Employment Law Updates: Noncompete Agreements, Updates Regarding Title VII, Increase to FLSA Salary Thresholds, and New Colorado AI Act

The landscape of federal employment laws has undergone significant transformations, in the past couple of months, requiring employers to remain vigilant and adapt to a dynamic legal environment. When there are discrepancies between federal and Colorado law, employers must remember to prioritize compliance with the law that offers greater rights or protections to employees.[i] This applies across areas such as minimum wage, overtime, workplace safety and anti-discrimination measures. It is important for employers to understand the nuances of these new laws and specifics for compliance.

FTC Ban on Non-Compete Agreements

           On April 23, 2024, the Federal Trade Commission (”FTC”) took an unprecedented step by finalizing a rule that will ban non-competition agreements nationwide, with limited exceptions.[ii] The final rule is slated to take effect 120 days following publication in the Federal Register; however, pending litigation challenging the rule may delay or block its implementation.[iii] The earliest possible effective date for the rule is September 4, 2024.  It is important to note, however, that there is litigation pending against the FTC and enforcement of these new rules. As such, it is important that employers remain up to date on the status of such litigation and whether implementation will occur on September 4, 2024.

           The rule accomplishes three fundamental requirements: (1) employers cannot form new non-compete agreements with employees; (2) employers cannot enforce existing non-compete agreements unless an exception applies and (3) employers must explicitly notify current and former employees that such agreements are unenforceable.

           The FTC defines non-competition agreements broadly as any employment term or condition that prohibits, penalizes or functions to prevent a worker from seeking or accepting employment with another business or operating a business.[iv] This includes both written and oral workplace policies, extending beyond traditional contract terms. While the FTC did not explicitly invalidate other forms of employer protection, such as non-solicitation, confidentiality or non-disclosure provisions, agreements that effectively prevent an individual from securing new employment could face potential invalidation under the rule.

Exceptions

There are several limited “exceptions” to the broad ban on non-compete agreements:

1. Sale of Business Exemption: The final rule does not apply to a non-compete clause made in connection with the sale of a business. Specifically, this exemption applies to the “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.”[v] A “bona fide” sale is one made in good faith, which was added to the final rule to address concerns that employers will use sham transactions, stock-transfer schemes or other mechanisms designed to evade the rule.
2. Statute of Limitations: The final rule does not apply “where a cause of action related to a non-compete clause accrued prior to the effective date.”[vi] This means that the final rule does not make any existing non-competes unenforceable or invalid from the date of their origin; instead, it is an unfair method of competition to enforce certain non-competes beginning on the effective date of the final rule. For example, currently ongoing litigation seeking to enforce a non-compete is not a violation of the final rule.
3. Good Faith Exception:It is not an unfair method of competition to enforce or attempt to enforce a non-compete clause if the person has a good-faith belief that the final rule is inapplicable.[vii]
4. Senior Executives Exception:Non-compete clauses with senior executives prior to the effective date remain enforceable. The rule defines “senior executives” as workers earning at least $151,164 annually and who are in “policymaking” positions.[viii] This includes the CEO or any other officer of a business entity or person who has “policy-making authority,” meaning final authority to make policy decisions that control significant aspects of a business entity or common enterprise.

Notice Requirement

Before the effective date, employers must notify current and former employees who may be subject to active non-compete clauses that these clauses are no longer enforceable unless they are senior executives. The rule includes model notice language and creates a safe harbor for employers that use the model notice. However, employers are not obligated to use the model language to comply with the law; they must consider three key criteria:

1. Employers must provide “clear and conspicuous” notice that identifies the person who entered into the non-compete with the employee.
2. Employers must provide notice in digital format, i.e., email or text, or on paper. Oral notice does not satisfy the notice requirement.
3. There is an exemption from the notice requirement if the employer has “no record” of an employee’s street address, email address or mobile telephone number.

FLSA Increase in Salary Threshold for Exempt Employees

           On April 23, 2024, the Department of Labor (“DOL”) issued a final rule that significantly raises the minimum salary thresholds for the “white collar” overtime exemptions under the federal Fair Labor Standards Act (“FLSA”). Employees are entitled to overtime pay for all hours worked more than forty hours in one work week unless the employee falls under one of the following exemptions: executive, administrative and professional (“EAP”). The effective date for the final rule was July 1, 2024, but certain sections will not apply until January 1, 2025:

• Beginning July 1, 2024, the final rule calls for an increase in the threshold EAP employees to $844 per week, which annualizes to $43,888 per year. The final rule will raise the annual compensation threshold for highly compensated employees (“HCE”) to $132,964 per year.
• Effective January 1, 2025, the salary threshold for the white-collar exemptions will increase again to $1,128 per week ($58,656 per year). The annual salary for HCE will increase to $151,164.
• Starting July 1, 2027, salary thresholds will update every three years, using up-to-date wage data to determine new salary levels.

However, as previously mentioned, when there are inconsistencies between federal and Colorado law, Colorado employers must comply with the law that gives more protection to employees. On January 1, 2024, the Colorado Department of Labor and Employment (“CDLE”) issued Colorado Overtime and Minimum Pay Standards (“COMPS”) Order #39.[ix] This order references the Publication and Yearly Calculation of Adjusted Labor Compensation Order (“PAY CALC Order”), which provides that, starting in 2024, the minimum wage in Colorado for EAP employees is set at $1,057.69 per week. This amount is adjusted annually for inflation.[x] HCE must be paid at least $123,750 annually, and the EAP salary weekly. Consequently, in 2024, the salary exemption thresholds in Colorado are $1,057.69 per week for EAP employees and $132,964 per year for HCE.

Anticipated legal challenges may impact the effective date.[xi] Additionally, the final rule clarifies that each part of the rule is “severable,” meaning that if one part of the final rule is found invalid by a court, it will not necessarily invalidate the entire rule. For now, employers can identify currently exempt employees not meeting the new salary threshold and decide whether to increase affected salaries to maintain exemption or reclassify the employee as nonexempt while keeping current pay levels.

Updates From Supreme Court and EEOC On Title VII and Harassment Guidance

           In a landmark decision, the U.S. Supreme Court resolved a circuit split in Muldrow v. City of St. Louis, Missouri, et al., No 22-193, holding that Title VII of the Civil Rights Act of 1964 prohibits discriminatory job transfers that cause some harm with respect to an identifiable term or condition of employment, but the transferee need not show the harm was significant.

Jatonya Muldrow filed a sex discrimination lawsuit against the St. Louis Police Department, alleging that she was involuntarily transferred from her role in the Intelligence Division to a patrol position because her supervisor preferred to hire a man. Although Muldrow retained her rank and salary, her job responsibilities, benefits and schedule changed significantly in the new position.

Title VII makes it unlawful for an employer to “discriminate against any individual with respect to . . . terms [and] conditions . . . of employment, because of such individual’s race, color, religion, sex, or national origin.”[xii] In a unanimous decision, the Supreme Court in Muldrow rejected a heightened legal standard some appellate courts had applied to Title VII claims to challenge discriminatory job transfers. The Court clarified that Title VII only requires a showing that the transfer resulted in some “disadvantageous” change in an employment term or condition based on sex. Evidentiary support for the harm is still necessary. The Court did not provide precise guidance on what constitutes leaving a plaintiff “worse off,” but it emphasized that the harm need not be “significant.” As such, employes must be careful to analyze all impacts on an employee when considering job transfers.

The U.S. Equal Employment Opportunity Commission (“EEOC”) published a comprehensive resource that brings together best practices for preventing and remedying harassment and clarifies recent developments in the law, which was the first update in over 25 years.[xiii] The guidance covers harassment based on race, color, religion, sex (including pregnancy, childbirth or related medical conditions; sexual orientation; and gender identity), national origin, disability, age (40 or older) or genetic information. Specifically, it addresses various new developments concerning workplace discrimination and harassment and reflects U.S. Supreme Court precedent extending anti-discrimination protections to LGBTQ+ workers.  The guidance provides more than 70 hypothetical examples of potential unlawful harassment, including examples reflective of today’s modern workforce with both hybrid and remote workers and widespread use of electronic communication and social media. The guidance also addresses retaliatory harassment, interclass harassment (where the harasser is in the same protected category as the individual being harassed), and intersectional harassment (where individuals are targeted based on their membership in more than one protected category, i.e. a female who is over the age of 40). There is litigation pending against the enforcement of the guidance as it pertains to transgender employees by 18 states.  Colorado has long had laws protecting the rights of employees who are transgender and therefore the outcome of this lawsuit is not likely to have any impact in Colorado.

Colorado Artificial Intelligence Act

On May 17, 2024, Colorado became the first state to implement a comprehensive regulation of artificial intelligence (“AI”) when the governor signed the AI Act, “Concerning Consumer Protections in Interactions with Artificial Intelligence Systems.”^[xiv] The law will take effect on February 1, 2025, and is designed to regulate the use of “high-risk” AI systems. The AI Act defines “high-risk AI systems” as AI that makes, or is a substantial factor in making, consequential decisions affecting: (a) educational opportunities; (b) employment opportunities; (c) financial or lending services; (d) essential government services; (e) health care services; (f) housing; (g) insurance; or (h) legal services.^[xv] The AI Act imposes compliance obligations on both “developers” and “deployers” to avoid the risk of “algorithmic discrimination,” which is any situation where the use of an AI system results in unlawful differential treatment or impact that disfavors individuals or groups based on protected characteristics under Colorado or federal law (e.g., sex, reproductive health, religion, race, disability, or age).^[xvi] The AI Act does not provide a private right of action for consumers and will be exclusively enforced by the Colorado Attorney General (“AG”) or district attorneys, with potential fines of up to $20,000 per violation.[xvii]

Deployers

           In Colorado, employers largely satisfy the criteria for being considered a “deployer,” a term that encompasses any entity engaged in business that uses a high-risk system. This designation holds unless the employer adapts the system beyond its original specifications or employs it in a manner not intended by the developer. Developers are granted a conditional presumption of compliance when they can demonstrate adherence to the following protocols:

• Development of a risk management policy and governance program;
• Annual completion of an impact assessment for high-risk systems, detailing the system’s purpose, risks, inputs, outputs and monitoring measures, which must be retained for three years, and reassess within 90 days of any significant changes;
• Consumer notification when a high-risk system is utilized for making significant decisions affecting consumers. This includes providing a disclosure statement detailing the system’s purpose, decision nature and opt-out rights under the Colorado Privacy Act;
• Publication of a summary statement on their websites, detailing the types of high-risk systems deployed and the management of potential risks of algorithmic discrimination; and
• In cases where the system leads to a significant and adverse decision for the consumer, deployers must furnish:
  • A disclosure statement outlining the reasons for the decision;
  • An opportunity to the consumer to correct any incorrect personal information processed by the system; and
  • A chance to appeal the adverse decision.[xviii]

A deployer is exempt (other than consumer notification and disclosure requirements) if, while it uses the high-risk AI system, employs fewer than fifty full-time employees and does not use their own data to train or further improve their AI systems.[xix]

Developers

Employers classified as “developers” due to their business activities and involvement in creating or significantly modifying AI systems must adhere to specific obligations to prevent algorithmic discrimination. These responsibilities include:

• Provide a statement on foreseeable and harmful uses of high-risk systems;
• Summarize training data, limitations, purposes, benefits and necessary information for high-risk systems to aid deployers in meeting disclosure obligations;
• Offer documentation on high-risk system evaluation, data governance, intended outputs, risk mitigation measures and guidelines for consequential decision-making usage; and
• Publicly disclose:
  • Summary of the type of high-risk systems developed or significantly modified; and
  • Management strategies for potential risks associated with this system.[xx]

If a high-risk system results in algorithmic discrimination, the deployer and/or developer must inform the attorney general within 90 days of discovery.[xxi] They must also provide their risk management policy and impact assessments if requested, within the same timeframe.[xxii]

Further, under the AI Act, developers and deployers must inform consumers when they are engaging with any AI system (i.e., regardless of whether the system is “high-risk”) unless it is clear to a reasonable person that the interaction is with AI.[xxiii] This disclosure is mandatory for any AI designed for consumer interaction, whether it’s used, sold, or otherwise made available.

Conclusion

Employers should anticipate the likelihood of increased litigation and new regulations addressing each of these new laws. With federal and state courts and legislatures frequently introducing new requirements, it is a prudent time for employers to reassess their workplace policies and promptly address any complaints to ensure alignment with evolving standards.

Disclaimer: What is written here is for general information only and should not be taken as legal advice. If legal advice is needed, please consult an attorney.

[i] 16 C.F.R. § 910.4 (explaining that the final rule supersedes all state laws to the extent that a state’s law permit or authorize conduct prohibited under the final rule or in conflict with the notice requirements); 7 C.C.R. § 1103-1 (explaining that if an employee is covered by multiple minimum or overtime wage requirements, the requirement providing a higher wage, or otherwise setting a higher standard, shall apply).

[ii] 16 C.F.R. § 910 (2024).

[iii] Chamber of Commerce v. F.TC, 6:24-cv-00148 (E.D. Tex. 2024) (U.S. Chamber of Commerce lawsuit against FTC to block rule from taking effect).

[iv] 16 C.F.R. § 910.1.

[v] Id. at § 910.3(a).

[vi] Id. at § 910.3(b).

[vii] Id. at § 910.3(c).

[viii] Id. at § 910.2(a)(2).

[ix] 7 C.C.R. § 1103-1 (2024).

[x] 7 C.C.R. § 1103-14 (2024).

[xi] Mayfield v. U.S. Dep’t of Labor, 1:22-cv-792-RP (W.D. Tex. 2023) (defending the Department of Labor’s statutory authority to impose any salary requirement in defining the criteria for the white-collar exemption).

[xii] 42 USC § 2000e-2(a)(1).

[xiii] U.S. Equal Employment Opportunity Commission, eeoc-cvg-2024-1, enforcement guidance on harassment in the workplace (2024), https://www.eeoc.gov/laws/guidance/enforcement-guidance-harassment-workplace; see also Allen Smith, EEOC Final Guidance Provides Many Examples of Unlawful Harassment, SHRM (Apr. 29, 2024), https://www.shrm.org/topics-tools/employment-law-compliance/eeoc-final-guidance-harassment?utm_source=marketo&utm_medium=email&utm_campaign=editorial~HR%20Daily~NL_2024-04-30_HR-Daily&linktext=EEOC-Final-Guidance-Provides-Many-Examples-of-Unlawful-Harassment&mktoid=49339340&mkt_tok=ODIzLVRXUy05ODQAAAGSzpEA-UktrXlT2Hmm3und4J5HaZVJEBuJJcFx7cgm3SfNxr7Mld9cya5Zhl7D__yBLUCEEcTucXh5oenGWzRyWZFaarqJRf8o-c-9SrXThRaj1PlP.

[xiv] CRS § 6-1-1701.

[xv] Id.

[xvi] Id.

[xvii] Id.

[xviii] Id.

[xix] Id.

[xx] Id.

[xxi] Id.

[xxii] Id.

[xxiii] Id.