An Update on Enforceability of Non-Compete Provisions in Employment Contracts

May 30, 2019

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, House Bill 4755 would render such agreements with employees earning less than $31,200 unenforceable. The legislation also would prohibit selecting the law of another state in a contract 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 in committee since June 2017, and the House has taken no action on the bill since its introduction.

Massachusetts recently adopted a law restricting the use of non-compete agreements. The law applies to agreements entered into on or after October 1, 2018. Among other changes, no non-compete affected by the law can last longer than twelve months after the end of employment, although that time limit can be extended through an employee’s unlawful conduct. The new law requires additional consideration beyond continued employment if the agreement is made after employment begins. A non-compete provision is presumed necessary if the employer’s legitimate interest in protecting confidential information or goodwill cannot be protected through non-solicitation or confidentiality agreements. The law also provides additional limits on the geographic scope of the agreement. Only non-compete agreements with garden leave provisions, which require the employer to pay at least 50% of the employee’s highest annualized salary over the two years prior to termination of employment for the duration of the restricted time period, are valid. Non-compete agreements cannot be enforced against non-exempt employees under the Fair Labor Standards Act, employees under 18 years old, or employees terminated without cause or laid off.

California 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. Pending legislation would prohibit enforcement of most non-compete agreements in Pennsylvania and Vermont. 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. Also in Hawaii, a bill banning non-compete agreements among low-wage workers is pending in committee. Oregon and Utah have both limited the length of the clauses to a year and eighteen months respectively. Alabama set two years as a presumptively reasonable length of time for non-compete agreements.

Two bills affecting non-compete agreements have been referred to U.S. Senate committees in the past year, but no further action has been taken on either. The Workplace Mobility Act of 2018 would ban all non-compete agreements, while the Freedom to Compete Act would prohibit non-compete agreements between employers and employees classified as non-exempt under the Fair Labor Standards Act . The Workplace Mobility Act has been dormant in committee since April 2018, while the Freedom to Compete Act has been in committee since January 2019. 

In most states, including Ohio and Michigan, 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.

 

Hosted on the FirmWisesm Platform