Are You in Compliance? Rhode Island and New Hampshire Restrict Noncompetition Agreements
As 2020 approaches, employers in New England may want to review their noncompetition agreements to determine whether they comply with recently enacted laws in Rhode Island and New Hampshire. In 2019, both states passed laws that limit the categories of employees against whom employers may enforce noncompetition agreements.
Beginning on January 15, 2020, the Rhode Island Noncompetition Agreement Act (RINAA) will prohibit employers in Rhode Island from enforcing noncompetition agreements against four categories of employees: (1) employees who are classified as nonexempt under the federal Fair Labor Standards Act, (2) students who work as interns or as other types of short-term employees while enrolled at educational institutions, (3) minors, and (4) “low-wage employees” (i.e., employees whose average annual earnings, exclusive of amounts paid at a premium rate for overtime or work performed on a Sunday or holiday, are not more than 250 percent of the federal poverty level for individuals as established by the U.S. Department of Health and Human Services’ federal poverty guidelines).
As for the types of agreements that the RINAA renders unenforceable against such employees, the statute defines “noncompetition agreements” as agreements “between an employer and an employee, or otherwise arising out of an existing or anticipated employment relationship, under which the employee or expected employee agrees that he or she will not engage in certain specified activities competitive with his or her employer after the employment relationship has ended.” Noncompetition agreements include forfeiture-for-competition agreements, which are agreements “that by [their] terms or through the manner in which [they are] enforced, impos[e] adverse financial consequences on a former employee as a result of the termination of an employment relationship if the employee engages in competitive activities.”
The RINAA, however, makes clear that prohibited noncompetition agreements do not include several common restrictive covenants:
“Covenants not to solicit or hire employees of the employer”
“Covenants not to solicit or transact business with customers, clients, or vendors of the employer”
“Noncompetition agreements made in connection with the sale of a business entity or all or substantially all of the operating assets of a business entity or partnership, or otherwise disposing of the ownership interest of a business entity or partnership, or division or subsidiary of any of the foregoing, when the party restricted by the noncompetition agreement is a significant owner of, or member or partner in, the business entity who will receive significant consideration or benefit from the sale or disposal”
“Noncompetition agreements originating outside of an employment relationship”
“Forfeiture agreements” (which are “agreement[s] 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”)
“Nondisclosure or confidentiality agreements”
“Invention assignment agreements”
“Noncompetition agreements made in connection with the cessation of or separation from employment if the employee is expressly granted seven (7) business days to rescind acceptance”
“Agreements by which an employee agrees to not reapply for employment to the same employer after termination of the employee”
Under the RINAA, if a prohibited noncompetition agreement is part of a larger employment agreement, only the noncompetition agreement will be unenforceable. The remainder of the employment agreement will remain enforceable.
Finally, although the statute is scheduled to take effect on January 15, 2020, it does not indicate whether it will invalidate only those prohibited noncompetition agreements entered into after that date or all prohibited noncompetition agreements, regardless of whether they were executed before or after the effective date.
Since September 8, 2019, noncompete agreements between employers and low-wage employees (namely, those employees who earn “an hourly rate less than or equal to 200 percent of the federal minimum wage”) have been unenforceable in New Hampshire. Under New Hampshire law, a “noncompete agreement” is an agreement between an employer and employee that restricts the employee from working “for another employer for a specified period of time,” working “in a specified geographical area,” or working for “another employer that is similar to such low-wage employee’s work for the employer who is a party to the agreement.” Unlike the RINAA, New Hampshire’s noncompete law does not expressly exclude common restrictive covenants from the definition of “noncompete agreement.”
Similarly, while the RINAA expressly states that the other provisions of an employment agreement that contains an unenforceable covenant not to compete remain enforceable, New Hampshire’s statute contains no such savings language. However, by its terms, the New Hampshire statute extends only to “noncompete agreements” and voids only such agreements, most likely leaving other restrictive covenants and the remaining provisions of employment agreements that contain unenforceable noncompete agreements intact.
Finally, like the RINAA, the New Hampshire statute does not state whether it will apply to all prohibited noncompete agreements or only those that are entered into after the effective date of the statute.
Rhode Island and New Hampshire have joined a growing number of states, including two other New England states, Massachusetts and Maine, in limiting the enforceability of noncompetition agreements. Employers that have relied on covenants not to compete with nonexempt employees, interns, minors, or low-wage workers in Rhode Island and low-wage workers in New Hampshire to safeguard protectable business interests may want to consider alternatives for protecting their interests, such as confidentiality and nonsolicitation agreements.