Going into 2020, employers should be mindful of several new state laws aimed at limiting the enforceability of noncompete agreements against low-wage employees. Crucially, while protecting low-wage worker job mobility is the key aspect of these new state laws, each has its own unique nuances and one-off requirements, further complicating employer efforts to protect their legitimate business interests when key employees leave.
This article summarizes these new state noncompete laws (all of which became effective in 2019 or take effect in 2020), and briefly discusses new federal-level efforts to adopt legislation, tracking recent noncompete trends.1
On June 28, Maine Gov. Janet Mills signed into law L.D. 733. By its terms, L.D. 733 prohibits all noncompete agreements between an employer and employee when the employee’s wages fall at or below 300% of the federal poverty line.
The scope of L.D. 733 is broad, prohibiting employees from requiring or permitting an employee from entering into noncompete agreements if employee wages fall below this 300% threshold. Further, if an employer advertises a job opening that will require a noncompete agreement, L.D. 733 requires that the employer disclose in the advertisement that a noncompete agreement will be required.
In addition, an employer must notify an employee or prospective employee of any noncompete requirement and provide the employee or prospective employee a copy of the noncompete agreement at least three business days before the employer requires a signature on the agreement. As the statute explains, the Legislature adopted this onerous notice requirement so that employees will have an opportunity to review the agreement and negotiate its terms before accepting employment. If an employer violates any of the above requirements, a $5,000 fine may be imposed and the noncompete agreement will be rendered void and unenforceable.
Maryland also recently passed a law prohibiting noncompete agreements between employers and low-income/low-wage workers. The law renders null and void any noncompete agreement in the state between an employer and employee when the employee earns equal to or less than $15 per hour, or $31,200 per year.
By its terms, this new law does not apply to employees earning more than $15 per hour or $31,200 per year, and also does not apply to "a contract or a similar document or agreement with respect to the taking or use of a client list or other proprietary client-related information." This new law went into effect Oct. 1.
Effective Sept. 8, 2019, New Hampshire’s new noncompete law titled Act Relative to Noncompete Agreements for Low-Wage Employees renders void and unenforceable all noncompete agreements for employees earning below 200% of: (1) the federal minimum wage (which would be $14.50, or $7.25 x 2); or (2) the minimum wage for tipped workers under New Hampshire law.
On May 14, Oregon enacted H.B. 2992, which requires employers to provide employees bound by noncompete agreements a signed copy of the agreement within 30 days following the employee’s last date of employment. If an employer fails to do so, the noncompete agreement cannot be enforced.
Notably, this additional requirement comes after Oregon has already enacted several other restrictions governing the enforceability of noncompetes. Under Oregon law, employers must also give employees written notice of any noncompete requirements in writing no later than two weeks before the first day of an employee’s employment.
Further, noncompete agreements are only enforceable in Oregon when, among other key requirements, the employee subject to the noncompete agreement is a properly classified exempt employee under Oregon wage and hour law, and when the employee’s annual earnings exceed the median income for a family of four as specified by the U.S. Census Bureau.
Effective Jan. 15, 2020, Rhode Island noncompete agreements will be unenforceable against the following types of workers:
- Employees classified as nonexempt under the federal Fair Labor Standards Act;
- Employees 18 years of age or under;
- Undergraduate or graduate students serving in an intern capacity or otherwise working while enrolled in an education institution; and
- Low-wage employees, defined as employees with annual individual earnings that are 250% of the federal poverty line or less (currently, this means that noncompete agreements with employees earning $31,225 or less will be unenforceable).
Importantly, the above restrictions do not apply to noncompete agreements "in connection with the cessation of or separation from employment if the employee is expressly granted seven (7) business days to rescind acceptance." In other words, noncompete agreements may be enforceable regardless of the above requirements if they’re entered into in connection with an employee’s termination, in return for bargained-for consideration, and after the terminated employee is given a seven-day chance to rescind such an agreement after signing.
The above requirements also do not apply to:
- No-rehire/no-reapplication agreements by which an employee agrees not to seek or become employed with their employer after termination;
- Agreements prohibiting employees from soliciting or hiring other employees or trade secret protection agreements;
- Agreements relating to the sale of a business entity;
- Invention assignment agreements; and
- Agreements that "[impose] adverse financial consequences on a former employee as a result of the termination of an employment relationship, regardless of whether the employee engaged in competitive activities, following cessation of the employment relationship."
On May 8, Washington enacted a new law governing noncompete agreements titled Act Relating to Restraints, Including Noncompetition Covenants, on Persons Engaging in Lawful Professions, Trades or Businesses. Under this new law, effective Jan. 1, 2020, noncompete agreements are not enforceable against employees making below $100,000 annually or independent contractors earning below $250,000 annually. These monetary thresholds will be adjusted annually to track inflation. Further:
- Noncompete agreements exceeding 18 months will be presumed unenforceable under the new Washington law, unless the employer can prove by clear and convincing evidence that a longer duration is necessary to protect the employer’s good will;
- Noncompete agreements are unenforceable if the employee is terminated through a layoff, unless enforcement of the noncompete includes compensation equivalent to the employee’s base salary at the time of termination to cover the time in which the employee will be barred from working under the terms of the noncompete arrangement; and
- An employer must disclose the terms of the noncompete agreement in writing to a prospective employee who will be subject to it "no later than the time of the acceptance of the offer of employment."
This law does not impact client or employee nonsolicitation provisions, nor does it affect agreements governing the protection of trade secrets. Employers who violate Washington’s new law will owe the greater of a $5,000 penalty or an employee’s actual damages, plus any and all attorney fees and costs incurred by the employee.
In January, Sen. Marco Rubio, R-Fla., introduced the federal Freedom to Compete Act, a proposed law which seeks to bar noncompete agreements for low-wage workers. This proposed legislation would amend the Fair Labor Standards Act to prevent employers from using or enforcing noncompetes against most federally nonexempt employees.
The Freedom to Compete Act would prohibit noncompete agreements between an employer and employee who does not meet the overtime exemptions for bona fide executive, administrative, professional or outside sales employees. The law would also broadly preclude employers from enforcing, threatening to enforce or renewing any noncompete agreements with employees who do not meet the above exemptions.
Under the proposed legislative framework, the new law would be enforced by the US Department of Labor. The Freedom to Compete Act is currently pending before the Senate Committee on Small Business and Entrepreneurship.
Drafting and enforcing noncompete agreements is a daunting task in light of these new requirements, especially when taken together with the patchwork of other state-imposed restrictions on noncompetes outside of these recent changes. Indeed, in adopting these new requirements, the above states follow a trend of implementing disparate noncompete requirements, requiring employers to closely evaluate the laws in the states where they have employees.
For instance, in 2018 Massachusetts followed New Jersey and New York City in similarly banning noncompetes for FLSA nonexempt workers. Massachusetts’ 2018 law had several additional procedural requirements governing noncompete enforceability. Even earlier, in 2017, Illinois passed the Freedom to Work Act, which bans noncompetes for low-wage employees, defined as employees earning the greater of the federal minimum wage ($7.25), the state minimum wage ($8.25), or $13 per hour.
Further complicating matters, each state has its own distinct body of case law interpreting noncompete agreements and the related state-specific restrictions governing them. Employers (especially those with multistate operations) should audit their noncompete agreement procedures to ensure they comply with state-specific legal requirements, with a particular eye toward ensuring compliance with the new laws discussed above.
Article first published in Law360.com on 20 December 2019.
1 "Non-Compete Agreement" under all statutes discussed below relates to agreements barring employees from securing alternative employment with a competitor or within an industry for a specified period of time. None of these laws appear to impact employee or customer non-solicitation agreements or agreements protecting an employer’s trade secrets.