Update on Restrictive Covenants in Employment

May 31, 2018

Non-competition provisions are common in employment agreements. Employers use these agreements to prevent employees from unfairly taking their skills and knowledge to a competitor, and to protect trade secrets and other confidential information. Employees and some courts dislike non-competition agreements, however, because they can limit future job opportunities and stifle free trade and competition. Moreover, many employers, especially in high-tech industries, oppose the use of these agreements because they make it harder to attract new talent. As a result of this opposition, proposed legislation and court developments may drastically alter the legal landscape for these clauses in the near future.

Currently, courts in Ohio and Michigan will enforce reasonable non-competition agreements. Enforceable agreements must further the employer’s legitimate interests and must not: restrict an employee’s opportunity to work using his or her own knowledge; apply for too long; or apply in an overly broad geographic area.

Proposed legislation currently pending in the Michigan House would limit employers’ ability to obtain non-competition agreements from current employees. If passed, the new law would render agreements with employees earning less than $31,200 unenforceable. The legislation also would prohibit using choice of law provisions to avoid non-enforcement by courts. Violations of the proposed statute would result in a $5,000 fine for each violation. This legislation has been under consideration by the Committee on Commerce and Trade for a year, and there are currently no plans to take action on the bill.

Legislation severely restricting the use of non-competition clauses in Massachusetts is currently in front of the Massachusetts House Committee on Steering, Policy and Scheduling. Among other limitations on non-competition agreements, the proposed legislation would require fair and reasonable consideration beyond continued employment when entered into after the start of employment. In addition, this new law would limit the location and time that non-competition agreements could bind an employee and require notice to prospective employees that entering into the non-competition agreement was a condition of employment. This statute also would forbid enforcement of non-competition agreements with non-exempt employees under the Fair Labor Standards Act. 

California already prohibits courts from enforcing non-competition agreements. This prohibition extends to all employees. The law provides limited exceptions related to the sale of a business. Under California law, employees may sue employers if termination results from an employee refusing to sign such an agreement. Montana, North Dakota, and Oklahoma also disallow non-competition agreements. Other states, while not making non-competition clauses unenforceable, have limited their scope. In Hawaii, Act 158 banned non-competition clauses for technology business employees only. Oregon and Utah have both limited the length of the clauses to a year and eighteen months respectively. 

The Mobility and Opportunity for Vulnerable Employees Act, proposed in the U.S. Senate on June 4, 2015, would ban non-competition agreements for every worker making less than $31,200 (not including overtime) per year. Violations of this proposed federal law would subject an employer to civil fines up to five thousand dollars. This bill remains in a Senate committee.

In most states, non-competition agreements are enforced if employers draft their provisions reasonably. However, the validity of these agreements may rapidly change in the near future. Employers should be aware of these potential sea changes in this area of the law.

 

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