As momentum for regulation of non-competes grows at the federal level, states continue to pass restrictive non-compete legislation on their own.
As previously reported, on January 5, 2023 the Federal Trade Commission (“FTC”) proposed a new rule which would effectively ban all non-compete agreements between employers and other workers—not only prohibiting new non-competes, but invalidating existing ones. After receiving almost 27,000 comments during an extended comment period, the FTC voted to delay a vote on the proposed rule until April 2024. Given the vehement opposition to the proposed rule by certain industry groups, even should the FTC move forward with a rule, most expect immediate legal challenges and therefore further delays.
Last month, the Court of Appeals for the First Circuit found that a Delaware choice of law provision in a non-competition and non-solicitation agreement with a former Massachusetts employee was sufficient to invoke Delaware law. Notably, the non-compete agreement at issue was entered into prior to the October 1, 2018 effective date of the Massachusetts Noncompetition Agreement Act (the “Noncompetition Act”).
As we previously reported in the context of low-wage workers, Rhode Island recently passed the Rhode Island Noncompetition Agreement Act, which will be effective January 2020. This legislation extends protections far beyond low-wage workers, however. The Act contains many provisions similar to (and clearly based on) Massachusetts’ recently passed non-competition legislation, but also several major differences.
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.
Last month, the Supreme Judicial Court dismissed a suit brought by a Massachusetts employer to enforce a non-compete on its California-based employee on the ground of forum non conveniens. The SJC held that the non-compete’s Massachusetts choice of law provision was unenforceable and that California substantive law should apply. Recall that even with the recent change in Massachusetts non-compete law, such restrictive covenants are still permissible, while in California, employee non-competes are subject to an outright ban.
This week, the Massachusetts Noncompetition Agreement Act became effective. For employers, this means that all non-compete agreements entered into on or after October 1, 2018 must comply with the new law’s requirements. It is likely that most Massachusetts employers will have to revise their existing agreements.
In the early morning hours of August 1, 2018, the Massachusetts House and Senate passed long-awaited non-compete legislation. Assuming that Governor Baker signs the bill into law, the legislation will become prospectively effective October 1, 2018. The Massachusetts Noncompetition Agreement Act (the “Noncompetition Act”) is many years in the making, as Massachusetts legislators have made numerous, but unsuccessful, attempts to enact a law addressing non-competes over the past several years.
In the early hours of this morning, the House and Senate advanced the non-compete legislation without any amendments. The legislation now moves to Governor Baker for approval. If enacted, the law would apply to all non-competes signed after October 1, 2018. In the coming days, we will report on what employers will now need to consider if Governor Baker signs the legislation.
On Wednesday, the Massachusetts Senate passed an Economic Development bill that revives the long-debated issue of non-compete legislation in the Commonwealth.
Over the past few years, we have reported on the Massachusetts Legislature’s unsuccessful attempts to alter non-compete law in the Commonwealth. In 2016, the Legislature was tantalizingly close to passing legislation before adjourning in July without reaching a compromise, and no fewer than six non-compete bills were introduced in 2017.
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.