Companies often want to limit their workers’ ability to work for competitors by entering into non-competition agreements. How to do this effectively- while staying within a stringent legal landscape- can be tricky, especially with the changes the Biden administration is implementing.
What is a Non-Competition Agreement?
A non-competition agreement, or non-compete, as it is most often referred to, is generally written as an employment contract in which the terms of the document restrict the individual’s ability to work in a particular industry, geographical area, and/or for a specific timeframe.
Why is the Spotlight on Non-Competes Now?
On July 9, 2021, President Biden issued an Executive Order directing the Federal Trade Commission to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit workers’ mobility.” Therefore, given the new focus on non-competes, there is no better time to look at your state’s non-compete guidelines and be aware of pending federal legislation.
Anticipated Legislative Updates for Non-Competition Agreements
Effective: October 1, 2021
Summary: The law prohibits non-competition agreements for employees who are only paid by the hour, not including any tips or gratuities. In Nevada, a non-compete is void and unenforceable unless it: (1) is supported by consideration, which is something of value, like money; (2) doesn’t impose restraints on the former employee that are greater than necessary to protect the employer; (3) doesn’t impose an undue hardship on the employee; and (4) only imposes restrictions on the former employee that are reasonable to the consideration the employer is giving them.
Effective: January 1, 2022
Summary:Oregon’s Governor amended the state’s non-competition agreement law by clarifying that non-competition agreements are void and unenforceable unless all the following are met:
(1) The employer has a protectable interest, which is when the employee:
– Has access to trade secrets;
– Has access to competitively sensitive confidential business or professional information that isn’t a trade secret, including product development plans, product launch plans, marketing strategy or sales plans; or
– Is employed as an on-air talent by a broadcasting employer.
(2) The employer gives a signed, written copy of the non-competition agreement to the terminated employee within 30 days of when they were terminated;
(3) The employee’s gross salary and commissions must exceed $100,533, calculated on an annual basis, at the time of the employee’s termination from employment. Per the Act, this amount will be adjusted annually for inflation; and
(4) The agreement may not exceed 12 months.
If an employer would like to enforce a non-competition agreement where the employee does not meet the salary requirements, the employer must agree in writing to pay the employee for the duration of the agreement, whichever is greater: (1) pay that equals at least 50 percent of the employee’s annual gross base salary and commissions at termination; or (2) $50,266.50 (50 percent of $100,533, annually adjusted).
The amendments to the Act did not change the previously stated notice requirements, which include the employer needing to: (1) inform the employee “in a written employment offer … at least two weeks before the first day of employment that a non-competition agreement is required as a condition of employment”; and (2) provide the employee with “a signed, written copy of the terms of the non-competition agreement” within 30 days after the date of their discharge.
Effective: January 1, 2022
Summary: On August 13, 2021, Illinois’ Governor signed a bill amending the Illinois Freedom to Work Act. The amendments will apply to all agreements entered on or after January 1, 2022. The changes prohibit non-competition agreements with employees earning $75,000 or less, and non-solicitation covenants with employees earning $45,000 or less. The annualized earning thresholds increase periodically, beginning in 2027.
Non-competition and non-solicitation agreements will be illegal and void unless they meet each of the following requirements: (1) The employee receives adequate consideration; (2) The covenant is ancillary to a valid employment relationship; (3) The covenant is no greater than is required for the protection of a legitimate business interest of the employer; (4) The covenant does not impose an undue hardship on the employee; and (5) The covenant is not injurious to the public.
Before entering non-competition or non-solicitation agreements with employees, employers must: (1) Provide at least 14 calendar days to review the restrictions, although employees can elect to sign them before that period; and (2) Inform employees in writing that they can consult with an attorney before entering the agreement. The new law also creates new penalties by allowing mandatory attorneys’ fees rights for an employee who prevails against an employer, and the law authorizes the Illinois Attorney General to investigate any instances of a “pattern and practice” prohibited by the Bill.
The Illinois Attorney General may impose a civil penalty of $5,000 per violation or $10,000 for each repeat violation within a 5-year period.
4. District of Columbia
Effective: April 1, 2022
Summary: The D.C. Ban on Noncompete Agreements Amendment Act of 2020 prohibits employers and prospective employers from (1) requiring or requesting that an employee sign an agreement with a non-compete provision, (2) having a workplace policy that prohibits an employee from being employed by another, performing work or providing paid services for another, or operating their own business, (3) retaliating against an employee because they refuse to agree to a non-compete provision, fail to comply with a non-compete provision or policy, or ask or complain about a non-compete provision or policy that they reasonably believe to be illegal to an employer, including their employer, a coworker, lawyer, or governmental entity.
The Act makes it mandatory for employers to provide employees the following written notice: “No employer operating in the District of Columbia may request or require any employee working in the District of Columbia to agree to a non-compete policy or agreement, under the Ban on Noncompete Agreements Amendment Act of 2020.” This notice must be provided to employees no later than (1) Ninety calendar days after the Act takes effect, (2) Seven calendar days after hire, and (3) Fourteen calendar days after the employer receives a written request for it.
5. Federal Changes: The Workforce Mobility Act of 2021
The Workforce Mobility Act of 2021 (WMA) has been introduced in both the House of Representatives and Senate with bipartisan support. If enacted, it would:
(1) Largely limit the use of non-competes to situations where there’s a sale of a business or dissolution of a partnership.
(2) Authorize the U.S. Department of Labor to take steps to educate the general public about the limitations surrounding the use of non-compete clauses.
(3) Give workers a private right of action to sue for violations of the WMA.
This is not the first attempt by Congress to limit the use of non-compete clauses. Therefore, it is crucial to keep an eye on this changing legislation and see how it is received by the ever-changing workforce in America if passed by Congress.