United States: State Law Developments In Non-Compete Law

Last Updated: November 27 2018
Article by Benjamin I. Fink

While the White House "call to action" for restrictive covenant reform in employment issued under the Obama administration is not likely to be continued by the current administration, it may have sparked a trend at the state level. The "call to action" posits that non-compete clauses in employment agreements should be the exception rather than the rule.

The call to action enumerated three "best-practice policy objectives":

  1. Banning non-compete clauses for certain categories of workers such as workers in public health and safety occupations, workers under a certain wage threshold, workers who are unlikely to possess trade secrets, and workers laid off or terminated without cause;

  2. Improving the transparency and fairness of non-compete agreements by requiring non-competes to be proposed before a job offer has been accepted, or providing consideration for workers who sign non-compete agreements; and
  3. Incentivizing employers to write enforceable agreements through the adoption of the "red pencil doctrine" which renders contracts with unenforceable provisions entirely void.

While no legislation is expected at the federal level anytime soon, over the past two years, several state legislatures have enacted restrictive covenant reforms intended to curtail the overuse and overbreadth of restrictive covenants in employment, including non-compete and related agreements. For employers who use restrictive covenants and operate in multiple states, it is important to review your agreements to ensure compliance with the applicable state laws.

Recent State-Level Legislative Activity

  • California added LAB § 925 to its labor code, as of January 1, 2017. For employees who primarily work or reside in California, this statute prohibits choice of law and choice of forum provisions requiring the application of non-California law or litigation in a forum outside of California with regard to restrictive covenants ancillary to employment. The law does not apply to an employee who is represented by independent legal counsel during negotiation of the agreement.
  • Colorado amended its non-compete statute, C.R.S. § 8-2-113(3)(b) as of April 2, 2018. The amendment exempts physicians treating a patient with "a rare disorder" from the payment of damages for violation of a non-compete.
  • Idaho repealed a portion of its restrictive covenant statute, I.C. § 44-2704(6). Effective July 1, 2018, the rebuttable presumption of irreparable harm for a breach of a restrictive covenant by a key employee was repealed. Now, the burden is on employers to establish that an employee's departure adversely affected the employer's legitimate business interests, making it more difficult for companies to restrict the movement of "key employees."
  • Illinois enacted the Illinois Freedom to Work Act, 820 ILCS 90, as of August 18, 2017. This statute prohibits employers from requiring "low-wage employees" to sign non-competes. "Low wage employees" are defined as employees whose earnings do not exceed the applicable federal, state, or local minimum wage or $13.00 per hour.
  • Nevada enacted N.R.S. 613.200 and N.R.S. AB 276 § 1, effective as of June 3, 2017. Under this statute, a non-compete agreement is unenforceable unless it: (i) is supported by valuable consideration, (ii) does not impose any restraint that is greater than is required for protection of the employer, (iii) does not impose any undue hardship on the employee; and (iv) imposes restrictions that are appropriate in relation to the valuable consideration. However, the statute also permits courts to revise non-compete covenants that are overbroad to the extent necessary to make them reasonable under the law. Additionally, Nevada prohibits restriction of a former employee from providing services to a client if the former employee did not solicit the client's business.
  • New Mexico amended N.M.S.A. 24 1i-1 and 24 1i-2 as of April 6, 2017 to include nurse practitioners and nurse-midwives in its definition of "health care practitioner[s]" who are protected by its ban on non-competes. It also provides that employer use of choice of law and choice of forum provisions requiring adjudication of a non-compete dispute in another state's forum or under another state's laws are unenforceable.
  • Oregon expanded its non-compete protection with O.R.S. 410.631 and 410.632 effective January 1, 2018, which prohibits non-compete and non-solicitation agreements for home care workers. A home care worker is defined in the act as a person (i) who is hired by an elderly person or a person with a physical disability, who receives money from the Department of Human Services, whose compensation is funded in whole or in part by the department, an area agency, or other public agency, and who provides either hourly or live-in home care services,(ii) a personal support worker, or (iii) a person who provides home care services to private payers through the program for purchase of home care services laid out in O.R.S. 410.605.
  • Utah expanded its non-compete protections to employees in the broadcasting industry, effective May 8, 2018. The new law bans non-competes for broadcast workers who make less than $913 per week, and limits the duration of non-compete agreements for such workers to the length of the workers' employment contract or one year after the day the employment is terminated if earlier than the duration of the employment contract.

Other states may not be far behind in enacting restrictions on the use of non-competes. Below are five states that have proposed legislation relating to non-competes in those states.

Proposed Legislation

  • Massachusetts proposed House Bill 4419 is a compilation of eight proposed bills which would augment current non-compete law by (i) limiting the duration of non-competes to 12 months unless the employee has breached his fiduciary duty in which case the permissible duration would be extended to two years, (ii) requiring that employees have the right to independent counsel before signing a non-compete, and (iii) requiring employers to disclose non-competes at the earlier of the time of a formal offer or 10 business days before employment.
  • New Hampshire proposed Senate Bill 423 would impose a wage-based limit on non-competes by prohibiting non-compete agreements between employers and low-wage employees, defined in the act as employees who earn the greater of $15 per hour or the federal minimum wage.
  • New Jersey proposed Senate Bill 3518 would impose numerous requirements on restrictive covenants including requiring that (i) the employer disclose the agreement and its terms in writing by the earlier of a formal offer of employment, or 30 business days before commencement of employment and advise employees of the right to independent counsel, (ii) the agreement not be broader than necessary to protect the legitimate business interests of the employer, (iii) the duration of the agreement not exceed 12 months following termination of employment, (iv) the agreement be limited in geographical reach to areas in which the employee provided services or had a material presence during the two years before termination of employment, (v) the agreement be limited in scope to only those activities that employee provided during her last two years of employment, and (vi) the agreement not contain a choice of law provision used to avoid the application of New Jersey law on the topic. This proposed Senate Bill would also provide a private right of action with a two-year statute of limitation during which employees subject to an unlawful restrictive covenant could bring a civil action. The law would also ban judicial modification of restrictive covenants that are found to be overly restrictive.
  • Pennsylvania proposed House Bill 1938, known as the Freedom to Work Act, would prohibit the enforcement of non-compete agreements with limited exceptions and prohibit courts from rewriting such agreements.
  • Vermont proposed House Bill 566 would prohibit non-compete agreements with very limited exceptions.

For employers conducting business in multiple states, it is important to stay apprised of the trend toward reigning in the use or overuse of non-competes and the manifestation of this trend in the laws of the various states.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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