State Law Restrictive Covenants Update
Several states have recently enacted or modified legislation that may significantly restrict an employer’s ability to regulate their former employees’ post-employment activities. Likewise, several other states are considering legislation that would significantly alter the application and enforceability of non-competes. The information below provides a non-exhaustive summary of important current and prospective changes to state non-compete and restrictive covenants laws that employers should further consider with the assistance of counsel.
Recently Enacted State Law on Restrictive Covenants
In July 2021, a Colorado bill concerning misdemeanor reform was signed into law. Embedded in this bill was an amendment to Colorado’s existing non-compete statute categorizing a violation of it as a class 2 misdemeanor. While the current non-compete law is somewhat unclear, it generally prohibits employers from intimidating an employee from maintaining subsequent employment with limited exceptions, such as prohibitions reasonably necessary to protecting an employer’s trade secrets. Though further changes to the law, which are partially aimed at clarifying the law’s current text, are on the horizon, its existing statute remains unchanged and effective through August 2022. Employers must be especially careful regarding how they draft and use non-competes, as violations may include criminal penalties.
Washington, D.C. recently passed the Ban on Non-Compete Act of 2020, one of the more restrictive non-compete laws in the United States. The law bans non-compete agreements with minor exceptions, including those that are necessary to protect the disclosure of the employer’s confidential information and trade secrets. Additionally, employers are required to provide written notice to new and current employees about their rights under this Act. Notably, the D.C. law does not contain a carve out for employees earning more than a certain salary threshold, which has been a hallmark of non-compete reform in other states. Rather, the statute implements a blanket ban on most non-competes. Employers who fail to comply with this new law are subject to fines of up to $2,500 per violation. Although the Act technically became effective in March 2021, its implementation was delayed multiple times, and is currently slated to go live on October 1, 2022.
As of January 2022, the Illinois Freedom to Work Act limits the use of non-competes used in the state. Specifically, employers cannot enter non-compete agreements with employees whose annual salary is less than $75,000 -- a figure that will increase and adjust in statutory increments according to the law. A non-compete that is intended to protect an employer’s legitimate business interest still may be enforced if it is not more restrictive than necessary to protect such interests, such as trade secrets and goodwill. Employers should carefully note the timing and notice requirements for non-compete agreements, which include a review period for employees of not less than 14 days and an explicit notice that the employee may consult with an attorney before signing. Failure to follow these and other requirements may render non-compete agreements void, and result in penalties including attorney’s fees.
As a result of the pandemic, employers are restricted from entering into agreements with employees whose separation from employment was a result of COVID-19.
In 2021, the Nevada legislature modified the state’s existing non-compete law. The updates add limits on an employer’s legal recourse against former employees. Now, an employer cannot bring an action to restrict a former employee from providing services to a former customer under specific circumstances. Additionally, non-compete agreements with hourly employees are unenforceable. The amended law also requires a court to award reasonable attorney’s fees and costs to the employee if the non-compete is deemed unlawful.
On January 1, 2022, the Oregon legislature modified existing non-compete law, adding several clauses providing new guidance on non-compete agreements used in the state. For example, valid agreements can no longer extend more than 12 months after employment ends. In addition, only employees earning an annual salary of $100,533 (adjusted annually for inflation), whose work pertained predominately to intellectual or creative tasks, or trade secrets, may be subject to non-competes. An otherwise lawful non-compete agreement may still be void if it is not provided to an employee in writing prior to their first day of work.
Washington State House Bill 1795 became effective June 9, 2022, and effectively bans nondisparagement and nondisclosure provisions except in limited circumstances. Washington currently limits non-compete restrictions to only employees and independent contractors who earn more than the statutory threshold. However, the law permits employers to implement such restrictions to protect proprietary and confidential information and trade secrets, so long as such information does not otherwise involve illegal activity. Therefore, Washington employers should carefully draft such provisions in their restrictive covenants agreements to ensure both ongoing enforceability and compliance with the new law.
Proposed or Pending Legislation Pertaining to Non-compete Agreements as of June 2022
On June 8, 2022, HB 22-1317 was signed into law. The revised law will likely attempt to clarify the misdemeanor provision, stating that it now only applies to an employer’s use of threats, force, or intimidation to prevent a worker from engaging in any lawful occupation post-termination. However, violations of other sections of the statute can expose employers to civil penalties, including up to $5,000 in fines per violation. Additionally, non-competes are now presumptively void unless entered into with a highly compensated worker (as determined by the Colorado Department of Labor), are to protect an employer’s trade secrets, and are not more restrictive than necessary to protect such interests. Otherwise permissible non-competes are void unless they comply with the statute’s notice requirements. Specifically, notice must be provided with the non-compete and identify its potential to restrict workers’ options for subsequent employment. This bill is slated to become effective in August 2022.
On May 2, 2022 the New Jersey Legislatures introduced Bill A3715, which would enact drastic and sweeping non-compete reform. The bill proposes several notice requirements and limits the enforceability of the agreement to 12 months. Most notably, the proposed law contains a garden leave-type provision that requires employers to pay 100 percent of the pay an employee otherwise would have earned had the employee been able to work during the non-compete restricted period. These significant proposed reforms are expected to engender much debate, and New Jersey employers would be well-served to closely monitor the progress of this bill.
In March 2022, New York State legislature introduced Bill Number A9591A addressing non-compete agreements. If enacted, this law will prohibit an employer from seeking, requiring, demanding, or accepting a non-compete from any covered employee. A covered employee means any employee, regardless of whether they are employed under contract, including independent contractors. Whether the bill will proceed through the legislature, and in what final form, remains to be seen.