New Year, New Restrictions on Non-Compete Agreements
January 15, 2020
By Joshua R. Woodard and Shalayne Pillar
States across the country continue to enact legislation limiting the use of non-compete agreements. The most notable trend is the applicability (or, rather, non-applicability) of non-competition agreements to low-wage earners. As the new year begins, and many of these laws take effect, now is a great time to check restrictive covenant agreements to ensure compliance.
Below is a brief overview of some of the more substantial changes.
Rhode Island’s “Noncompetition Agreement Act,” 28 R.I. Gen. Laws § 59-1, et seq. eliminates the use of non-compete agreements against low-wage earners and, significantly, all non-exempt employees, employees 18 years old or younger, and all undergraduate or graduate students in a short-term employment relationship or an internship—whether paid or unpaid. The law defines low‑wage earners as employees whose annual earnings do not exceed 250% of the federal poverty level (or $31,225 per year under current data).
The law carves out numerous types of restrictions from the definition of “non-competition agreement” including covenants not to solicit or hire employees; non-compete agreements made in connection with the sale of a business; and forfeiture agreements that impose financial consequences on former employees as a result of his or her termination, regardless of whether the employee engaged in competitive activities. Similarly, client and vendor solicitation restrictions, confidentiality agreements, or non-disclosure agreements are not prohibited by the law and are still permissible. The law also exempts non-compete agreements made in connection with separation from employment “if the employee is expressly granted seven (7) business days to rescind acceptance.”
Effective date: January 15, 2020.
Recently enacted Wash. Rev. Code § 49.62 strictly voids non-compete agreements for employees who make less than $100,000 per year or independent contractors who make less than $250,000 per year, imposing a much higher bar than many other states. Although the law does not apply to non-solicitation or non-disclosure agreements, it imposes several significant limitations to non-compete agreements, such as:
- Non-compete agreements lasting 18 months or longer are presumptively unreasonable and unenforceable.
- Non-compete agreements must be provided in writing to the employee prior to the employee accepting the offer of employment.
- Non-compete agreements entered into after the employee begins his or her employment must be accompanied by additional consideration (i.e., additional compensation or benefits).
- To enforce a non-compete agreement against a laid-off employee, the employer must compensate the employee with his or her previous base pay for the entire period of enforcement, minus any compensation earned during such period.
- Employees may obtain damages—including attorney fees—if the agreement is found to violate the new law, or if a court modifies (i.e., blue pencils) the same.
Effective date: Although effective January 1, 2020, the new law also applies to non-compete agreements entered into before that date.
In Oregon, recently enacted Or. Rev. Stat. § 653.295 requires employers to provide employees a signed, written copy of the terms of a non-compete agreement within 30 days after employment is terminated. A strict reading of this language would not permit employers to provide a copy of the agreement on the employee’s last day of work, requiring it be provided after.
Effective date: January 1, 2020.
Maryland also joins the growing trend of states to prohibit non-compete agreements for low-wage earners, defined by Md. Code Ann., Lab. & Empl. § 3-716 as employees who earn equal to or less than $15 per hour, or $31,200 annually. Notably, the new law does not apply to agreements related to the taking or use of client lists or other proprietary information.
Effective date: October 1, 2019.
Maine’s recently passed “Act to Promote Keeping Workers in Maine,” Me. Rev. Stat. tit. 26, § 599-A et seq., offers substantial changes to the state’s non-compete laws. For one, the law prohibits non-compete agreements for low-earning employees, which the law defines as employees who earn less than 400% of the federal poverty line (or $49,960 per year under current data). Some other important provisions include the following:
- Employers must disclose that acceptance of a non-compete agreement will be required prior to making an offer of employment and also provide current or prospective employees a copy of any non-compete agreement at least three business days before the employee or prospective employee will be required to sign the agreement.
- A non-compete agreement is not enforceable until six months after an employee enters into the agreement.
- In addition, non-compete agreements are not binding on employees during their first year of employment with an employer.
- The Maine Department of Labor is now authorized to impose monetary civil fines of “not less than $5,000” on employers who enter into non-complaint agreements.
Effective date: September 18, 2019.
Adding to the growing trend, N.H. Rev. Stat. Ann. § 275:70-a also prohibits non-compete agreements for low-wage earners, defined as employees who make 200% of the federal minimum wage (or $14.50 per hour under current law).
Effective date: September 8, 2019.
2020 will likely bring additional regulations regarding these agreements. Recently, on January 9, 2020, the U.S. Federal Trade Commission held a public workshop on possible rulemaking regarding non-compete agreements. Topics included the effect of non-compete agreements on the labor market and whether the federal government should step in to address “gaps” in existing state law. Congress may also enter the debate: proposed legislation in the U.S. Senate would narrow the use of non-compete agreements to include only necessary instances of a dissolution of a partnership or the sale of a business. These efforts make clear that regulation of non-compete agreements will continue, and most likely increase, throughout 2020.
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