As employers gear up for 2019, they should be mindful significant reforms in the area of non-compete law that took place in 2018. Although non-competes are widely used and enforceable in the majority of states, there is a growing trend toward limiting the use of non-competes in favor of employee mobility. In recent years, several states have proposed, passed, and enacted laws restricting or prohibiting these types of agreements and many courts have been increasingly reluctant to enforce them against employees. In addition, attorneys general across the country have been investigating employers’ use of broad non-competes and pushing employers to limit their use.
By way of quick background, a non-compete, also referred to as a “restrictive covenant,” is a contractual provision – typically found in an employment agreement under which an employee agrees not to enter into or start a similar profession or trade in competition against his/her employer). The use of non-competes is premised on the idea that when an employee leaves the company, they might begin working for a competitor or start a business, and gain competitive advantage by exploiting customer relationships built through the employers time, effort and expense, or confidential or sensitive information about their former employer’s customers, operations, trade secrets, business practices, upcoming products, and marketing plans.
For example, in October of last year, Massachusetts enacted a new law regulating various aspects of non-compete agreements, including by limiting their scope and enforceability as well as imposing new requirements on employers who chose to use non-competes in contracts with their employees. The Massachusetts law prohibits employers from enforcing non-competes against employees who are classified as nonexempt under the Fair Labor Standards Act and from enforcing non-competes against employees who are fired or laid off. The law also limits non-competes to 12 months or less and establishes a mandatory “garden leave” for employees, requiring employers to pay 50% of a workers’ base salary for as long as the non-compete is in effect, unless the worker gets employment elsewhere. Employers must also provide notice of the non-compete to the employee, and the form and timing of such notice depend on when the employee is asked to sign the agreement. Because the law took effect only a few months ago, courts have not yet been presented with legal questions regarding the new regulations on non-competes, but we will likely see an increased amount of activity in the coming months surrounding Massachusetts’ new law and its impact on employee mobility.
Utah, Idaho, and Colorado also passed or amended laws regulating and limiting the use of non-competes by employers in their states in 2018. And in the previous few years, California, Illinois, Nevada, and other states have also passed similar legislation in an effort to curtail or control the usage of non-competes in the workplace. The statutes of those states similarly implemented regulations involving non-competes by placing the burden on employers to establish the necessity of a non-compete agreement, prohibiting employers from requiring those employees whose earnings do not exceed the applicable minimum wage from signing non-competes, and requiring that non-compete agreements be supported by valuable consideration beyond continued employment.
Other states may be following suit in 2019, including New Jersey, Pennsylvania, New Hampshire, Vermont, and Pennsylvania. Notably, New York City recently proposed a bill that would (1) prohibit non-competes for low-wage workers, and (2) bar non-competes for all employees unless, at the beginning of the hiring process, the employer discloses to the employee the possibility that a non-compete might be used.
Further, attorneys general in numerous states (California, District of Columbia, Illinois, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, and Washington) have begun investigating employers who broadly use non-competes in agreements with their employees and successfully reaching settlements with these employers under companies will either eliminate or reduce the use of non-competes in their business operations. These investigations appear to target national fast food and retail companies, but other industries and organizations have been affected, as well. In September 2018, for example, Attorneys General from New York and Illinois reached a settlement with shared-office pioneer WeWork, in which the company agreed to completely eliminate or narrow overly broad non-competes for most of its employees.
While regulation of non-compete agreements has seen a significant increase at the state-level, similar laws proposed at the federal level have seen much less success. The federal Workforce Mobility Act was sponsored early in 2018 by Senators Christopher Murphy (Connecticut), Elizabeth Warren (Vermont), and Ronald Wyden (Oregon). This legislation would flatly ban all non-competes for all employers and employees in the U.S. engaged in commerce, but presently the law has not received any congressional attention or action.
Employers, especially those located in or conducting business in jurisdictions with recently passed legislation regulating non-competes, should be mindful of the shifting landscapes of non-compete agreements in the workplace. While courts have consistently said that analysis of non-compete agreements must be done on a case-by-case basis, it seems that the days of broad non-compete agreements are coming to an end with this onslaught of legislation at the state level. As non-compete agreements become harder to enforce, employers should seek advice from counsel to review existing employment agreements and to best practices for non-competes in 2019 and beyond.