Maine Limits Use of Noncompetes and Prohibits Employer No-Poaching Pacts
Maine has joined the trend of other New England states, including Massachusetts, New Hampshire, and Rhode Island, in limiting the use of employee noncompete agreements. On June 28, 2019, Maine Governor Janet Mills signed into law L.D. 733, “An Act to Promote Keeping Workers in Maine.” This new law significantly limits employers’ use of noncompete agreements, and it prohibits the use of mutual no-poaching agreements among employers seeking to keep their employees from jumping ship. The Act goes into effect September 18, 2019.
A noncompete agreement is defined in the statute as a contract that “prohibits an employee or prospective employee from working in the same or similar profession or in a specified geographic area for a defined period of time following termination of employment.” L.D. 733 restates the common law notion that noncompete agreements are “contrary to public policy,” and can be used only to protect legitimate business interests of the employer, such as trade secrets, confidential information and goodwill.
New Restrictions in Noncompete Agreements
Limitation on Use of Noncompetes for Low Wage Earners
Under the new law, employers cannot require an employee to sign noncompete agreements unless the employee makes in excess of 400% of the federal poverty level. In practical terms, this means that an employee cannot be subject to a noncompete unless they are currently earning at least $48,560 per year. In 2020, the minimum income requirement will be $49,960.
Delayed Noncompete Effective Date
Under the new law, except for certain physician agreements, the terms of a noncompete agreement cannot take effect until one year after the employee’s start date or six months from the date the agreement was signed, whichever is later. This means that employees who accept a job and leave within their first year are not going to be bound by the noncompete, even if they have developed relationships with key company customers or come into possession of trade secrets or confidential information that could be used to compete against their employer. In order to protect customer relationships and confidential information in that first year of employment, employers will have to rely upon alternative restrictive covenants, such as customer non-solicitation, nondisclosure or confidentiality agreements.
If a prospective employee is required to sign a noncompete agreement, the employer must disclose that requirement in writing prior to making the job offer. If an employer requires a current or prospective employee to sign a noncompete agreement, it must provide a copy of the agreement at least three business days before the required signing deadline.
Employers who require employees to sign noncompete agreements that do not meet the statutory requirements are subject to a fine of not less than $5,000.
Restrictive Employment Agreements
“Restrictive Employment Agreements” are defined by the statute as agreements between two or more employers, including through franchise agreements or contractor/subcontractor agreements that “prohibit or restrict one employer from soliciting or hiring another employer’s current or former employees.” Restrictive employment agreements, often called no-poaching agreements, are categorically prohibited under the statute.
Consultants and staffing agencies routinely impose restrictions or financial penalties on customers who seek to direct hire talent that agencies have placed within the customer organizations. These restrictions are necessary to protect a consultant or staffing agency’s significant investment in recruiting the talent. It is unclear whether such restrictions or penalties will be deemed lawful under the new law.
As with unlawful noncompete agreements, companies that enter into unlawful restrictive employment agreements are subject to a fine of not less than $5,000.
What Should Employers Do to Prepare for this Change?
Maine’s statute will apply to noncompetes that are signed or renewed after September 18, 2019. In advance of the change, employers should review their standard noncompete agreements and onboarding procedures to ensure that agreements entered into after the effective date will meet the requirements of the statute and apply only to those against whom they can be enforced.
Talent acquisition teams should create procedures to ensure that appropriate disclosures are made in a timely fashion. Standard offer letter language may need to be revised to include the required notice.
Keep in mind that there may be noncompete agreements embedded in stock option or grant plans, severance agreements and cash bonus plans. Those agreements should also be reviewed prior to the statute’s effective date.
Employers who have understandings or agreements with other companies not to hire each other’s employees will need to reexamine those arrangements to ensure they do not run afoul of the statute.