employer following their employment.

The final Rule also requires that the notice provide the following: (1) the name the person who agreed to the non-compete clause with the worker, and (2) a notice on paper by hand to the worker, or sent by mail to the worker’s last known personal street address, or emailed to an address belonging to the worker, including the worker’s current work email address or last known personal email address, or texted to a mobile number belonging to the worker.

While employers should assess and identify which employees should receive these notices, employers should wait on sending those notices due to the ongoing litigation, which could significantly impact the Rule’s enforceability.

First, as previously stated, one of the exceptions to the final Rule is having a good-faith basis to believe that the Rule is inapplicable. There is a split in the Federal Circuit Courts between Pennsylvania, Texas, and potentially others. Accordingly, if the employer is similarly situated to the Texas Plaintiffs and has a good-faith belief that the Texas Court ruling is the correct interpretation of the law, then the exception could apply. In that scenario, the employer could have a defense to enforcement of the FTC Rule and its notice requirements.

Second, with the Circuit split and the upcoming election, there is a real possibility that the final Rule may be rendered unconstitutional or eliminated.

Continue to Monitor the Alerts from Z&R

As the situation continues to evolve, employers should familiarize themselves with the moving parts, this Checklist, and begin identifying the employees and agreements subject to the potential Rule (ban of non-competes). Once identified, employers should evaluate what types of protections are in the employer’s best interest. While the FTC’s new Rule has been enjoined from enforcement (in one Court) and its validity continues to be litigated, employers should prepare but continue to wait for further guidance as this matter develops. Continue to stay tuned and Z&R will update you.

*Please contact ZR’s Practice Leader of its Non-Compete/Trade Secret practice, Ami J. Patel (ajp@zrlaw.com) at 216-696-4441 or Kimana Bowen (kab@zrlaw.com) if you have any questions about any of the items on the check list regarding the FTC’s new Non-Compete Rule or need assistance with review of your existing and new agreements.