United States: Rhode Island Joins The New England Trend With A Law Placing Substantial Limitations On Noncompete Agreements

Rhode Island has followed the recent trend of its neighboring states—including Maine, Massachusetts, and New Hampshire1—by enacting a law that largely prohibits employers from entering into noncompete agreements with their employees. The Rhode Island Noncompetition Agreement Act, R.I. Gen. Laws 28-58-1, et seq. (the "Act"), creates a statutory scheme that is aimed at safeguarding the "bargaining power and mobility of low-wage workers" by limiting the enforcement of these agreements. The Act, however, vastly overextends its protections to prohibit noncompete agreements for many employees—not just low-wage workers.

Employers have used noncompete agreements for decades to protect trade secrets and prevent employees with specialized, in-depth knowledge of the business from luring away their customers. Businesses also commonly use noncompete agreements to prohibit sales employees from using inside information about customer identities, preferences, and pricing (acquired while working for one employer) to leave that job and lure the very same customers away to a competitor. Because of the very nature of such agreements—they limit competition—there is well-established case law restricting noncompetes in a way that is equitable to both employers and employees. For instance, to be enforceable, a noncompete agreement must be narrowly tailored to protect only the former employer's legitimate business interest. Employers have typically accomplished this by limiting the types of job activities that a former employee may undertake for a competitor, narrowly defining what constitutes a "competitor," providing a reasonable geographic area in which the former employee may not compete, and/or limiting the length of time that the former employee may not work for a competitor.

Notwithstanding this well-developed area of contract law, the Act does not draw upon any of these requirements. Rather, the Act prohibits such agreements, without exception as to geographic location, duration, or similar profession, between employers and:

  • all nonexempt employees as defined by the Fair Labor Standards Act (a federal law);
  • undergraduate and graduate students;
  • employees age 18 years or younger; and
  • "low-wage employee(s)," defined as those employees whose annual earnings are not more than 250% of the federal poverty level.

The Act raises significant concerns for employers trying to enforce its provisions. The federal poverty level is a calculation dependent upon the number of persons in an employee's household, and the total household income (not just the income from the employee at issue). This standard creates a logistical nightmare for employers trying to discern—especially upon hire—whether an employee qualifies as "low wage" under the Act. Furthermore, prohibiting noncompete agreements for all "nonexempt" employees under the Fair Labor Standards Act is seemingly arbitrary, as such an exemption is only partially based on income level and is more closely tied to job duties. As a result, the Act will severely limit the ability of employers to utilize noncompete agreements for many sales employees—the very employees who are typically armed with the type of confidential, customer-specific information that will allow them to unfairly compete.

The Act attempts to provide employer-centric protections by explicitly excluding nonsolicitation covenants, nondisclosure agreements, confidentiality agreements, noncompete provisions made in connection with a severance or settlement agreement that includes a rescission clause, and forfeiture agreements from its reach.

Finally, though the Act—set to take effect January 2020—is aimed to create an all-encompassing "scheme" regarding noncompete agreements, it does not provide guidance as to the most basic questions, including, for instance, the penalties imposed upon employers for violations (other than invalidating such agreements).

In light of all of the above, employers are advised to consult with knowledgeable employment counsel on a regular basis to ensure compliance with the current state of the law. Employers may need to consider severance alternatives for employees leaving employment who could pose a significant risk of unfair competition after separation. In addition, employers might consider alternative protections to noncompete agreements, including bolstering confidentiality and nonsolicitation agreements for employees with access to sensitive and/or confidential information.

Footnotes

1 See Jacqueline Johnson and Melissa McDonagh, Maine and New Hampshire Join the Ranks of States Restricting Use of Noncompete Agreements – with Rhode Island on the Cusp, Littler ASAP (July 15, 2019).

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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