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The laws regarding the use of non-competes are changing quickly. If you are a California client, then you already know (or should know) that the use of non-competes is illegal under California law. The same applies to non-solicitation covenants, which are really non-competes in disguise. The only exception to the California law is in connection with the sale of a business. A non-compete restricting the seller of a business from competing with the business he or she just sold is enforceable. North Dakota, Oklahoma, and DC also largely prohibit the use of non-competes.
Other states’ laws on non-competes vary widely. Ohio, for example, is fairly permissive. The non-compete will be enforceable as long as it is reasonable in terms of time period and geographic scope. Massachusetts, on the other hand, is much more restrictive. You may be able to enforce a non-compete, but the employer also has to pay the former employee during the restricted period. This is called a “garden leave” clause – the employer is paying the person not to work for competitors, leaving that person free to spend time on other pursuits, like gardening. The employer must pay the former employee at least half of that person’s highest salary during the past 2 years. The restricted period is also capped at 12 months. Massachusetts is the first state to require garden leave clauses.
A number of states (Colorado, Illinois, Maine, Maryland, New Hampshire, Oregon, Rhode Island, Virginia, and Washington) have passed laws prohibiting the use of non-competes with lower-wage workers. Some states have limited the use of non-competes with certain categories of workers, such as healthcare workers. For example, Connecticut prohibits non-competes with homemakers, companions, and home health service workers, and a number of states (such as Delaware) prohibit physician non-competes.
On top of this trend at the state level to restrict the use of non-competes, the federal government is now looking at passing a rule to prohibit the use of non-competes. The rule proposed by the Federal Trade Commission would protect both employees and independent contractors. It would supersede state laws, except for those which provide greater protections to workers. The rule would not apply to non-competes connected to the sale of a business. The federal rulemaking process is a lengthy one, so it may be several months before there are any new developments.
The bottom line is that companies need to be cautious and intentional about using non-competes. Including a standard non-compete in every agreement with employees and contractors may no longer be a valid or safe approach. If the use of a non-compete is permitted, it’s better to tailor the non-compete to the specific relationship, identifying the employer interests to be protected, and defining the geographical and temporal scope narrowly. Given the changing landscape, if you want us to have you review your use of noncompetes, please do not hesitate to contact us.
