Two major new rules expected in 2024 will have profound effects on the economy and employers around the country: (1) the FTC’s non-compete rule and (2) the Department of Labor’s overtime rule. Both agencies issued notices of proposed rulemakings (NPRM) in 2023 detailing their plans, and both rules are expected to be finalized in the first half of 2024. They pose massive industry changes nationwide and may face significant legal challenges.

The FTC’s Non-compete Rule. Start with the FTC, where ambitious Chair Lina Khan has proposed a sweeping and aggressive rule that would ban non-compete clauses in employment contracts. Chair Khan and her fellow commissioners issued the NPRM in early 2023 after President Biden signed an executive order in 2021 instructing the FTC to examine the issue.

The FTC went big. Its proposed rule would ban essentially all non-compete provisions in employment contracts, affecting millions of employers and employees nationwide, and it could override dozens of state laws that already address non-compete clauses. On top of that, the rule would require employers to rescind existing non-compete clauses.

Contract law—historically the ambit of state regulation—has long governed these issues, but the FTC rule would end that longstanding practice. More than 25,000 individuals submitted comments this year on the proposed rule, and FTC watchers largely expect the agency to submit a final rule in the first half of this year—possibly in April. That rule could take the form of the NPRM but could also include changes, such as exempting high earners.

But if the final rule mirrors its proposed form, several things are clear. First, the rule will have a massive effect on employment contracts. Many industries employ non-compete clauses—from the financial sector to technology companies. And all those existing contracts would be forced to change. Economists and experts have weighed in with differing opinions on whether wiping out non-compete clauses would have a net positive effect. The FTC predicts the rule would save hundreds of billions of dollars for workers, boost the economy, protect workers, and provide much-needed flexibility for employees.

Second, legal challenges will be made. Trade organizations and public interest groups have already signaled that they will file suit as soon as the ink dries on the new rule. The cases will surely raise several key points:

• The Scope of FTC rulemaking authority. The FTC says it has the power to issue its rule under Sections 5 and 6 of the FTC Act. Section 5, 15 U.S.C. 45 gives the FTC power over “unfair methods of competition” (UMC), and the FTC claims that non-compete clauses are out of bounds.

But it remains unclear whether Section 5 sweeps as broadly as the FTC claims. Consider the text. Nowhere does Section 5 confer substantive rulemaking power. And the FTC traditionally has not issued UMC rules. So, to find rulemaking authority, the FTC has turned to Section 6(g) of the FTC Act, which allows the FTC “to make rules and regulations for the purpose of carrying out the provisions of this subchapter.” 15 U.S.C. 46(g).

Legal commentators disagree over whether Section 6(g) confers substantive rulemaking authority or merely allows the FTC to issue procedural or housekeeping rules. Indeed, experts have contributed to an entire book on the topic. And ultimately, the courts will have to decide this question. The rulemaking authority will undoubtedly play a leading role once the FTC finalizes its rule.

• - Major Questions and Nondelegation. Two further issues complicate the FTC’s authority—one statutory and one constitutional. The “Major Questions Doctrine” poses one serious obstacle. That doctrine, rooted in statutory interpretation, tells Congress that it must be crystal clear before granting broad rulemaking power over important political and economic issues.

The non-compete rule almost assuredly would amount to a “major” question under the Supreme Court’s rationale. The FTC itself has said that the rule would “increase American workers’ earnings between $250 billion and $296 billion per year.” That is pretty big.

So does the FTC Act clearly authorize the FTC to ban non-compete clauses? Maybe. After all, Section 5 tells the FTC “to prevent persons . . . from using unfair method of competition.” But historically, the FTC did not use its Section 5 power via unfair methods of competition (UMC) rulemaking. Instead, it employed a case-by-case approach through adjudication in court and administrative proceedings.

Rulemaking, though, presents a different story. Under the Major Questions Doctrine, the courts will have to find that Congress unequivocally granted the FTC power to regulate and ban non-compete clauses through substantive rules. And under recent Supreme Court precedent, it remains questionable whether Congress spoke clearly enough in the FTC Act to confer such rulemaking power.

And even if the FTC does have rulemaking power, parties are sure to wield a second sword against the FTC’s rule. The “nondelegation doctrine” is a constitutional rule that prohibits Congress from delegating its lawmaking power to the executive branch unless Congress provides an “intelligible principle” to guide the agency’s decision-making. The “intelligible principle” test is a low bar—the Supreme Court has not held that any rule violates the nondelegation doctrine for more than 90 years. Yet, Supreme Court justices have recently signaled interest in reviving the doctrine. And the FTC rule could present the perfect case.

After all, the last time the Supreme Court used the nondelegation doctrine to strike down a law, the language at issue mirrored the language in the FTC Act. In A.L.A. Schecter Poultry Corp. v. United States, 295 U.S. 495 (1935), the Court held that the National Industrial Recovery Act, which authorized the president to approve “codes of fair competition,” violated nondelegation. Compare that to the FTC Act’s language allowing the FTC to regulate “unfair methods of competition.” Former FTC Commissioner Noah Phillips highlighted these similarities and warned that the “broad language” in Section 5 “raises the specter of the nondelegation doctrine.”

Indeed, if the justices plan to bring the nondelegation doctrine back to life, the FTC non-compete rule could provide the way to do so.

Regardless, the FTC will likely issue its non-compete rule by mid-2024. Employers with such clauses should be prepared.

DOL Overtime Rule

The FTC is one of many agencies busy at work on a major rule. The Department of Labor has announced plans to update its overtime rules by rewriting regulations that define which employees amount to “executive, administrative, or professional” workers (the “white-collar” exception). Under Section 213 of the Fair Labor Standards Act, the DOL may “define and delimit” white-collar workers. Historically, DOL has employed a “duties test,” a “salary” test, and a “salary level” test to make those distinctions.

In September 2023, DOL issued a new proposed rule that would significantly alter the landscape of the so-called “white-collar” exception to overtime. In particular, the new rule would raise the salary level for overtime-eligible workers from $684 to $1,059 per week (or from $35,000 to $55,000 annually). The DOL estimates the new rule would affect about 3.4 million employees in its first year. And over the first decade, costs to employers would be about $664 million.

The rule will very likely face the same challenges as the FTC’s non-compete rule—namely, whether:

1. The DOL has such rulemaking power.
2. The Major Questions Doctrine bars the rulemaking.
3. The FLSA runs against of the nondelegation doctrine.

It wouldn’t be the first time the white-collar exception went to court. In 2017, a federal district judge in Texas struck down the Obama Administration’s attempt to raise the salary level from $455 to $913 per week. See Nevada v. DOL, 275 F. Supp. 3d 795 (E.D. Tex. 2017). There, Judge Mazzant held that such a “significant increase would essentially make an employee’s duties, functions, or tasks irrelevant if the employee’s salary falls below the new minimum salary level.” And that “is not what Congress intended with the EAP exemption.” Thus, Judge Mazzant held that the rule was “unlawful.” Employers will likely mount similar legal challenges to the DOL’s latest rule.

Indeed, a Supreme Court case last term may have foreshadowed potential lawsuits over the DOL’s rule. In Helix Energy Sols. Grp. Inc. v. Hewitt, 598 U.S. 39 (2023), the justices held that employees earning a daily pay rate (paid for each day worked) are not paid on a “salary basis” and thus are not exempt from overtime.

The Court did not, however, consider salary levels, which will sit at the center of the white-collar exception rule. Justice Gorsuch in dissent recognized the point, noting the argument that “the statute requires attention to the employee’s duties,” not his salary. 598 U.S. at 63 (emphasis in original). But because that “foundational argument” had been forfeited, Justice Gorsuch thought the argument would have to be addressed another day.

Justice Kavanaugh, joined by Justice Alito, similarly noted in dissent that the FLSA “focuses on whether the employee performs executive duties, not how much an employee is paid.” Id. at 67 (Kavanaugh, J., dissenting). And “[s]o it is questionable whether the Department’s regulations—which look not only at an employee’s duties but also at how much an employee is paid and how an employee is paid—will survive if and when the regulations are challenged as inconsistent with the Act.” Id. (emphasis added).

Those challenges are sure to come when the DOL finalizes the rule. The question is whether the FLSA’s text—which exempts those working in an “executive, administrative, or professional” capacity from overtime—allows the DOL to use salary (as opposed to duties or functions) as a proxy for determining a worker’s status as an executive.

But legal issues aside, the new rule will usher in millions more overtime-eligible employees when finalized, and employers are well served to prepare for the rule by mid-2024.