Maine, Maryland, New Hampshire, Washington and Rhode Island have recently joined the growing ranks of states that prohibit non-competes with lower income workers, reflecting a growing public policy concern regarding fairness of imposing non-competes—and the accompanying threat of lawsuit—on vulnerable workers who likely do not have access to sensitive business information or deep customer relationships. Although these states all are addressing the same issue, they are tackling it to varying degrees that may depend on the fact that each state has a uniquely situated workforce.
- In Maine, on June 28, 2019, Governor Janet Mills signed into law “An Act To Promote Keeping Workers in Maine,” which prohibits employers from entering into a noncompete agreement with an employee whose wages are at or below 400% of the federal poverty level, or $48,560 per year.
- In Maryland, on May 25, 2019, the state enacted a law effective October 1, 2019 that prevents employers from entering non-competes with employees earning less than $31,200 annually or $15/hour.
- In New Hampshire, the existing non-compete statute was amended on July 10, 2019 (taking effect on September 8, 2019) to prohibit employers from requiring employees to sign agreements containing non-compete restrictions unless they earn in excess of 200% of the federal poverty level, which is equal to $14.50/hour (or $24,280 per year).
- In Washington, on May 8, 2019, Governor Jay Inslee signed a new law, effective January 1, 2020, that, among other things, renders non-competes unenforceable against employees earning less than $100,000 in total annualized compensation (not just base salary) or independent contractors earning less than $250,000 a year. In addition, employees earning less than two times the state minimum wage generally may not be restricted from working an additional job (including for a competitor).
- In Rhode Island, Governor Gina Raimondo signed into law the Rhode Island Non-Competition Agreement Act, effective January 2020, which prohibits agreements with those employees with average annual earnings of not more than 250 percent of the federal poverty level (for 2019, $31,225 for an individual and $64,375 for a family of four).
These are just the latest states that have overhauled their non-compete laws on this issue. In Illinois, for example, the “Illinois Freedom to Work Act”—which applies to all noncompete agreements entered into on or after January 1, 2017—prohibits any non-governmental employer from executing a noncompete agreement with any employee who earns less than the greater of (1) the hourly minimum wage under federal, state, or local law, or (2) $13.00 per hour. Massachusetts, too, joined the trend when its legislature enacted the “Massachusetts Noncompetition Agreement Act,” effective October 1, 2018, which includes a provision forbidding employers from entering into noncompete agreements with any employee classified as non-exempt under the Fair Labor Standards Act (FLSA).
In addition, many other states have bills pending that would prohibit or limit non-competes with lower earning workers, including New Jersey, Hawaii, Indiana, Missouri, and Pennsylvania. Similar bills in New York and Virginia died this legislative session, but reflect those states’ interest in addressing this issue.
This growing trend has also gained momentum at the federal level. On January 15, 2019, Senator Marco Rubio introduced the “Federal Freedom to Compete Act,” which, similar to the Massachusetts prohibition, prevents employers from entering into noncompete agreements with any employee except those classified as exempt executive, administrative, professional, or outside sales employees under the FLSA. Though broad, the Act—which, if enacted, amends the FLSA—does not prevent employers from executing agreements to protect trade secrets.
If 2019 is any indication, more states—and perhaps the federal government—will likely take action to preclude non-competes for employees earning lower wages. But, these laws also demonstrate that states are seeking targeted approaches to non-compete reform, addressing specific scenarios, rather than choosing to proceed toward an outright ban.
Two recent cases reaffirm that Minnesota remains among the small, but growing, list of states that require employers to provide advance notice of any non-compete to a potential future employee prior to the commencement of employment. In both Safety Center, Inc. v. Stier, No. A17-0260, 2017 WL 5077437 (Minn. Ct. App. Nov. 6, 2017) and AutoUpLink Techs., Inc. v. Lynn Clark Janson, No. A17-0485, 2017 WL 5985458 (Minn. Ct. App. Dec. 4, 2017), the Minnesota Court of Appeals affirmed that, if at-will employment is the only consideration offered, the non-compete must be presented to the employee before the offer of employment is accepted.
In what may be a trend, several courts around the country this year have embraced strict interpretations of non-compete agreements, refusing to blue pencil or equitably reform overbroad or unreasonable clauses in non-compete agreements. Traditionally, courts have exercised the doctrine of equitable reformation to re-write provisions to render them reasonable, or at the very least, strike unreasonable provisions to save those that are reasonable.
In the first half of 2016, we have already seen significant changes to a number of state non-compete laws. In this post, we provide a compilation of recently enacted legislation in Alabama, Connecticut, Idaho, Oregon, and Utah, as well as several important developments at the federal level.
Last week, the Illinois Attorney General filed suit against Jimmy John’s, alleging that the company’s non-competes violate state law. These non-competes prohibit all employees, including sandwich makers, from working during their employment and for two years afterward at businesses within several miles of any Jimmy John’s nationwide that earn more than 10% of their revenue from submarine or similar sandwiches. The complaint alleges that the non-competes do not protect a legitimate business interest such as trade secrets or customer relationships, and it seeks a declaratory judgment that the agreements are unenforceable.
In the last few weeks, Utah and Idaho have each passed bills changing the landscape of non-compete enforceability in strikingly different ways. Utah’s law places further limitations on the use of non-competes. In contrast, the Idaho bill (expected to be signed by the governor shortly) permits greater enforceability of non-competes.
The states have a rich tradition of passing legislation forbidding or limiting the use of non-compete agreements with identified classes of employees. As you might expect, a number of states forbid or limit the use of non-compete agreements with:
- Physicians, nurses, psychologists, social workers and other medical professionals
- Individuals working in broadcasting
A recent decision from a Wisconsin state court serves as a cautionary tale for employers that do not routinely impose or enforce non-compete restrictions consistent with the employee’s role and potential to harm the business.
In Kohl’s Department Stores Inc. v. Janet Schalk, 2015CV001465 (Wis. Cir. Ct. Aug. 11, 2015), Judge Robert Mawdsley denied Kohl’s request for an injunction preventing its Chief Information Officer, Janet Schalk, from joining Hudson’s Bay Company partly on the grounds that Schalk’s non-compete was overly restrictive in light of Schalk’s role in comparison with the non-competes of other employees. Kohl’s, relying upon its non-compete contract with Schalk barring her from working in a similar position with a competitive retailer for one year, argued that Schalk should be barred from joining Hudson’s Bay, a Canadian department store company, because Schalk “has the playbook, the crown jewels, our entire strategy in her hands.” Schalk argued that the non-compete was too broad and that Hudson’s Bay was not a competitor given its high-end retailing–featuring Saks Fifth Avenue and Lord & Taylor–compared to Kohl’s mid-tier status. Schalk also contended that Kohl’s overstated her role and knowledge of the company’s strategy.
The Pennsylvania Supreme Court recently held in Socko v. Mid-Atlantic Systems of CPA, Inc. that a non-compete is enforceable only if a current employee receives new consideration beyond continued employment. The Court held that this is the case even if a non-compete provides that the parties “intend to be legally bound,” which typically obviates the need for consideration under the Pennsylvania Uniform Written Obligations Act (UWOA). After considering the historical background regarding non-competes and general principles of statutory construction, the Court concluded that “a construction of the UWOA which would vitiate the need for new and valuable consideration when entering into an agreement containing a restrictive covenant after the initiation of employment would be unreasonable.”
Although last year’s legislative efforts to ban—or limit further—non-competes in Massachusetts failed, proponents have vowed to revive the issue again in 2015-2016. Excluded from those proposed measures, however, has always been any restriction on employers’ use of customer non-solicitation clauses. Should the Legislature ever pass restrictions on non-competes, employers that have not already done so will flock in droves to the use of customer non-solicits, particularly with respect to sales-related employees. This makes the courts’ ongoing struggle to define customer “solicitation” in the digital age of paramount importance.
In the rapidly changing business world, protecting a company's human capital and proprietary information is critical to maintaining a competitive edge. On this blog, Nutter's experienced Business Litigation and Labor, Employment & Benefits attorneys offer news and insights on all aspects of restrictive covenants and trade secrets—from analyzing a rapidly evolving body of case law, to summarizing new legislation and legislative efforts, to providing other need-to-know updates and more.