The writing is on the wall: remote work is here to stay. According to data collected by Ladders, three million professional jobs in the US went permanently remote in the fourth quarter 2021 alone. By the end of 2021, 18 percent of all professional jobs in the US were remote. Ladders projects that number will be close to 25 percent by the end of 2022. Of course, this leaves employment lawyers and HR professionals wondering — what employment laws apply to our distributed workforce?
One particularly thorny issue facing employers in this context is the permissibility of post-termination non-competition agreements. Non-compete laws and their requirements differ greatly from state to state. For example, in Illinois, one of the requirements is that the employee must earn at least $75,000 annually in order to enter into an enforceable post-termination non-compete, but in Oregon, that minimum annual income threshold increases to $100,533 — and that same employee would be subject to no income threshold if Missouri law applied. On the other hand, in Colorado, where post-termination non-competes are generally unlawful, the employer could soon face misdemeanor criminal liability for seeking to enforce an unlawful post-termination non-compete against any employee, and in California, the employer could be exposed to compensatory and punitive damages if a claim is accompanied by other deemed tortious conduct (e.g., interference with the employee’s future employment prospects by seeking to enforce the unlawful agreement).
In this post, we analyze how remote work further muddles the already complicated landscape of post-termination non-competes and how employers can best navigate this complex backdrop.
What law applies? Guidance from recent case law
One issue arising out of remote work is knowing what state’s law will apply when it comes to the enforceability of non-compete restrictions. With remote work, long gone are the days where an employer can be relatively certain that the state where an employee is located at the beginning of the employment relationship will be the same state that employee is living and working in at the end of the employment relationship. As a result, when the need to enforce non-compete restrictions arises, the parties may dispute what state’s law should apply to the non-compete (e.g., the state where the employee was located when they entered into the contract, the state where the employee began work for the employer, or the state whether the employee was living or working at the end of the employment relationship).
A New York case provides some insight on how courts may address these situations. In Medtronic, Inc. v. Walland, 2021 U.S. Dist. LEXIS 172235 (S.D.N.Y. Sep. 10, 2021), Medtronic, sought a preliminary injunction against the former CEO of a company it had acquired. The former CEO had been hired in 2017, while living in California. When he was later promoted to CEO in 2018, he negotiated his employment agreement while living in California and then moved to New York to start his new role. Notably, the employment agreement included non-compete terms and a New York governing law provision. In March 2020, the former CEO moved back to California, and in December 2020, he resigned.
Medtronic filed suit in New York federal court seeking to enforce the non-compete restriction, but the parties disagreed as to what state’s law should apply. Medtronic argued New York law should apply per the terms of the employment agreement; however, the former CEO argued that California law should apply given his past and current location. The court held that there was a conflict of law (regarding the enforcement of the non-compete provision) that rendered a choice of law analysis necessary and ultimately found that California had a materially greater interest than New York in the controversy given the CEO lived in California both when he negotiated the non-compete restriction and at the time of the dispute. Applying California law, the court went on to hold that the non-compete restriction in the employment agreement was not enforceable. As the Medtronic case highlights, figuring out what state’s law may apply to a non-compete restriction is going to be a fact intensive analysis and employers need to consider the various states where employees are located when they negotiate their agreements, as well as where the employees are working both at the start and end of employment (and maybe even throughout the employment relationship).
An older California case provides further guidance. In Sabol-Krutz v. Quad Electronics, Inc., 2015 U.S. Dist. LEXIS 88144 (E.D. Ca. July 6, 2015), a former sales representative sought a declaratory judgment that the post-termination non-compete agreement she entered into was unenforceable. The former sales representative entered into the non-compete agreement at the start of her employment in Michigan, but the agreement did not contain a governing law provision. After working in Michigan for a few years, she moved to California and continued working for the company, but her business-related contacts with California involved no more than one percent of her overall business activity. Under these particular facts, the court held that although she was a California resident, Michigan had a greater interest and Michigan law should apply–ultimately abstaining from deciding the matter in deference to the parallel action filed in Michigan state court.
More often than not, where the employee begins and terminates the employment relationship in California, forum selection clauses seeking to apply another state’s law are unlikely to be enforced, as demonstrated by Ninth Circuit’s recent decision in DePuy Synthes Sales Inc. et al. v. Howmedica Osteonics Corp. et al. No. 21-55126, 2022 U.S. App. LEXIS 6463, (9th Cir. Mar. 14, 2022).
While these cases place an emphasis on the employee’s location when the non-compete restriction was entered into, some states have non-compete laws which specifically outline choice of law rules based on the employee’s location at the termination of employment. Notably, Massachusetts’ non-compete statute looks at the location where the employee lived and worked in the last 30 days of employment in determining whether to apply the contract’s designated law – something that can be very hard to know at the start of the employment relationship.
What should employers do? Employer takeaways
Employers, especially those who heavily rely on post-termination non-compete restrictions with employees, should audit their non-compete agreement procedures to ensure they are complying with the state laws that may apply given their employee population. Employers also should pay closer attention to employees who travel to and from states which have a strong public policy against non-compete agreements (e.g., California, North Dakota, Oklahoma and Washington D.C.) and states which have complex schemes employers must comply with to have enforceable non-compete agreements (e.g., Colorado, Illinois, Massachusetts, Oregon and Washington). Specifically, employers should take care to:
- Have a remote work policy in place that requires employer consent before an employee can change their primary remote work location (or at a minimum at least require reporting of such changes)
- Review current agreements in light of where employees worked when agreements were entered into and where they are currently working
- Consider if new or revised agreements are needed and if new consideration needs to be provided for such agreements.
If you have any questions or for help drafting your company’s non-compete agreements, please contact your Baker McKenzie employment lawyer. Stay tuned for more on state and federal updates with respect to non-competes.