Employer Alert: Non-Competes Are Under Attack in Certain States

Posted by Benjamin I. Fink on

1.16.20: The blog below has been updated from its previous post on 8.28.19

Between the now-infamous Jimmy John’s debacle and the Obama administration’s call to reduce use of non-compete agreements, it’s fair to say that 2016 was a tough year for employers who rely heavily on non-competes. Though 2016 is now long behind us, the year’s major events were the beginning of a trend toward reducing the types of employees whose post-employment activities can be restricted through non-competes.

One trend that has picked up significant steam is the reform of state non-compete laws to reduce the use of non-competes against low-wage employees. Though evident now, the trend was initially slow in getting started. Between 2016 and 2018, only two states, Illinois and Massachusetts, reformed their non-compete laws to limit the use of non-compete agreements against low-wage employees. However, throughout 2019, and even the beginning of 2020, several additional states have revised their non-compete laws to render non-competes with low-wage employees unenforceable.

In addition to state legislators, federal lawmakers have also exhibited an interest in reducing the use of non-compete agreements, particularly for low-wage workers. Federal legislators introduced two bills in 2019 that were aimed at drastically reducing the use of non-competes throughout the country. Both federal and state interest in changing non-compete laws is already having an impact on employers’ ability to protect their business interests. Accordingly, employers need to be aware of these developments and react accordingly in states in which they have operations.

States That Have Restricted Use of Non-Compete Agreements Against Low-Wage Employees Since 2016:

Illinois: Illinois’ 2016 “Freedom to Work Act” prohibits non-governmental employees from entering into covenants not to compete with “low-wage employees.” Per the act, “‘[l]ow-wage employee’ means an employee whose earnings do not exceed the greater of (1) the hourly rate equal to the minimum wage required by the applicable federal, State, or local minimum wage law or (2) $13.00 per hour.”

Massachusetts: Massachusetts’ 2018 “Noncompetition Agreement Act” provides that noncompete agreements are unenforceable against non-exempt employees, students who hold internships or other short-term employment, employees who are terminated without cause or laid off, and employees age 18 or younger.

Maine: The 2019 “Act to Promote Keeping Workers in Maine” says that “an employer may not require or permit an employee earning wages at or below 400% of the federal poverty level to enter into a noncompete agreement with the employer.”

Maryland: Maryland’s 2019 “Noncompete and Conflict of Interest Clauses Act” declares that non-compete agreements are null and void for employees who make equal to or less than $15 per hour or $31,200 per year.

New Hampshire: New Hampshire’s 2019 legislation states that “[a] noncompete agreement entered into between an employer and a low-wage employee shall be void and unenforceable.” The act defines a “low-wage employee” as an employee who earns less than or equal to 200% of the federal minimum wage.

Oregon: Oregon’s 2019 legislation declares that a covenant not to compete can only be enforced against an employee if his annual gross salary and commissions exceeds the median family income for a four-person family, as determined by the U.S. Census Bureau for the most recent year available at the time of the employee’s termination.

Rhode Island: Rhode Island’s 2020 “Noncompetition Agreement Act” renders non-competes unenforceable against nonexempt employees under the FLSA, students participating in internships or other “short-term employment” arrangements, employees who are eighteen years old or younger, and employees whose average annual earnings “are not more than [250%] of the federal poverty level . . .  as established by the United States Department of Health and Human Services federal poverty guidelines.”

Washington: Washington’s 2019 statute makes non-competition covenants unenforceable against an employee unless the employee earns more than $100,000 per year.

Federal Efforts to Ban Certain Non-Compete Agreements:

While the state non-compete statutes referenced above were certainly the most notable changes of 2019, it is also worth noting that a few members of Congress have also taken an interest in changing the nation’s non-compete landscape. In January of 2019, Senator Marco Rubio of Florida introduced SB124 which is aimed at banning non-compete agreements for certain nonexempt employees under the FLSA. This bill has not gained much traction in the U.S. Senate. In addition to Senator Rubio’s Bill, in October of 2019, Senators Chris Murphy and Todd Young introduced SB 2614, titled the “Workforce Mobility Act of 2019.” This bill aims to drastically narrow the use of non-competes by rendering them unenforceable in nearly all situations. Several other federal legislators have expressed milder interest in non-compete agreements. In March of 2019, for example, numerous senators penned a letter to the Comptroller General at the U.S. Government Accountability Office to ask the GAO to review the effects of non-compete agreements on the economy.

In addition to federal lawmaking efforts, several public interest groups, state attorneys general, and members of Congress have petitioned the Federal Trade Commission to promulgate a rule regarding the use of non-competes. Thus far, the FTC has declined to issue a rule, but the regulatory body did hold a workshop on January 9, 2020 to determine whether there is a legal and empirical basis to promulgate a rule. The FTC has not issued a press release regarding the workshop since it was held.

Given other priorities in Washington and the current administration it appears unlikely that non-compete reform will take hold at the federal level, but these federal developments further demonstrate the interest this issue is receiving around the country.

Conclusion:

Employers who operate in multiple states need to keep abreast of changes to non-compete laws, as these changes can have a serious effect on an employer’s ability to protect their business interests. If you are an employer and you question whether you can enter into a non-compete agreement with an employee, consider hiring competent counsel who can answer your questions and help you protect your interests.