Protected Occupations: Statutory Exemptions from Non-Competes for Employee Classes

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
  • Lawyers
  • Individuals working in broadcasting

Public health, public policy and ensuring the free flow of information and ideas motivate the prohibition or limitation on non-compete agreements for these occupations. But what about auto salespeople? Cosmetologists? Secretaries and clerical staff? Or real estate brokers? All of these occupations are examples of exempted or specially protected employee classes. Louisiana prohibits auto dealerships from binding sales staff to non-competition agreements. Vermont protects barbering and cosmetology students from being required to enter a non-competition agreement with the beauty shop that trains them. Workers in purely clerical or secretarial positions in Missouri are not subject to non-competition agreements. Real estate agents in Louisiana may be bound by a non-solicitation agreement with a real estate brokerage only if the covenant is “displayed in bold-faced block lettering of not less than ten-point type” and a three-day rescission period is part of the agreement.

A review of all fifty states reflects an idiosyncratic approach to the passage of these exemption statutes, even in occupations where broad consensus prevails that non-competes are against public policy, as in health professions, law, or the media. Not all states have an absolute bar to enforcing non-competes in broadcasting. The state of Washington, for example, only prohibits their enforcement if the employee “is terminated without just cause or laid off by action of the employer.” Statutes on physician non-competes range broadly, from outright prohibitions; to permitting only damages and not injunctions  (permitting damages for physician’s violation of employment agreement, including damages related to competition); to permitting non-competes only in the context of sale of a practice. On the other side of the spectrum, one state even affirmatively endorses non-compete agreements for locksmiths.

Much of the public comment over the last couple of years in support of the various Massachusetts bills limiting or prohibiting non-competition agreements highlighted extreme examples of the use and enforcement of restrictive covenants, incidents that defied common sense. For example - the camp counselor who was threatened with enforcement of a non-compete when the teenager decided to work for a different camp the following summer - or the pizza delivery person who was prohibited from working within a radius of his former employer. Were these cases ever to be litigated, they would have ended swiftly in favor of the employees, but the employees never set foot in the courthouse because they abided by the non-competes to avoid that fate. Proponents of the anti-non-compete bills argue that this chilling effect is sufficient reason to bar non-compete agreements altogether.

To address concerns of this nature, one of the bills from the 2013-2014 session, Bill H. 1715, proposed that non-compete agreements be permitted only if the employee earns $250,000 or more annually, absent certain other limited circumstances such as theft of company product. This attempt to classify employees by compensation-level misses its  mark and fails to sort out employees who may be fairly subject to non-competes from those who do not put at risk legitimate protectable interests of their former employer. Compensation level is not an adequate proxy for whether an employee can unfairly harm a former employer. Workers earning much less than $250,000 may be capable of harming the goodwill of their former employer or using its confidential information in a competitive position. Engineers and sales staff are good examples.  These employees are often compensated at levels below this proposed cap and frequently can do harm to a former employer in a new competitive position.

The history of occupation-based exclusions does, however, offer a statutory model that could address the extreme examples of non-compete misuse in the marketplace. Statutes might exclude the use of non-competes for seasonal workers or minors working part-time positions, for example. There may be industries where non-competition obligations rarely or never arise from a legitimate protectable business interest. The challenge with this approach is to craft exemptions that correctly identify employee classes that are not in a position to damage a former employer by trading on its goodwill or confidential information in a competitive position. So far in Massachusetts, this is exactly the inquiry that the Court undertakes with the benefit of evidence about the specific employee and business to determine if an agreement should be enforced. Any legislation that offers wholesale exclusions by class would have to be thoroughly studied and supported by solid evidence about the realities of the marketplace, if it is to supplant the process that the Court now undertakes here in the Commonwealth.

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.

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