Compliance & Policy
The HR Professional’s Guide To The End of The Non-Compete Era
Last month, the Federal Trade Commission issued a new rule that invalidates non-compete agreements for the vast majority of employment contracts, reducing the percentage of the employees subject to non-compete agreements from almost 20% of the workforce to less than 1%
June 10, 2024

Key Takeaways

  • New rule from the Federal Trade Commission (FTC) banning non-compete contracts for most workers (excluding senior executives that meet certain criteria) is set to take effect in September 2024 - although lawsuits are likely to delay implementation of the rule temporarily if not indefinitely
  • For HR Professionals, some of goals sought by non-discrimination agreements can be achieved via other means, like non-solicit agreements to limit client-poaching, more specific non-disclosure agreements to protect intellectual property, and longer vesting periods for stock options to promote talent retention
  • The healthcare industry will be critically impacted by the new rule as a result of both the high stakes associated with healthcare outcomes and the large number of physicians currently subject to non-compete agreements
  • The FTC claims that banning non-competes will reduce healthcare expenses by 200 billion over the next decade, but many industry insiders believe it will cause health care expenditures to increase, in part due to wage inflation for healthcare workers
  • The new rule, if implemented, is estimated to produce 8,500 new businesses each year, tens of thousands of new patents, and will result in the average US worker earning $524 dollars more each year

ARTICLE | The HR Professional’s Guide To The End of The Non-Compete Era

Last month, the Federal Trade Commission issued a new rule that invalidates non-compete agreements for the vast majority of employment contracts, reducing the percentage of the employees subject to non-compete agreements from almost 20% of the workforce to less than 1%.

For human resource professionals, executives, and organizational leadership, the impacts of these changes will be considerable - from talent acquisition and retention to employee health outcomes - and may be worth considering in advance of when the new rule takes effect this coming fall.

To be clear, it’s very possible if not more likely than not that at least one of the pending/forthcoming lawsuits challenging the new rule will succeed on some level, but the FTC makes a fairly compelling case - both against non-compete agreements and for the agency’s ability to regulate them - that is unlikely to go away even if the new rule in its current form doesn’t survive judicial review unscathed.

In the event that the current era of non-competes truly does come to an end, whether sooner or later, more than a few aspects surrounding common business practices for managing talent retention, intellectual property protection, and limiting competition will have to be rethought and reconfigured from the ground up, which will provide both significant challenges and meaningful opportunities.

How HR professionals and organizations in general respond to those challenges and adapt their way of doing business to adjust to the new non-compete normal, and more importantly how effective those adjustments prove to be, will likely reshape human resources management practices and business organizational structuring for decades to come.

  • What: The new rule prohibits the establishment of almost all new non-compete agreements going forward beginning on the effective date for all employees, including senior executives but excluding business sales. The new rule also invalidates current existing non-compete agreements for most employees, but makes an exception that allows existing non-compete agreements to stay in place for senior executives - defined as earning more than $151,164 in the last year and having final authority to make policy-setting decisions that affect significant aspects of the business.
  • When: The new rule is set to take effect on September 4, 2024, at which point non-excepted existing non-compete agreements will be invalidated and all future non-compete agreements will be banned. Any existing non-compete agreement that does not meet exception criteria will no longer be operable from that date forward, assuming that judicial intervention doesn’t delay the start date.
  • Why: The FTC determined that non-compete agreements lead to inefficiencies in the labor market that can increase cost and lower the quality of output in addition to being coercive, exploitative, and suppressing the wages of workers, even including workers not directly subject to non-compete agreements.

Non-Competes In US Before New Rule

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Non-Competes In US After New Rule

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What Happens Next?

The first thing that employers must do is notify all employees who will be affected by the new rule and inform them that their non-compete agreement will no longer be in effect as of September 4th (or whatever date in advance of September 4, 2024 that the company may choose). The FTC has provided model language to assist in the process that can be found on the agency website.

The next step must be quickly adjusting course in line with the new reality that non-compete agreements may soon be a relic of the past.To understand how the absence of non-compete agreements will affect business operations, it’s important to start with the main goals that non-compete clauses are typically utilized to meet - retaining talent, protecting IP/ trade secrets, and limiting competition.

These goals can all be pursued via a combination of other efforts, of course, but those efforts will not necessarily all be as effective as non-competes had been, nor will they all be equally effective for every employer that puts them to use.

While it remains to be seen what methods will and won’t be effective for a given employer/industry/goal, that process of trial and error in discovering what works and what doesn’t will likely have major consequences that will be felt across the labor market and economy as a whole in terms of how business is conducted going forward relative to the status quo.

IP Protection:

Non-compete agreements have often been employed in order to ensure that in-house know-how and trade secrets stayed in-house.

Perhaps the most relatable of the justifications for restricting the free movement of employees within a market is the understandable desire for organizations to keep some information out of the hands of competitors, would-be market entrants, and others who may inhibit the ability of the business to grow and succeed.

To those ends, non-compete agreements were fairly effective, which is partly responsible for the widespread practice of routinely including non-compete agreements in employment contracts.In a post-non-compete world, one concrete measure organizations can undertake to better protect intellectual property and trade secrets is putting in place more clear and restrictive policies and procedures for using company equipment and for accessing, downloading, storing, and utilizing company data and work product.

These efforts can decrease the likelihood that confidential information gets outside of the building in the first place, in addition to potentially helping to determine if, when, how, and by whom that information was improperly accessed or disclosed in the event of a breach.

While laws that allow for the protection of trade secrets and IP remain in place even absent non-compete agreements, however, in practice it can be much more difficult to prove infractions than to prevent them.

As a result, to better reduce the leaking of valuable information without non-compete agreements to limit in-house knowledge from benefiting competitors, employers are likely to redouble their talent retention-efforts, especially for specialized roles with specific insight into the organization’s competitive advantages.

Regardless of the efforts taken to retain talent, however, some employees with access to trade secrets and valuable organizational knowledge will inevitably move on to work for another employer, in which case tighter, and more specific non-disclosure agreements with heightened penalties for term violations may be the best tools available for ensuring departing employees know both what information should not be revealed and the legal repercussions they may face if they do so.

Talent Retention:

Once non-compete restrictions are lifted, employees will be able to more directly test the market value of their labor by offering it to competitors.

At first, this newfound employee freedom of movement may lead to both increased turnover and increased wages/labor expenses. While some employees will take the opportunity to open their own business, the majority of the influx of talent on the market will likely look to move on and/or move up resulting in an industry-wide game of musical chairs.

As a growing number of companies begin adopting alternative means for achieving the goals they had previously pursued via non-compete agreements, however, that churn is likely to settle and may ultimately lead to a lower turnover rate overall.

For example, while non-competes provided a serviceable ‘stick’ to limit employees’ ability to leave their jobs, the absence of non-compete agreements suddenly makes the various ‘carrots’ that serve a complementary purpose all the more crucial.

While some other retention-aiding ‘sticks’ can still be put to use toward improved retention, including Training Repayment Assistance Programs (TRAPS) so long as those programs are not so severe as to constitute de facto non-compete agreements, ‘carrots’ like escalating bonus schedules, accumulating benefits, and longer vesting periods for stock options will have an increasingly important function in keeping top talent on board.

Inhibiting Competition:

The threat of increased competition is two-fold when employees are suddenly more capable of either putting their skills to use for a rival organization or starting their own operation in the space.

In either case, non-solicit agreements can be effective in limiting that exposure by limiting the ability of employees to poach clients on their way out the door and for a period of time following their employment. Non-solicit agreements should also be put in place to restrict former employees from hiring your organization’s current staff, agents, and sales people for a set period of time following the former employee’s term of employment.

Non-disparagement and non-interference agreements may also be useful in similar situations with similar goals by preventing former employees from disparaging, disrupting, damaging, or otherwise interfering with their former employer’s business.

As for inhibiting competition from existing industry counterparts who benefit from talent your organization developed in-house, the best defense is to shore up your IP protection alongside reinforced talent longevity and retention efforts.

The best offense, on the other hand, may be to bolster your own organization’s ranks with some of the new talent who will be making their services available on the market in the near future.

Exceptions To The Rule:

Beginning September 4th, 2024 most non-compete clauses will be banned going forward, but not all.

Non-compete agreements involving the sale of a business will remain valid for both past and future business sales so that buyers can remain protected from competition from the seller.

Importantly, this exception applies to any bona fide good faith sale in which the seller has an ownership stake regardless of the size of that stake - which is a departure from the proposed rule which required a minimum 25% ownership stake for non-compete clauses to be valid. Though the final rule is an expansion of the exception form the proposed rule, the FTC is clearly aware of the potential abuse of this exception.

Further, the FTC notes that the invalidation of existing non-compete agreements isn’t retroactive, so violations of existing non-competes can still result in viable legal action if the violations or conditions enabling the violations occurred prior to the new rule taking effect.

Most existing non-compete agreements that don’t meet the business sale exception will also be invalidated as of September 4th, 2024, but there is an exception for existing non-compete agreements involving ‘senior executives’ - defined in the rule as employees who earned at least $151,164 in the last year and who have final authority to make policy-setting decisions that affect significant aspects of the business.

Non-profit organizations are also outside the scope of the new rule as beyond the purview of the FTC, but regulators note that they do retain jurisdiction over organizations who may be non-profit in name, designation, and/or tax status, but nonetheless operate as for-profit entities and/or primarily for the benefit of their operators, in which case the new rule will be applicable.

Healthcare-Specific Impacts of Banning Non-Compete Agreements

Given the prominent role that healthcare plays in workforce management, benefits administration, and worker productivity, human resources professionals should also be mindful of some of the healthcare-related changes that may result from banning non-compete agreements.

The two primary negative impacts that non-compete restrictions can have on the healthcare industry according to public commentary highlighted by regulators can be boiled down to reduced access to care and reduced quality of care.

While reduced quality or access to a product or service is generally considered a problem across most industries, the stakes are often significantly higher when health is involved, which is one reason that the FTC paid special attention to address some healthcare related issues and objections related to banning non-competes.

Further, the healthcare industry will be critically impacted by the new rule as a result of the large number of physicians currently subject to non-compete agreements, with as much as 45% of physicians at for-profit hospitals are currently constrained by non-compete agreements.

While the new rule has the support of the American Medical Association, there are still plenty of agents and organizations within the healthcare industry who are of the opinion that the rule will ultimately have a net negative impact.

In responding to those who oppose the new rule, regulators make it clear that they are very much aware of the relevant concerns held by some within the healthcare industry about how the new rule will affect their operations - including that the rule would worsen the existing healthcare worker shortage problem and would drive up healthcare worker wages and health care costs in general as a result - but the FTC largely dismisses those concerns as unsupported by the data.

It is not entirely clear whether or not regulators found those concerns to be without merit, however, or if the evidence in support of those propositions was simply insufficient while they found the data and commentary in opposition to non-compete clauses more compelling.

For example, a significant number of physicians commented that non-competes negatively impact the quality of care they can provide by forcing them to accept care-impacting decisions made by administrators at the institution with which they are contracted while depriving them of the opportunity to offer their skills and experience to a competing institution instead, which can ultimately lower the overall quality of care for both healthcare institutions in the example.

Further, while regulators conceded that tax-exempt organizations in general operate outside the realm of the FTC, they do notably claim jurisdiction over (and fired a shot across the bow of) the many nominally non-profit hospitals and healthcare organizations that nonetheless pay executives exorbitant salaries and contribute less to their communities than the value of the tax breaks they get as a result of their non-profit structure.

What will be the overall impact on healthcare? The FTC claims the new rule will lower healthcare expenses by an average of $20 billion per year over the next decade in addition to creating more competition and offerings to better meet patient needs/demand, while opponents believe freedom of movement for healthcare workers will result in higher wages that drive the cost of healthcare up.

Whatever the end result, there will almost certainly be healthcare-related confusions and complications that arise as the industry adapts to the changing environment, which will likely cause employees to lean on their employers further for guidance and help navigating the evolving healthcare landscape.

Economic Impacts of Banning Non-Compete Agreements

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The Case Against Non-Compete Agreements

According to the Federal Trade Commission (FTC), about 30 million workers are currently subject to non-compete agreements, which means any problems that non-compete agreements may be causing or exacerbating are going to be felt economy wide.

Despite the widespread adoption and long history of non-compete clauses in employment contracts, the practice has long been the subject of controversy, with data analysis increasingly seeming to confirm some of the most common critiques of non-compete agreements, including that they are economically inefficient, lead to higher costs, result in worse quality product/service offerings, and stifle innovation.

One of the biggest arguments against non-competes embraced by the FTC is that they unnaturally inhibit free market forces that could potentially distribute labor more efficiently if non-competes weren’t restricting the free movement of talent within a market/geographic region.

Those restrictions affect not only the movement of labor and ideas among existing competitors within a given market, which affects the value of that labor in turn (i.e. wage suppression), but non-compete agreements also inhibit new entrants from accessing the market, which has a chilling effect on innovation by limiting the availability of expertise and experience to would-be innovators and their organizations, whether preexisting or brand new.

Interestingly, data indicates that non-competes not only depress wages and earnings for workers whose contracts contain non-compete clauses, but also for workers who aren’t directly subject to non-compete clauses, as well, by lowering wages across the entire category.

Quality of product and service offerings is another victim of non-compete agreements highlighted by the FTC, noting that employees who are unable to take their services elsewhere are less capable of pushing back against excessive workload, job requirements, or cost-saving measures that are likely to result in a lower quality of work output.

Given these findings, it is no surprise why the FTC decided that the use of these kinds of restrictions should be banned.

Not everyone agrees, however, with opponents challenging both the wisdom of the new rule and the FTC’s authority to issue it, which is a position supported by many stakeholders across a range of industries who believe that regulators at the FTC have overstepped their regulatory bounds with the new rule and grossly misunderstood and/or mischaracterized the potential effects that banning non-compete agreements may have.

Legal Challenges To The New Rule

As of this writing, there are at least 2 separate lawsuits that have been filed against the FTC with regard to this rule.

The most prominent plaintiff thus far is the US Chamber of Commerce, which claims that the FTC lacked the authority to issue such a broadly-sweeping rule, amongst other claims. The suit was filed in the US District Court for the Eastern District of Texas, which the Chamber presumably believes to be a district friendly to the cause and somewhat increases the chances that the challenge will be heard favorably, at least in the short-term.

In making its case, the Chamber specifically pointed to the substantial costs that companies would have to undertake to protect their investments in terms of both developing talent and safeguarding intellectual property if non-competes are no longer permissible.

The FTC counters those complaints by claiming that the agency is specifically mandated to regulate unfair methods of competition, which they have concluded includes non-compete agreements.

The Chamber has not yet said whether it will move for a temporary injunction blocking the enforcement of the rule pending their legal challenge, but as September approaches, that motion for injunction becomes increasingly likely unless another legal challenger to the new rule (of which many more are anticipated) takes that action first.

Mployer Advisor’s Take

Despite having the final rule in hand and just a few months before it is scheduled to take effect, the general consensus is that legal challenges to both the rule banning non-competes and the FTCs right to enact the rule will succeed in delaying implementation at the very least.

How those cases play out remains to be seen for the time being, but given the current makeup of the federal judiciary, substantial changes to the rule if not a de facto gutting of it seem more likely than not prior to the rule taking effect.

Even if the non-compete ban is severely diminished if not invalidated by the time it has been terminally adjudicated, given the clarity of the case they present and the resolution in their actions, regulators at the FTC may very well attempt to achieve the same ends via different, more judicially palatable means should they still be in position to do so next year following the elections this fall.

One way or another, the spotlight has been shone on non-compete clauses, and a return to the era of widespread, default non-compete agreement use is unlikely to happen regardless of the fate of the current legal challenges to the new rule.In justifying the ban, the FTC noted that there were a number of less-intrusive ways for employers to achieve the benefits they’ve come to expect from non-compete agreements including talent retention and IP protection, including some of those discussed above.

Further, the FTC pointed to the experience of several early adopter states like California and Oklahoma that paved the way for the new rule via heightened non-compete regulation above and beyond the national standards at the time. Those early adopter states not only provide evidence that banning non-competes won’t result in the worst outcomes predicted by those opposed to the new rule, but they are also home to thousands of companies that can serve as case studies that can benefit out-of-state companies addressing these issues for the first time with how best to adapt to the new, more competitive environment.

Forward-thinking organizations might be wise to begin looking toward those models, exploring their options, and making the transition away from relying on non-compete agreements before being directly faced with a swiftly approaching the legal deadline for doing so, whether that deadline ends up being this coming September or a little farther down the road.

Workforce Management
Employee Compensation Cost Breakdown - Wages, Salaries & Employee Benefits by Industry and Occupation
The average US employee costs their employer about $45.42 per hour in total compensation expenses with a little more than 30% of that expense going toward employee benefits and perks.
Author:
April 22, 2024

The average US employee costs their employer about $45.42 per hour in total compensation expenses, excluding members of the armed forces. A little less than 70% ($31.29) of that total compensation was earned in salary and/or wages while a little more than 30% ($14.13) of that expense covered employee benefits and perks according to the BLS.

Benefits and perks cross a number of segments. Below is the full breakdown but as you can imagine, the majority comes from medical, social security, leave, and retirement. While life, disability, dental and vision are all important, the only represent a small percentage of the full medical.

Employers each year invest over $1T into their employee's benefits, this is over 5% of the US GDP. Your firm does the same, employee benefits are often one of the top five expenses each year for an employer, in some industries it is in the top three.

Going one level deeper, the average hourly wage/salary costs were nearly identical between service employees and goods producing employees at $30.34 and $30.31 hours, respectively, whereas the average hourly employee benefits expense was a couple dollars higher for goods-producing employees at $14.44 an hour per employee than for service employees at $12.44 an hour per employee.

Expenses derived from leave, however, whether paid time off or sick leave, were slightly higher for the service industries at $3.34 per hour relative to the $2.82 per hour average leave expense for employees in industries that produce goods.

Employee Compensation Costs by Industry

First, lets take a look by industry. As the following chart illustrates, the information industry had both the largest wage/salary expense at $48.25 per hour and the largest employee benefits expense at $26.60 per hour, for an average total compensation expense of $74.85 per employee per hour.

Despite paying a slightly lower average wage/salary expenses per employee at $47.95 than the information industry’s $48.25, the utilities industry nonetheless has the highest average hourly total employee compensation expense at $76.91 as a result of boasting the largest average hourly employee benefits expense of $28.96.

The other services industry had the lowest average total employee compensation costs of just $17.82, followed by leisure and hospitality at $19.44, and the retail industry at $25.08 before making the jump up to the manufacturing industry, which spends an average of $43.68 on employee compensation per hour.

Interestingly, despite paying the lowest wages and salaries, the other services, leisure and hospitality, and retail industries pay the largest proportion of total employee compensation in the form of wages and salaries. In short, the pay is relatively bad in these industries and the benefits are even relatively worse.

Employee Benefit Expense Breakdown

As noted above, the split between wages/salary expenses and employee benefits expenses was about 70% to 30%.

The 30% of total employee compensation expenses that went toward employee benefits can be further broken down, the largest portion of which went to health insurance of course, which cost private employers about $2.94 per hour per employee on average.

Social Security contributions were the next largest expense at $2.06 per employee per hour, followed by paid leave at $1.67, non-production bonuses at $1.20, and defined contribution benefits which cost employers an average of $1.07 per employee per hour in 2023.

Those 5 employee benefit expenses alone (totally $8.97 per employee/hour) accounted for more than 70% of the average total hourly employee compensation expense of $12.77 per hour.

The least expensive eight benefits expenditures combined to equal a little more than $1 in total cost per employee per hour, or a bit over 8% of the total average employee benefits expense.

While the list stacks up for the minor benefit offerings, with a negligible impact on cost. some of them are the most important to certain segments of employees. As noted above, the split between wages/salary expenses and employee benefits expenses was about 70% to 30%.

Employee Compensation Costs by Occupation Type

Next, lets look at the specific occupation. While workers in private industry cost their employers $43.11 per hour in total compensation expenses, those figures unsurprisingly varied quite significantly based on occupation type.

Management, business, and financial occupations had the highest average hourly compensation costs at $81.72, followed by professional and related occupations at $66.53.

Construction, fishing, farming, and forestry employees cost their employers an average of about $44.50 per hour in compensation expenses, while sales, transportation, and office and administrative employees had an average compensation expense of about $33 per hour. Service industry employees came in at the bottom of the list costing just $21.55 per hour in total compensation.

It is worth noting that the benefits expenses incurred for sales employees is surpassed by all other occupations outside service occupations, and although sales occupations pay higher wages and salaries than transportation and office/administrative jobs, transportation and office/administrative jobs are nonetheless more expensive in total compensation because of their relatively more substantial benefits offerings.

Employee Compensation Costs by Industry & Occupation

When accounting for both industry and occupation type at the same time, the combined effect that these independent factors have on average employee compensation expenses can be seen even more clearly, as in the following charts outlining employee compensation costs by industry, further broken down by occupation type.

For example, management, business, and financial jobs in the professional and business services industry cost their employers ($89.79 per hour) more than $12 more an hour in total compensation expenses than employees in the same field that work in the manufacturing industry ($77.56 per hour).

On the other hand, office and administrative support jobs compensation expenses were slightly more expensive in the manufacturing industry, albeit largely consistent across industries - $34.4 per hour in the manufacturing industry, $32.31 in the professional and business services industry, and $32.38 per hour in the trade, transportation, and utilities industries.

In a future installment, we’ll take a look at how these employee compensation expenses also vary by company size and region as well as how occupation and employee headcount combine to affect average hourly employee compensation cost.

Economy
The Market Employment Summary for April 2024
Each month, Mployer Advisor breaks down the Bureau of Labor Statistics’ most recent State Employment and Unemployment Summary to highlight some employment trends across various markets. This is an overview of April’s report. 
April 19, 2024

Editor's Note: This report is based on survey data from March 2024 that was published in April 2024. This is the most recent data available. (Source: Bureau of Labor Statistics)

The national unemployment rate average fell by one-tenth of a point last month, as US employers added more than 300 thousand new jobs.

Only 6 states recorded a statistically meaningful reduction in unemployment rate, however, led by Arizona at minus 0.3%. 

Florida was the only state to register an increase in unemployment last month, while the remaining 43 states and Washington DC saw no meaningful change in their month-to-month unemployment figures. 

Similarly, only 5 states saw a net increase in jobs over the month, led by Virginia which added almost 17 thousand new entries to in-state payrolls, while the remaining 45 states and DC essentially held steady on net.

There are 5 states plus Washington DC that have unemployment rates above the US national average, down from 6 such states last month plus DC, while 24 states boast unemployment rates below the national average.

Below is the breakdown of the Bureau of Labor Statistics’ (BLS) market employment summary for April 2024.

States With the Highest Unemployment Rates

California posted the highest unemployment rate for the second month in a row, holding steady at 5.3%, followed by Washington DC which ticked up a tenth of a point to 5.2% and swapping places with Nevada who ticked down a tenth of a point to 5.1%.

Rounding out the only other states with unemployment rates higher than the US average are Illinois, New Jersey, and Washington state - which each came in at 3.8% unemployment last month.

Florida, which saw its unemployment rate go up by one-tenth of a point, was the only state to record a statistically significant increase in unemployment last month.

Over the past 12 months, 29 states have recorded meaningful increases in unemployment, led by Rhode Island at plus 1.3%, followed by Connecticut at plus 1.1%, which were the only states that saw their unemployment rates increase by 1% or more over the year.

States With The Lowest Unemployment Rates

For the third straight month, North Dakota and South Dakota recorded the lowest unemployment rates among the states, both holding steady over the month at 2.0% and 2.1%, respectively.

Vermont was next on the list at 2.2% unemployment, followed by Maryland and Nebraska at 2.5% each.

Of the 6 states that recorded a net drop in unemployment rate last month, all but Arizona at minus 0.3% recorded a reduction of just one-tenth of a point. Those states are Maine, Montana, New York, Vermont, and Virginia. 

Massachusetts saw its unemployment rate decrease by one-tenth of a percent over the course of the last 12 months, and it was in fact the only state to record a net decrease in unemployment over that time frame.

States With New Job Losses

No states saw statistically significant job losses last month.

States With New Job Gains

5 states in total saw the total number of jobs being worked in their states increase last month.

As a percentage, Arkansas and Kentucky saw the largest job gains at plus half a percentage point each, while Kansas and Virginia both registered 0.4% increases, rounded out by the 0.3% increase in Georgia.

Looking at the raw number of jobs added, however, Virginia had the biggest month, growing their in-state payrolls by 16,500. For context, that’s 10 thousand more jobs over the month than what Arkansas added. 

Over the last 12 months, Idaho has seen the largest jobs gain in terms of percentage, with a 3.7% increase in payroll entries over the past year. Nevada isn’t far behind with a 3.4% increase over the same time period. 

Mployer Advisor’s Take: 

On the one hand, annualized inflation of 3.5% - as was recorded last month - is lower than inflation has been in all but 6 months out of the past 3 years.

On the other hand, inflation has ticked upward (albeit slightly) now 3 out of the last 4 months. 

The latter trend is what Fed head Jerome Powell is pointing to while signaling that they will likely be delaying the planned interest rate decreases until 2025.

Perhaps even more concerning, Powell indicated that the Fed’s analysis shows that the cause of the lingering inflation may be linked to the increasing difficulty of insuring an economy that is being subjected to increasingly volatile forces, particularly with regard to natural disasters and weather related events.

We will dive further into the new outlook on how uninsurability may be driving inflation in future pieces and what it means, but suffice it to say for now, given the potential scope of the problem that Powell believes has prevented inflation from being tamped out thus far, plans for lower interest rates may as well be on hold indefinitely.

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Economy
The Employment Situation for April 2024
The latest economic release from the Bureau of Labor Statistics reports that the U.S. added 303 thousand new jobs last month, while the unemployment rate ticked down to 3.8%.
April 5, 2024

Editor's Note: This report is based on survey data from March 2024 that was published in April 2024. This is the most recent data available. (Source: Bureau of Labor Statistics)

US employers had another banner month on the hiring front, adding 303 thousand new jobs, while the unemployment rate ticked back down a tenth of a point to 3.8%.

Not only did these job figures exceed expectations, they did so by more than 50% over the approximate 200 thousand jobs that economists were forecasting. 

It’s also worth noting that this report marks the 26th consecutive report with the US average unemployment rate below 4% - which is the longest such streak in nearly half a century.

The healthcare industry saw the largest number of new jobs added last month, with 72 thousand new payroll entries, which is a 20% increase over the 60 thousand new jobs the healthcare industry has averaged over the last 12 months. 

Government jobs had the next largest increase adding 71 thousand new jobs, which was up by more than 30% above its 54 thousand average monthly job additions.

The construction industry also added a significant number of jobs at plus 39 thousand, which is more than two times its monthly average - a trend that was matched by the other services industry, which added 16 thousand jobs last month, doubling the monthly average it has recorded over the past year.

While the social assistance industry saw growth as well, the pace was much slower than usual with the addition of just 9 thousand new jobs last month relative to its monthly average of 22 thousand. 

Perhaps most noteworthy of all the industries that recorded job growth last month, however, is the leisure & hospitality industry, which added 49 thousand jobs last month, beating its 12 month average of 37 thousand, and now finally fully recouping all the jobs the industry lost during the peak of the initial pandemic -4 years in h making.

There was no significant change in employment figures last month in the manufacturing, wholesale, transportation & warehousing, information, finance, professional & business services, mining, natural gas extraction, and quarrying industries.

Average hourly earnings rose by 12 cents to $34.69 last month, which is an increase of three-tenths of a percent. When accounting only for private sector, non-supervisory employees, however, the increase was only 7 cents per hour, bringing the average hourly earnings for this subset of the workforce up to $29.79.

The average workweek increased by one-tenth of an hour to 34.4 hours per week.

Mployer Advisor’s Take

Despite this significant job growth including a net upward revision of more than 20 thousand more jobs than were previously reported in January and February, the wage growth remains relatively slow and stable, which will help keep at bay some of concerns about what these strong economic reports will mean for the interest rate cuts that are expected before the end of the year.

This kind of dynamic of job growth without the corresponding wage growth is only possible because of the entrance (or reentrance) into the job market of more than 400 thousand people last month, bringing the labor participation rate up two-tenths of a point to 62.7%.

Still, the strength of this report undoubtedly increases the likelihood that the three interest rate cuts that the Federal Reserve has penciled in for 2024 will fall in the second half of the year, and any similarly strong reports that come over the next few months may very well push at least one of those cuts into 2025. 

With prices increasing by a very historically reasonable 3.2% (albeit still above the Fed’s target of 2%) as of the most recent data available, continued strong job growth is a lot more likely to delay and/or decrease the forthcoming rate cuts than another flare up in inflation seems to be, which is a pretty great place for this economy to be in, all things considered

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Market Insights
Living Wage vs. Minimum Wage In The Modern Age
While the concept of a living wage has become an issue of increasing importance to both employers and employees in recent years, the number of workers actually earning a living wage has been steadily decreasing at the same time - though that decrease has not been experienced across industries and/or geographies in equal measure.
April 1, 2024

While the concept of a living wage has become an issue of increasing importance to both employers and employees in recent years, the number of workers actually earning a living wage has been steadily decreasing at the same time - though that decrease has not been experienced across industries and/or geographies in equal measure.

It may once have been easy to confuse minimum wage standards with living wage standards. In fact, the federal minimum wage was initially devised in part to ensure a living wage, those standards long ago diverged with cost of living significantly outpacing minimum wage increases on balance since the 1950s.

That said, the chasm between minimum wage and living wage seems to have become all the more stark in recent years, especially during the pandemic recovery when workers paid well above minimum wage found themselves unable to keep up as cost of living climbed faster than rising wages despite (and because of?) the historically labor-friendly labor market. 

Inflation has largely been under control for the better part of a year now, with the last 9 months holding steady below 4% annualized, but cost of living remains high and the minimum wage remains exactly where it has been for the last 15 years - 7 dollars and 25 cents an hour.

That $7.25 an hour in 2009 would be worth $10.58 today accounting for inflation, etc. Meanwhile, as of 2022, the average living wage in the US according to MIT was just over $25 dollars an hour at the time, or $27.53 in today’s dollars. 

With more workers than ever failing to secure a living wage, the repercussions of this situation are likely to be felt far beyond those who are personally affected, though not all industries are contributing equally to the issue nor are all cities/states/regions responding passively to the growing problem.

Industries With the Highest Living Wages

According to data from Revelio Labs, more than one third of workers (36%) employed by the top one thousand companies in the US are paid less than a living wage, defined here as a wage sufficient for two full-time workers to support themselves as well as two dependents. Even worse, nearly 1 out of 5 of those employees (19.2%) does not make enough money to meet basic needs. 

As the following graphic illustrates, among the 10 largest industries in terms of total number of employees (which collectively account for 10% of the US workforce), the industries involving technology development dominate the upper end of the scale, with the software, computer services, technology hardware, and pharmaceuticals/biotech industries all paying more than 80% of their employees at or above the living wage threshold.

On the other extreme, both the restaurant and leisure as well as the retail industries pay living wages to fewer than 40% of their employees, while the commercial support services, medical equipment, banking, and industrial goods industries all pay living wages to about 70% to 80% of their employees. 

Even when taking into account geographic variance in cost of living, the big picture doesn’t change much, although the following graphic seems to indicate a somewhat less favorable view of the tech industry’s propensity toward paying living wages when factoring for local cost of living, with the total percentage of employees that are paid a living wage in the software and pharmaceuticals/biotech industries dropping by between 3% and 4%, respectively.

Mostly, however, the information best illustrated by this graphic may simply be that industries like tech and media tend to gravitate toward areas with a relatively higher cost of living while the more industrial industries tend to be located in areas with a relatively lower cost of living compared to the national average.

Minimum Wage Across States

According to the National Conference of State Legislatures, Washington DC currently has the highest minimum wage among ‘states’ at $17 per hour, followed by Washington state at $16.26, then California and New York at $16 each. 

Beyond the 5 states that have no internally legislated minimum wage and are therefore subject only to the federal minimum wage standard (Alabama, Louisiana, Mississippi, South Carolina, Tennessee), there are 15 states that have set their minimum wage to the current federal level of $7.25 per hour - Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, New Hampshire, North Carolina, North Dakota, Oklahoma, Pennsylvania, Texas, Utah, Wisconsin, and Wyoming. 

Average minimum wage across the remaining states is about $13 per hour.

Minimum Wage Increases Coming Soon

There are 9 states that currently have enacted increases to their current minimum wage thresholds that have not been enacted yet:

  • Delaware: Increase of $1.75 from $13.25 to $15 effective January 1, 2025
  • Florida: A series of three minimum wage increases of $1 each are set to occur on September 30th of each of the next three years, raising the statewide minimum wage from $12 up to $15 by October 1, 2026.
  • Hawaii: 2 minimum wage increases are currently planned, raising the current minimum wage of $14 per hour up to $16 per hour effective on January 1, 2026 followed by another $2 increase up to $18 per hour two years later, effective on January 1, 2028.
  • Illinois: $1 increase from $14 per hour up to $15 per hour effective on January 1, 2025.
  • Michigan: Annual rate hikes are planned for January 1 of each of the next 6 years, increasing the statewide minimum wage from $10.33 per hour up to $12.05 by 2031.
  • Nebraska: 2 minimum wage increases of $1.50 each are currently planned to take effect on January 1 of 2025 and 2026, respectively, increasing the current minimum wage from $12 to $15.
  • Nevada: On July 1 of 2024, Nevada’s minimum wage will climb from $11.25 to $12.
  • Rhode Island: The minimum wage is set to increase by $1 per hour on January 1, 2025, bringing the pay rate up from $14 per hour to $15.
  • Virginia: 2 minimum wage increases of $1.50 each are currently planned to take effect on January 1 of 2025 and 2026, respectively, increasing the current minimum wage from $12 to $15.

What Comes Next?

It’s been almost 12 years since fast food workers launched the Fight for 15 movement to push for better pay (specifically $15 per hour) as well as better/safer working conditions. Currently, the US average living wage is about $27 per hour - nearly double the lofty (and obviously unachieved) goal that $15 per hour represented little more than a decade ago.

In the 85 years since the federal minimum wage was first introduced, it has been raised at least 23 times - most recently in 2009 - with an increase on average more than once every 4 years, but never in the past had more than 10 years passed in between increases, which makes the current 12 year pause all the more noteworthy. Perhaps even more concerning is that the previous record gap between federal minimum wage threshold increases was between 1997 and 2007, which indicates a troubling trend.

Some states are evidently trying to take up the mantle in lieu of waiting for further federal action, but even among the states with the highest planned minimum wages, those thresholds fall significantly short of the living wage standard.

It is also worth noting that all of the states that currently have minimum wage increases set on the books also already have a statewide minimum wage threshold that is meaningfully higher than the current federal standard. 

With 40% of states effectively mirroring the federal minimum wage standard, this problem will likely only worsen in the near term and become exacerbated on a regional basis, until some kind of federal solution is enacted.

Still, whenever Congress eventually gets around to increasing the federal minimum wage again, based on current conditions there is virtually zero chance that the increase will close much of let alone all of the gap between the minimum wage and living wage in a given area. 

Of course, failure to raise minimum wage standards to meet base standard of living expectations does no preclude other factors and/or market forces from reversing the trend toward larger proportions of the workforce earning unlivable wages, but whatever those factors may be they have yet to emerge, and the long-term implications of these conditions remain unclear.

Compliance & Policy
Legal/Compliance Roundup - March 2024
Each month, Mployer Advisor collects and presents some of the most relevant and most pressing recent changes in law, compliance, and policy in areas related to employee benefits, health care, and human resources.
March 29, 2024

Each month, Mployer Advisor collects and presents some of the most relevant and most pressing recent changes in law, compliance, and policy in areas related to employee benefits, health care, and human resources. 

Federal Prescription Data Reporting Updates

RxDC reports for calendar year 2023 are due June 3, 2024 in accordance with the Title II, Division BB of the Consolidated Appropriations Act of 2021.

While this information is usually submitted by carriers, pharmacy benefits managers, and third party admins - these entities will often need to seek out information directly from employers and can be expected to do so as the submission deadline approaches.

Some of the noteworthy updates to this year’s submission instructions include:

  • Clarification that nutritional supplements, over-the-counter medication, and medical devices are not to be included on lists of prescription drugs;
  • Simplification of the total monthly premium calculation, now computed by dividing the total annual premium by twelve;
  • Simplification of premiums calculation accounting for paid claims instead of incurred claims;
  • Addition of a new column to input enrollment data; and
  • Instructions on how to submit large data files that exceed the maximum allowable limit, as well as updated instructions on how to input various other data;

Click here for the Centers for Medicare and Medicaid Services 2023 instruction guide for RxDC submissions.

2023 EEO-1 Component 1 Submissions Due Date Approaching

Collection of EE0-1 Component 1 data will open on April 30, 2024 - with a final deadline for EEO-1 Component 1 submissions currently set for June 4, 2024.

Check the Equal Opportunity Employment Commission (EEOC) website for updates as well as an instruction booklet and file submission specifications, which the EEOC expects to have posted by March 19, 2024. 

This filing must be submitted by every company that has 100 or more employees across all locations and/or is affiliated with a company that has 100 or more employees through common ownership or centralized management. 

Further, this filing must also be submitted by any company with 50 employees or more that has a contract with the federal government worth at least $50,000 or has an establishment that holds a federal contract worth at least $50,000. 

Companies or establishments thereof that are federal contractors and serve as depositories of federal funds no matter how much or how little, as well as financial entities that are issuing and paying agents for US Savings Bonds and Savings notes must also submit this form. 

Updates regarding the timely, etc. will be posted here on the EEO-1 website.

OSHA Form 300-A Electronic Submissions Past Due

Electronic submissions of form 300-A was due March 2, 2024 for non-exempt companies and establishments, which include firms that had 250 or more employees during 2023, or 20 or more employees in industries designated as high risk. 

Form 300 and 301 was also due on March 2 for qualifying institutions, which include firms in high-hazard industries that had 100 employees or more during 2023.

Click here for more information about how and where to submit these forms in addition to guidance in determining what your organization is required to submit.  

Employee vs. Independent Contractor Classification

As of March 11, 2024, the Department of Labor effectively reverted back to ‘the economic reality’ test for determining whether a given worker should be classified as an employee or as an independent contractor.

The economic reality test takes into account the following 6 factors when evaluating a workers employment status and classification:

  • Whether it is possible for the worker to either profit or lose money as a result of the arrangement;
  • What investments have the employer and worker each made toward completing the work;
  • Is the work relationship a more permanent arrangement or more temporary;
  • How much control does the employer exert over the worker’s process;
  • How crucial is the worker’s output to the employer’s business; and
  • The levels of skill and initiative possessed by the worker.

You can find more information from the DOL on determining employee and contractor status here.

Employers Rejecting Job Applicants Due to Credit Reports Must Now Provide Credit Rating Agency Info 

As of March 20, 2024 enforcement began for Consumer Protection Bureau’s rule requiring Employers that reject job applicants due to information obtained through a credit report to provide the rejected applicant with information about the credit reporting agency from which the report was obtained, including name, address, and telephone number.

This rule, which went into effect in April of 2023, is an update to 2018’s Summary of Your Rights Under The Fair Credit Reporting Act.

You can read more about the new rule, its impact, and enforcement here.

Retirement Planning
401ks from the Employee Perspective - Savings & Contribution Benchmarking
Too often, misconceptions can lead employees to put off or minimize retirement savings in the near term, without realizing the impact those delays and that underinvestment will have in the long run, which can have negative consequences for employees later in their careers as they try to make up lost ground. 
March 25, 2024

The concept of a ‘retirement age’ is tragic in a sense, because it causes so many people to conceive of retirement as something that can be achieved passively like a milestone similar to a birthday, with little input required to get there beyond waiting out the passage of time.

‘Retirement age’ as a term also somewhat implies that the age of retirement is expected to be the same for everyone, while age is one of the least relevant of several factors that will ultimately determine if and when any given person is capable of retiring from the workforce and maintaining their expected standard of living. 

Too often these misconceptions can lead employees to put off or minimize retirement savings in the near term, without realizing the impact those delays and under investments will have in the long run, which can have severely negative consequences for employees later in their careers as they try to make up for lost ground. 

Last week, we discussed 401ks largely from an employer perspective and provided some benchmarking data that can help organizations better understand how their retirement benefit offerings compare to the market, here we will take a closer look at retirement savings from the perspective of individual workers, account holders, and would-be retirees.

For employers who want to optimize the value of the benefits they offer, it is necessary but not sufficient that employees internalize the value of those benefits in line with market expectations, but employees must also believe on a personal level that their individual retirement position is secure and on track relative to both their peers and their own subjective situational goals. 

How Much Should Employees Be Saving For Retirement?

It’s natural for employees to have many varied questions about their retirement options and considerations, of course, but almost no matter what kind of retirement a given employee may be envisioning, the best answer to the question of how to attain that vision involves a recommendation to start saving more money sooner.

In order to maximize the benefits of earnings compounding over a longer period, the best time to start saving for retirement was any time between day one on the job and yesterday, but the second best time to start saving is now. 


And while there are a number of factors of varying complexity that can affect both retirement goals and the steps necessary to achieve them (e.g. geography, expenses, age, etc.), this recent piece from CNN highlights a basic retirement savings outline crafted by Fidelity Investments that is a good starting point to help employees to get their bearings at the very least:

  • Aim to have saved an amount approximately equivalent to one year’s  salary by the age of 30;
  • Aim to have saved 3 times annual salary by the age of 40;
  • Aim to have saved 6 times annual salary by the age of 50;
  • Aim to have saved 8 times annual salary by the age of 60; and
  • Aim to have saved 10 times annual salary by the age of 67.

Of course, while the simplicity of this framework is certainly a strength in terms of its memorability and general applicability, that same simplicity is also a weakness when it comes to more specific, precise, or actionable advice. 

For example, although relative standard of living considerations are largely accounted for by using annual salary as a base unit (assuming one’s annual salary affords a comparable standard of living to what they hope to maintain in retirement), and retirement age is fixed at 67 in line with when full social security benefit payouts currently become available, the verbs ‘to have saved’ are doing a lot of heavy lifting without providing any detail about monthly savings breakdowns or how interest rates, raises, and contribution timing fit into the equation.

How Much Are Employees Actually Saving For Retirement?

Perhaps the greater weakness in Fidelity’s simplified retirement savings framework, however, is less about the lack of detail or actionability and more about the aspirational nature of the framework, which can be disconnected from the reality of what a given employee can potentially reproduce in light of their age, location, job, pay rate, and other circumstances.

In order to learn more about the reality on the ground for how employees are engaging with their 401k savings, real world data is likely going to be a better source of information than general guidelines. 

As the following graphics illustrates, two variables that have a significant impact on both contribution rates and total retirement account savings value are the account holder’s age and their tenure with their current company.

Clearly, older workers have had more time both to contribute to their 401k accounts and for those contributions to compound and grow, with workers over 65 years of age having a median of a little over 70 thousand dollars in those accounts while workers at the age of about 45 years old only had a median of about 38 thousand.

Note across the age ranges, the average savings figures are often about 3 times larger than the median savings figures, indicating that the majority of value contained within 401k accounts is skewed toward the accounts with above average levels of savings. 

While length of time on the job is certainly correlated to age and both increase alongside 401k savings over time, what may be most noteworthy about the age and tenure comparison is just how much more impactful tenure can be in terms of overall savings.

As the following graphic indicates, staying with a company for 10 plus years can reap major rewards in terms of retirement savings - of course how much of that outcome is dependent on rising through the ranks over an extended tenure isn’t clear from the available data.

Still, it is hard not to look at these graphs and see some indication of how valuable internal talent development and two-way loyalty can be for both employers and employees both during the tenure of the work and after leaving the workforce.

It is also worth pointing out that average 401k savings relative to tenure is about twice as large as median 401k savings relative to tenure, which is a less sizable wealth gap than average 401k savings relative to age, which was about 3 times larger than median 401k savings relative to age. 

These figures seem to show that longer tenure is more positively correlated with earning above average pay than getting older is positively correlated with earning above average pay. 

How Much Are Employees Contributing To Their 401ks? 

Combined employer plus employee contribution increases with age, as one would expect, but it is not as significant as one would expect - or hope.

The average combined employer and employee contribution rate is approximately 5%. Contributions begin at around 4% for individuals aged 20-29 and exhibit a gradual increase, reaching a peak of about 5.2% among the 50-59 and 60-69 age brackets.

A deeper analysis suggests that the primary driver behind this progressive increase is enhanced job tenure. As employees remain longer with their employers, they not only become more inclined to save for retirement but also benefit from mechanisms like auto-escalation features within 401(k) plans. This trend underscores the significant role that sustained employment plays in bolstering retirement savings efforts.

Recommendations For Your Employees

  • Maximize employer contribution matching whenever feasible 
  • Increase contribution 1% a year until on track to meet goals
  • Promote using and abiding to auto-enrollment and auto-escalation to help employees not fall behind
  • Promote catch-up contributions for employees age 50 and older who can add up to an additional $7,500 per year into their 401ks in 2024.

As the Baby Boomer generation continues to depart from the workforce and begins to test the capacity of our infrastructure and our country’s ability to care for its aging citizenry, the stark truths that successful retirement can almost only ever be attained through diligent proactive effort and is in no way guaranteed will become increasingly obvious for employees at all stages in their careers. 

Forward-looking companies should do more now to ensure their employees are well-positioned to manage the challenges they will meet when their careers have come to an end, which in turn will build loyalty, improve the expected outcomes, and enable employees to better focus on the challenges they encounter in their careers along the way  to the mutual benefit of everyone involved.