Evolving Legal Developments Regarding Non Compete Agreements
In recent years, efforts to limit the scope of noncompete employee agreements have gained momentum in both state and federal legislation. These new trends mean that employers must remain informed about legal updates that occur in the jurisdictions in which they offer employment. This article focuses on key shifting trends in state legislation.
Traditionally, a noncompete agreement in the employment context prohibits a former employee from performing certain defined activities that compete with the former employer, in a designated geographical area and for a specific period of time. Some states, such as California, have long restricted the use of non-competes in all instances, except when they fall under a statutory exception such as against the seller of a business or a former business partner. However, even in states that have long permitted non-competition restrictive covenants, these provisions have always required certain tailoring criteria in order to be enforceable. For example, the covenant not to compete must be “reasonable”, meaning no more restrictive than is necessary to protect the legitimate interests of the former employer. Additional aspects of the restriction, such as duration or geographic scope, must also be “reasonable” and narrowly tailored.
In recent years, an increasing number of states have passed laws addressing and/or limiting non-competition restrictive covenants in the employment context. These laws seek to address various components of a non-compete agreement, not just “reasonableness”. For example, public policy concerns, adequate consideration, and employee remedies form additional bases for striking noncompetes. Common legislative trends also include: (1) prohibiting noncompete agreements for employees in certain compensation ranges and/or classifications; (2) requiring employers to offer additional consideration, not just “at-will” employment, in exchange for employees signing restrictive covenant agreements; (3) requiring employers to provide advance notice of any noncompete agreement upon which employment will be conditioned; and (4) requiring employers to pay monetary damages/penalties for entering into/attempting to enforce unlawful noncompete agreements. As these laws continue to emerge and change, it is important for employers to note that some will apply retroactively to restrictive covenant agreements created prior to the effective date of the laws. This article does not examine the particular issues of retroactivity and effective dates, but contact us if you wish to learn more.
Public Policy Concerns
While states have traditionally cited public policy concerns when restricting the scope of non-compete agreements (i.e., protection against trade restrictions, protection of employees and their abilities to earn a satisfactory living, etc.), in recent years states have expanded the scope of public policy-based statutory protections. For example, one recent protection is that of advanced notification, requiring that employers provide employees with advance notice of any noncompete agreement when execution of the agreement is a condition of employment or promotion. The rationale is that an employee should be afforded the opportunity to make an informed decision about a material condition of a job offer or promotion, prior to accepting that employment or promotion. As an example, Illinois recently amended the previously enacted Illinois Freedom to Work Act (“IFWA”), imposing greater restrictions on the implementation of noncompete agreements, including a heightened notice requirement. Under the IFWA, a noncompete covenant is illegal and void unless the employer: (1) advises the employee in writing to consult with an attorney prior to entering into the covenant; and (2) provides the employee with a copy of the covenant at least 14 days prior to the commencement of employment or provides the employee at least 14 days to review the covenant prior to signing. Similarly, in Washington, under RCW 49.62, a noncompete is void and unenforceable unless the employer provides an employee with written notice of the terms of the non-compete prior to their acceptance of the offer of employment.
States have also enacted legislation banning noncompete agreements for employees in certain compensation ranges and/or classifications, particularly those in which a noncompete restrictive covenant would impede a former employee from making an adequate living. These compensation ranges and classifications include “low-wage employees,” “non-exempt employees,” and “hourly employees.” These prohibitions are intended to protect an employee’s ability to seek job opportunities while balancing protection of employers’ proprietary information, which can be adequately addressed through traditional confidentiality agreements as opposed to noncompete agreements.
“Low-wage earners” and workers who are paid on an hourly wage basis are increasingly being protected from non-compete agreements. For example, low-wage earners (as defined by applicable statute) in both Maryland and Virginia are now protected from noncompete agreements. In Maryland, any such provisions are null and void as against public policy. Virginia employers who enter into such an agreement with this cohort of employees can be subject to a civil penalty and/or other damages. And Nevada has added to existing legislation by prohibiting noncompete agreements for employees who are paid solely on an hourly wage basis, deeming them void and unenforceable. Others states, including Illinois, Oregon, and Washington, have either enacted or raised earning thresholds for employees who may be subject to noncompete agreements.
Further, in some states, employees who are classified as “non-exempt” under the Fair Labor Standards Act (FLSA) (i.e., eligible for overtime payments for any hours worked in excess of 40 in any workweek) may not be required to sign a non-compete agreement. For example, Massachusetts has codified this standard into law: non-compete agreements for this class of workers are unenforceable.
Washington, DC has also enacted legislation banning noncompete covenants for all employees, except in very limited circumstances, as a means to “protect employees” as a matter of public policy. The District of Columbia’s Ban on Non-Compete Agreements Amendment Act of 2020 (“DC Act”) was signed on January 11, 2021, but its effective date has been delayed several times; it is now scheduled to take effect on October 1, 2022. However, as of July 12, 2022, the DC Council passed the Non-Compete Clarification Amendment Act of 2022 (“DC Clarification Act”) which, if signed by the DC Mayor (and not blocked by the U.S. Congress), will amend key aspects of the DC Act, including a broadening of the very limited circumstances in which noncompete covenants may be permissible. Due to the DC Clarification Act, DC non-compete law is in flux; we encourage employers in the DC area to stay tuned for updates.
Adequate Consideration
As a general contracting principle, adequate consideration is required in order for a non-competition agreement to be enforced as a valid contract. In order for a restrictive covenant to be enforceable, an employer must provide a fair price in comparison to and in exchange for the promise made by the employee in signing. In some states, provision of a new job or continued employment is sufficient to meet this standard (“at-will employment”). However, increasingly states have re-defined what constitutes an employer-provided “fair price” in the context of a noncompete restriction, and some states now require additional consideration if a non-compete is introduced after the employment relationship has begun. Such “additional consideration” may take the form of a raise, a change in duties, a promotion, or a bonus. For example, Illinois now defines “adequate consideration” as: (1) the employee worked for the employer for at least two years after the employee signed an agreement containing a noncompete; or (2) the employer otherwise provided consideration adequate to support an agreement to not compete or to not solicit,[1] which consideration can consist of a period of employment plus additional professional or financial benefits, or merely professional or financial benefits adequate by themselves.
Employee Remedies
If an employer attempts to enforce an illegal noncompete, or an employee seeks to invalidate such a covenant, some states now allow for the court to award the employee certain remedies, such as court fees or attorneys’ fees. For example, under Illinois law, the IFWA provides that an employee who prevails on a claim or a counterclaim brought by an employer to enforce a covenant not to compete can recover all costs, as well as reasonable attorneys’ fees. This is an addition to any remedies available and any other relief awarded by the court. Similarly, in Nevada, new legislation instructs courts to award reasonable attorneys’ fees to employees in any action to enforce or challenge an illegal non-compete.
Certain state legislatures, including Illinois and Washington, have also passed laws permitting state-imposed penalties. Under the IFWA, the Illinois Attorney General is permitted to pursue action and impose monetary penalties against employers whose practices violate the IFWA. In Washington, RCW 49.62 provides for a private right of action for a person who is party to a noncompete agreement that does not comply with the law, and the state attorney general can also pursue action on behalf of any aggrieved individual.
As the legal landscape of non-competition restrictive covenants rapid evolves, and employers face a tight labor market and the “great resignation,” employers have been closely examining whether non-competition agreements should be used at all. If the answer is “yes,” the pool of those employees who need them in order to protect the legitimate interests of the employer should be small. For this “small pool,” employers must examine the laws in the state in which each employee works, to determine whether: (1) a non-compete is legal; and (2) if it is, what requirements must be met in order for the agreement to be valid, enforceable, and without penalty.
Have questions? Contact us to learn more.
[1] It is important to note that the legal landscape is also changing in the context of both customer non-solicit restrictive covenants and employee no-poach restrictive covenants. This article does not address these topics.