Non-Competes: Becoming Increasingly Difficult to Implement and Enforce
As 2024 was the year that Federal Government agencies (specifically the FTC) continued ruling against non-compete cases, they simultaneously created even more complex webs of legal compliance challenges for employers who rely on non-competes. It was not long ago that companies were essentially free to enter into a variety of restrictive covenant agreements with employees to protect business assets. However, while there have been nearly 10 states ruling against non-competes, the federal government has now jumped into “the game”. Employers now need to have their fingers on the pulse of law changes in the various Federal Agencies in which they operate before deciding to implement new restrictive covenant agreements or consider enforcing an existing one.
It is useful to understand the types of restrictive covenants that employers frequently use. Although most people use the term non-compete to cover all forms of restrictive covenants, the term “restrictive covenant” refers to several types of agreements employers use to limit an employee’s actions both during and after the employment relationship. Types of restrictive covenants include non-compete, non-solicitation, and confidentiality agreements. Non-compete agreements seek to limit a departing employee from competing with the company in a particular geographic area for a defined period. Non-solicitation agreements seek to limit a departing employee from poaching either current company employees or clients/customers. Confidentiality provisions define information as proprietary and limit the departing employee’s ability to divulge or use company information after the employment relationship ends. Non-compete agreements are considered to be the most prohibitive on the rights of employees and so are, correspondingly, the most regulated by state legislatures.
California and North Dakota have outright prohibited non-competes company usage, but now in 2024 the Feds have ruled against non-competes, starting with the FTC – with other Federal Agencies to follow.
Other states have created different types of limits on restrictive covenants instead of passing complete bans. For example, Idaho law requires that non-compete agreements only restrict key employees; meaning employees who are among the highest paid 5% of the employer’s business. South Dakota’s law states that non-competes cannot exceed two years from the date employment ends. In Utah, non-compete agreements entered after May 10, 2016, must limit the duration of non-competes to no more than one year after termination of employment.
Still other states have decided to impose restrictions on non-competes based on the amount of wages an employee earns. Illinois law prohibits employers from enforcing non-compete agreements against employees earning less than $13.00 per hour. Maine, New Hampshire, and Rhode Island have all recently passed legislation that bars employers from entering into non-competes with lower wage workers; although, the definition of what is a lower wage worker depends on the state. Maine’s new law considers anyone earning at or below 400% of the federal poverty level ($48,560) to be a lower wage worker. On the other hand, New Hampshire’s law proscribes non-competes for employees who make less than $24,280.
With the varied nature of the laws throughout the country, but now especially with the Federal Government trying to set law across all 50 states, knowing the Federal “focus” – specifical on: non-competes”, versus “non-solicitations of clients and employees, as well as confidential information (most importantly “trade secrets” highly valuable to the Company.
Employers need to evaluate whether it is either legal or wise to enter into various forms of restrictive covenants with your employees. Often, a business can protect their most important assets: their employees, clients/customers, and proprietary information while not having to jump into the very difficult and expensive state and federal laws against non-competes.
The non-competes more enforceable cousins: non-solicitation, confidentiality clauses and trade secrets can protect one’s company, and so far with the Fed’s approval and most state’s legal approval. If your company needs help parsing through these laws or would like assistance devising a legally compliant and effective restrictive covenants policy, contact the attorneys at myHRcounsel today.
Just a reminder, while many feel non-competes are strongest protection, with the Feds and states now ruling against them, our opinion is to take the path of least resistance, and draft agreements we know the federal and state government’s feel are the level of protection a Company should have, while stopping an employee from “working” is too much of a stretch, and having a “Non-compete” provision in an agreement often leads to the Courts ruling against a company, many times ruling against the company on the entire Restrictive Covenant Agreement as it looks down upon a Company that drafts an Agreement too board in hopes that it can win against an employee by having a long list of covenants against employees in hopes one “will stick”.
Instead, the Feds and State governments will often uphold a well written, specific agreement that had just those investments the Company has made in its employees and has the right and should have the expectation to protect those investments, versus draft and agreement with its power to stop an employee from working!