Laws regulating restrictive covenants like non-competition and non-solicitation agreements are changing quickly and it can be difficult to stay current. Because laws vary by state, employee location makes a difference in how to draft these agreements. Generally, employers need to comply with the employment laws of the state where the employee works. Changes in the remote work landscape can make drafting enforceable restrictive covenants more complicated than ever before. Let’s take a look at some notable changes in restrictive covenants in various jurisdictions across the country.
Non-Compete Agreement (NCA): A contract where an employee agrees to not compete with a company for a certain period of time after employment.
Non-Solicitation Agreement (NSA): A contract where an employee agrees not to solicit the company’s clients, employees, or other individuals with whom the employee worked.
Examples of State Limitations on Non-Compete Agreements in 2022
- Colorado: Employee non-compete agreements are permitted only if the employee makes at least $101,250 annually and only if the non-compete protects company trade secrets. Employers must also meet strict notice requirements. Lower wage thresholds apply to customer non-solicitation agreements.
- Illinois: Employee non-compete agreements are permitted only if the employee makes more than $75,000 annually. Employers must also meet strict notice requirements. Lower wage thresholds apply to non-solicitation agreements.
- Maine: Non-compete agreements cannot be enforced against an employee who makes less than 400% of the federal poverty level. Employers must also meet strict notice requirements.
- Maryland: Non-compete agreements cannot be enforced against an employee who makes less than $15/hour.
- Massachusetts: Non-compete agreements are not permitted for non-exempt employees under the Fair Labor Standards Act. Employers must also meet strict notice requirements.
- Nevada: Non-compete agreements are not enforceable against hourly employees.
- New Hampshire: Non-compete agreements cannot be enforced against an employee who earns an hourly rate less than or equal to 200% of the federal poverty level. Employers must also meet strict notice requirements.
- Oregon: Non-compete agreements are enforceable only for employees whose annual compensation exceeds $100,533. Employers must also meet strict notice requirements.
- Rhode Island: Employees must earn more than 250% of the federal poverty level and be exempt under the Fair Labor Standards Act for a non-compete agreement to be enforceable.
- Virginia: Non-competes are not enforceable against low-wage employees. “Low-wage employee” means an employee whose average weekly earnings are less than the average weekly wage of the Commonwealth, as determined by the Virginia Employment Commission–about $1,290 per week in 2022.
- Washington: Non-compete agreements are only enforceable against employees whose annual earnings exceed $107,301.04. Employers must also meet strict notice requirements.
- Washington, D.C.: Non-compete agreements are void unless an employee earns at least $150,000/year (or $250,000 for medical specialists). Employers must also comply with strict notice requirements.
Jurisdictions Banning Non-Compete Agreements
- California: Neither non-compete nor non-solicitation agreements are enforceable against employees.
- Oklahoma: Oklahoma has a complete ban against employee non-compete agreements. Non-solicitation agreements are permitted to the extent the prohibition is from soliciting the company’s customers and employees.
- North Dakota: Neither non-compete nor non-solicitation agreements are enforceable against employees.
2023 Wage Threshold Increases:
- Colorado’s wage threshold for non-competes will likely increase from $101,250 to $112,500 in 2023. The wage thresholds for customer non-solicitation agreements will also increase.
- Maine and Rhode Island tie their wage thresholds to the federal poverty level, which is likely to increase in 2023, and will be released in January of 2023.
- Oregon’s threshold is tied to the Consumer Price Index for All Urban Consumers, West Region (All Items), as determined by the U.S. Department of Labor’s Bureau of Labor Statistics, which will be released in January of 2023.
- Virginia’s wage threshold is determined by the average weekly wage in the state. The state has not released that number for 2023.
- Washington’s wage threshold for employee non-competes will increase to $116,593.18 in 2023.
Note that in 2023, Illinois, Maryland, Massachusetts, Nevada, New Hampshire, and Washington D.C. do not have wage threshold increases planned.
We are keeping a close eye on the Restoring Workers’ Rights Act of 2022 which would ban non-compete agreements with non-exempt workers under the Fair Labor Standards Act. If passed, the ban would apply both retroactively and prospectively. The bill has been referred to the House Committee on Education and Labor. We will continue to monitor any updates on this proposed federal non-compete ban for non-exempt workers.
We are also monitoring movement the Federal Trade Commission (FTC) may take in response to President Biden’s Executive Order on Promoting Competition in the American Economy. In this Order, the President called upon the FTC “to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” We will continue to monitor any updates the FTC may take in response to the President’s Order.
In current practice, some businesses may use standard-form non-compete and non-solicitation agreements as a matter of course or as a tactic to discourage employee migration and prohibit them from competing. Updates to existing restrictions and implementation of outright bans are making that practice dubious. Businesses who misuse non-compete or non-solicit agreements may incur hefty fines and even jail time in the most strict states. Now is a great time to reexamine your non-compete and non-solicitation agreements to ensure compliance and best practices.
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