New state and federal limits on post-employment restrictive covenants mean employers must stay on top of more than just vaccination policies or the logistics of office reopenings. The swath of new and on-the-horizon legislation aimed at limiting the enforceability of post-employment non-compete agreements deserves employers’ attention too. Part One of our blog post series on restrictive covenants addressed the intersection of remote work and state non-compete laws. Now, in Part Two, we summarize recent updates to state non-compete laws, pending state legislation that could impact non-competes, and new federal-level activity aimed at limiting non-competes.
Colorado recently raised the stakes for violations of its non-compete law. Effective March 1, 2022, under SB 21-271, a person who violates Colorado’s non-compete statute commits a class 2 misdemeanor.
Colorado’s non-compete statute (C.R.S. section 8-2-113) voids agreements that restrict trade, such as non-competition and non-solicitation of customers covenants, unless they fall within a specific statutory exception: (i) a contract for the purchase or sale of a business or its assets; (ii) a contract for protecting trade secrets; (iii) a contract provision recovering education or training expenses associated with an employee who has been with an employer for less than two years; or (iv) a restriction on executive or management personnel or each of their professional staff. As of March 1, 2022, a person who violates this statute commits a class 2 misdemeanor punishable by up to 120 days in jail and / or a fine of up to $750.
Many questions remain about the enforcement of this amendment, such as who will face ultimate liability for the employer (e.g., in-house counsel, HR staff, line managers, etc.). And though there is no indication that the new law is retroactive, Colorado employers were subject to criminal penalties for a violation of Colorado’s non-compete law even prior to SB 21-271 being passed, under C.R.S. section 8-2-115. SB 21-271 repealed C.R.S. section 8-2-115 while simultaneously inserting language into the non-compete statute itself making a violation a class 2 misdemeanor. It remains to be seen whether this is simple statutory consolidation, or a signal that Colorado plans to increase enforcement of violations of its non-compete statute. Employers should review their non-compete agreements and internal policies regarding which employees are required to sign such agreements to make sure they are in compliance with this new law.
Illinois employers also have had to fall in line with new non-compete laws in the last few months. On August 13, 2021, Illinois Governor Pritzker signed the Illinois Freedom to Work Act (Public Act 102-0358) into law, imposing new conditions on non-compete and non-solicitation agreements entered into on or after January 1, 2022 (with no retroactive application). The Freedom to Work Act imposes earning thresholds, banning non-competes for Illinois employees making less than $75,000 per year and non-solicitation agreements for employees making less than $45,000 per year. Employers also must provide employees at least 14 calendar days to review non-compete or non-solicitation agreements before signing them, and employers must advise employees in writing to consult with an attorney before signing such agreements. Notably, the Act does not include any language limiting the definition of non-competes or non-solicitation agreements to agreements that prohibit post-employment conduct as opposed to competitive conduct during employment. More information on Illinois’ Freedom to Work Act can be found in our previous blog post here.
Effective October 1, 2021, Nevada’s amended non-compete statute bans post-employment non-compete agreements with hourly wage employees. Notably, the amendments do not state whether the amended statute will apply retroactively. Outside of this ban, post-employment non-compete agreements in Nevada generally remain enforceable where they are supported by valuable consideration, do not impose restraints that are greater than are required to protect the employer, do not impose an undue hardship on the employee, and impose restrictions that are appropriate in relation to the consideration supporting the non-compete.
On May 21, 2021, Oregon Governor Kate Brown signed SB 169, making substantial changes to Oregon’s non-compete statute. Under the amended law, non-competition agreements entered into on or after January 1, 2022 cannot exceed 12 months in duration post-employment, tightening the restriction from the previous 18 month post-employment time frame. Employers can enforce post-employment non-competes against employees who are not the equivalent of “exempt” under the Fair Labor Standards Act (FLSA) or whose gross salary and commissions at termination do not meet the $100,533 income threshold (adjusted annually for inflation) only if the employer agrees in writing to compensate the employee during the post-employment restricted period with the greater of (a) compensation equal to at least 50 percent of the employee’s annual gross base salary and commissions at the time of the employee’s termination, or (b) 50% of $100,533 (adjusted annually for inflation).
In 2021, the District of Columbia enacted The Ban on Non-Compete Agreements Amendment Act (the D.C. Act). The D.C. Act essentially bans both post-employment non-competition agreements, as well as prohibitions on simultaneous work for other employers (i.e., moonlighting). The D.C. Act was initially slotted to go into effect April 1, 2022, but the D.C. Council passed an amendment delaying enforceability until October 1, 2022. Additional amendments loosening these restrictions have been proposed. The D.C. Act is not retroactive. However, unless further amended, the D.C. Act will invalidate most non-compete provisions entered into with Washington, D.C. employees on or after October 1, 2022.
Pending state legislation
Several states have pending legislation that would heavily restrict non-competes if enacted. We highlight a few below:
- New York’s Senate Bill S734 would essentially codify the non-compete standards followed by New York courts—allowing non-competes only when they are no greater than required for the protection of the legitimate interest of the employer, do not impose an undue hardship on the employee, are not injurious to the public, and are reasonable in time period and geographic scope. An “undue hardship” would include situations where an employee loses or leaves a job due to circumstances surrounding a declared state of emergency or disaster emergency (such as the COVID-19 pandemic), making non-competes unenforceable in those situations.
- Connecticut’s House Bill 5249 would limit non-competes to exempt employees who make at least a minimum threshold income (based on a multiplier of the “minimum fair wage” as defined in section 31-58 of Connecticut General Statutes), would limit non-competes to one year post-employment and to the geographic areas where the employee actually worked, would require the non-compete to be separate from the offer of employment and other employment-related agreements, and would require that the employee be provided 10 business days before being required to accept an offer of employment or otherwise sign the non-compete. However, the bill, if passed, would still allow the use of non-solicitation, no rehire, and confidentiality provisions in employment agreements.
- Oklahoma’s House Bill 3435 is based on the Uniform Restrictive Employment Agreement Act (the UREEA), which was enacted by the Uniform Law Commission last summer and seeks uniformity of statutory and common law rules regarding restrictive covenants. West Virginia’s pending Senate Bill 453 is also based on the UREEA.
On July 9, 2021, President Biden issued an Executive Order on Promoting Competition in the American Economy (EO) (see our prior blog, here). The EO signals support for severe limitation of post-employment non-compete restrictions, encouraging the Chair of the Federal Trade Commission (FTC) to exercise the FTC’s statutory rulemaking authority to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”
To date, there has been no specific guidance or rulemaking from the FTC, leaving uncertainty about the restrictive scope of any rulemaking under the EO, including whether it will entirely ban or just limit post-employment non-compete agreements, focus on restricting post-employment non-competition agreements for all workers or just those considered more vulnerable (such as low wage earners), restrict non-solicitation agreements (along with non-competition agreements), or preempt state law.
But one thing is certain: the FTC and the Department of Justice (DOJ) have remained focused on labor. In December 2021, the FTC and DOJ jointly hosted a virtual workshop titled “Making Competition Work: Promoting Competition in Labor Markets,” which (according to the DOJ website) addressed competition issues affecting labor markets and the welfare of workers, including the increased use of restrictive contractual clauses such as non-competes and non-disclosure agreements in labor agreements. The DOJ has continued on its new path of pursuing companies and executives alleged to have fixed wages or limited worker mobility in criminal (instead of civil) prosecutions—meaning possible jail time for defendants. And the DOJ recently filed a statement of interest in a Nevada state court litigation stating that it may consider certain categories of employer-employee non-compete agreements to be per se illegal agreements among competitors, and others may violate antitrust laws even when they are ancillary or vertical in nature. Employers should keep an eye out for these types of developments from the DOJ, and be on the lookout for action by the FTC.
And since the EO, there has been federal legislation introduced to restrict non-competes, but none appears to have made significant advancement. A couple of examples include:
- The Workforce Mobility Act of 2021 which would, among other things, restrict the use of non-compete agreements to situations involving the sale of a business or the dissolution of a partnership and create a private cause of action for aggrieved workers. Introduced in the Senate as 483 and in the House of Representatives as H.R. 1367 on February 25, 2021, neither of the proposed bills appears to have moved.
- The Freedom to Compete Act (S. 2375) which would amend the FLSA to ban non-compete agreements for non-exempt workers, and would apply retroactively to existing non-compete agreements. The bipartisan bill was introduced on July 15, 2021, and appears to have stalled in committee.
Drafting and enforcing post-employment non-compete agreements is a daunting task in light of these new requirements, especially when taken together with the patchwork of existing state-imposed restrictions on non-compete agreements. Employers should take these steps to ensure they are in compliance in all jurisdictions where they have employees (including remote employees):
- Review and inventory existing “form” employee agreements containing restrictive covenants, and assess whether any updates are necessary to comply with new state restrictions. For instance, in Illinois, employers should check whether updates are necessary for positions that do not meet the salary thresholds, and in Nevada, employers should make sure any agreements for hourly wage employees no longer contain post-employment non-compete provisions.
- Employers with remote workforces and multistate operations should be particularly careful to keep on top of applicable law in each state where they have employees and to audit their non-compete agreements to ensure they comply with local legal requirements. See our recent blog Navigating the Intersection of Remote Work and State-Specific Post-Termination Non-Compete Laws for helpful tips.
- Become familiar with (and calendar) any other time-based prescriptive changes in the laws. One example: Illinois’ salary thresholds increase on a regular basis—$5,000 every 5 years until reaching $90,000 in 2037 for non-competes, and $2,500 every 5 years until reaching $52,500 in 2037 for non-solicitation agreements. Staying on top of these types of changes could allow more flexibility in how you implement restrictive covenants in your workforce moving forward.
- Train your HR department to ensure that policies and procedures surrounding the presentation of employment offers and restrictive covenants comply with any new applicable law.
- Consider creative implementation of other viable strategies to suppress unlawful competition and protect confidential and trade secret information, including types of agreements not prohibited by applicable laws banning non-competes (such as, in some jurisdictions, confidentiality agreements, trade secret agreements, and invention-assignment agreements), choice of law and exclusive venue provisions, and modification of compensation approaches and on- and off-boarding procedures to provide maximum protection of the company’s confidential information and trade secrets.
Contact your Baker McKenzie employment attorney for help complying with recent changes to various state non-compete laws, and for all of your employment needs.