By Stuart Oberman, Esq.
March 15, 2023
Using non-compete agreements in a practice may be more complex than you realize. Recent developments under state and federal law require vigilance on the part of employers to monitor the ever-changing landscape of this area of human resources law.
Employers who operate in, or have employees, in more than one state must take extra precautions to ensure their policies and agreements are compliant with the applicable laws which govern each employee. This can be a daunting task as each state has its own set of unique laws which apply to non-compete agreements.
Non-compete agreements, also known as restrictive covenants, prohibit an employee from competing with their employer in some way after the employment ends. Many employers seek to use these agreements to protect their legitimate business interests. The terms of the agreement generally prohibit a former employee from working in competition with their former employer for a period of time in a defined geographic area.
Why It May Be Getting More Complicated to Use Non-Compete Agreements
Historically, in many states, if the employee received consideration in exchange for executing the non-compete agreement, and such agreement was found to be “reasonable,” it would be enforceable. More recently, there have been efforts to narrow the use of non-compete agreements.
In 2021, President Biden took aim at non-compete clauses in employment agreements and directed the Federal Trade Commission (FTC) to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” To date, the FTC has not promulgated any new rules regarding non-compete provisions, however it has been widely reported that the FTC is considering enacting restrictive regulations.
Additionally, last year two bills were introduced in Congress, The Workforce Mobility Act of 2021 and The Freedom to Compete Act, which, if passed, would impact the use of non-compete agreements except in limited situations. Congress has yet to take any action on these bills other than send them for review by committee. With no federal legislation in place, employers must look to state law for guidance regarding non-compete agreements.
What Different State Laws Say About Non-Compete Agreements
California prohibits the use of non-compete agreements in their entirety. Under California law, an employee may void any non-compete agreement which may be based on or attempted to be enforced under the law of any state outside of California. Thus, a Georgia company cannot circumvent California’s ban on non-compete agreements by stating that their employment agreements are governed by the laws of Georgia.
Washington D.C. also attempted a total ban on non-compete agreements, however, they later walked back their decision and instead made non-competes unenforceable for any employee earning less than $150,000 per year in total compensation or $250,000 for medical specialists. Washington D.C.’s new law also has other prohibitions in place, such as the length of any restriction being limited to 365 days.
Other states have also enacted legislation which limits the enforcement of non-compete agreements. For example, Nevada prohibits enforcement of non-compete agreements for employees who are paid solely on an hourly wage basis. Nevada also prohibits an employer from pursuing legal action against a former employee who works for a prior customer or client under certain circumstances.
Additionally, Colorado, Oregon and Illinois amended their laws to prohibit enforcement of non-compete agreements against certain employees earning less than a designated amount. This is in line with New Hampshire, Maryland, Maine, Rhode Island, Virginia and Washington, which already had laws on their books prohibiting the enforcement of non-compete agreements for employees whose income fell below certain thresholds. There is not a uniform standard utilized by the states as to what qualifies as a “low wage” or “high wage” as it may apply to enforcement of non-compete agreements.
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The laws of some states prohibit the enforcement of non-compete agreements as to entire industries. For instance, many states prohibit the enforcement of non-compete agreements for attorneys and employees in the broadcast industry. Alabama, Arkansas, Colorado, Delaware, Florida, Illinois, Massachusetts, New Hampshire, New Mexico, North Carolina, Rhode Island, Tennessee and Texas have either a complete or partial ban on enforcement of non-compete agreements for certain physicians, or, potentially, other healthcare professionals.
What Does It Take for a Non-Compete Agreement to Be Enforceable?
To be enforceable, a non-compete agreement, like any other contract, must be supported by “good and valuable consideration.” That means an employer must give its employee something of value in exchange for signing the non-compete agreement. In many states, such as Massachusetts, Minnesota, Missouri, Montana, North Carolina, Oregon, Pennsylvania, South Carolina, Texas, Washington, West Virginia and Wyoming, continued employment has been determined to not be sufficient consideration for the execution of the non-compete agreement. When asking employees to sign a non-compete outside of the initial hiring, employers in these states must give the employee something in addition to simply retaining their job.
Moreover, some states have restrictions on how long an employee must be employed after signing a non-compete agreement before it will be enforceable. Maine, for instance, requires the employee be employed for at least a year or six months after signature, whichever is longer. In many states, the enforceability of a non-compete agreement for an employee, who is terminated without cause, is questionable. While some states allow enforcement, others like Illinois, Maryland, Massachusetts and Montana, have found that if an employee is terminated without cause, the non-compete agreement will not be enforceable.
It is strongly recommended that an employer review any policies requiring execution of non-compete agreements to ensure they meet the requirements of all applicable laws and do not contain overbroad language or unreasonable restrictions.
As many states now have prohibitions against the enforceability of non-compete agreements in certain situations, an employer who attempts to enforce an invalid non-compete agreement could find themselves liable for civil penalties or other damages, including but not limited to, the attorney’s fees. An employer who has employees in multiple states should take care to make sure that their policies and documents are compliant with each state in which their employees may be located, including employees who work remotely. It is always best to review all non-compete agreements and policies with your legal counsel.