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.
©2023 Snell & Wilmer L.L.P. All rights reserved. The purpose of this publication is to provide readers with information on current topics of general interest and nothing herein shall be construed to create, offer, or memorialize the existence of an attorney-client relationship. The content should not be considered legal advice or opinion, because it may not apply to the specific facts of a particular matter. As guidance in areas is constantly changing and evolving, you should consider checking for updated guidance, or consult with legal counsel, before making any decisions.
The material in this newsletter may not be reproduced, distributed, transmitted, cached or otherwise used, except with the written permission of Snell & Wilmer.