More States Considering Limitations on Non-competes Through Legislation

More States Considering Limitations on Non-competes Through Legislation

By Richard Riece and Allison Angel 

The regulation of restrictive covenants seems to be moving from the courtroom to the statehouse. While some states have enacted laws to codify non-competition laws that favor businesses in its effort to sustain such agreements (e.g., Florida, Georgia, Wisconsin, etc.), activity in recent months indicate a counter-trend: legislation to limit employers’ use of non-compete agreements- an unsurprising result given much of the negative press about non-competes and the White House’s May 2016 report criticizing their overuse. [1]

 
In January 2017, the Massachusetts Legislature introduced a number of bills [2] seeking to limit employers’ use of non-compete agreements in the Commonwealth. Three of these proposed bills, HB 2371, SB 840, and SB 1017, impose a mandatory “garden leave clause” in any non-compete agreement. Such provisions would require employers who choose to enforce post-employment non-compete covenants to pay former employees, on a pro rata basis, either 50 or 100 percent of their earnings during the restricted period. If adopted, Massachusetts will become the first state to legislatively implement a garden leave requirement on employers.

 
In the months following, both the New York City Council [3] and New Jersey [4] Legislature followed suit, introducing their own proposals to limit non-compete agreements. The potential New York City ordinance, Introduction 1663, would prohibit the use of non-compete agreements for low wage employees, defined by New York labor law as clerical and other workers earning less than $900 per week. Int. No. 1663 further prohibits employers from imposing non-competes on potential employees who do not fall under the low wage employee label “unless, at the beginning of the process for hiring such employee, such employer disclosed in writing that they may be subject to such a covenant.” The bill was introduced by the City Council on July 20, 2017 and filed on December 31, 2017. If signed by Mayor Bill de Blasio, the ordinance will take effect 120 days later.

 
New Jersey Senate Bill 3518, introduced in November 2017, similarly aims to curtail use of non-competes by limiting the class of workers subject to such restrictions and establishing a ten point list of criteria that must be met as a threshold for enforceability. Such criteria, enumerated in the text of the bill, requires notice to the employee, a 12-month cap on non-compete periods, an opportunity for the employee to defend against or challenge the validity of restrictive covenants and various other reasonableness requirements. Senate Bill 3518 also includes a “grandfather clause,” which permits any agreements that were in effect on or before the date of enactment to remain valid.

 
On November 27, 2017, Pennsylvania legislators proposed a more drastic measure: banning employee non-competes in their entirety. Pennsylvania House Bill 1938 (HR1938), would prospectively deem non-compete language in employment agreements illegal, unenforceable and void as a matter of law, except for a small set of specific exceptions expressly authorized by statute. A policy declaration set forth within the bill emphasizes legislative intent – lowering unemployment, maximizing wages and benefits for working families, promoting unrestricted trade and increasing businesses’ ability to obtain qualified hires.

 
These goals are reflected in the policies of all states currently pursuing this slow, but steadily growing, trend. Many of the proposed bills seek to foster economic growth, in particular among small businesses that cannot afford to incur the cost of paying a new employee while waiting for the non-compete period to expire. Representative Thomas R. Caltagirone believes the bill will also “give Pennsylvania businesses an advantage over non-Pennsylvania businesses in retaining and recruiting the best and brightest talent to the Commonwealth. [5]”

 
Similar proposals have since been introduced in New Hampshire, Vermont and Washington state. New Hampshire’s SB 423, introduced on January 24, 2018, proposes a limited ban on non-compete agreements between employers and “low-wage employees,” which the bill defines as employees earning less than or equal to $15.00 per hour or the federal minimum wage. The New Hampshire Bill is scheduled for a hearing in February. Comparable protections for low-wage workers are echoed in the New Jersey, Massachusetts and New York City Council bills.

 
Vermont legislators adopted a broader position mirroring that of their Pennsylvania counterparts; Under Vermont House Bill 556, “an agreement not to compete or any other agreement that restrains an individual from engaging in a lawful profession, trade, or business is prohibited.” This language bans all non-compete agreements as void and unenforceable, except in the sale of a business or the dissolution of or dissociation from a partnership or limited liability company. An additional qualification states that nothing in the bill “shall be construed to prohibit an agreement that prohibits the disclosure of trade secrets” under Virginia law. If enacted, HN 556 will take effect on July 1, 2018. A similar bill limiting the use of non-compete agreements was referred to the Washington Senate’s Ways and Means Committee on February 2, 2018.

 
If successful, Pennsylvania and Vermont will join California, North Dakota and Oklahoma as the only states with complete bans on employee non-compete agreements.

 

[1] http://hnrklaw.com/of-interest-to-the-street/non-compete-agreements-analysis-of-the-usage-potential-issues-and-state-responses/

[2] House Bill 2371 (HB 2371), Senate Bill 840 (SB 840), and Senate Bill 1017 (SB 1017)

[3] Introduction 1663

[4] Senate Bill 3518

[5] House Co-Sponsorship Memoranda titled “ Prospective Ban on Restrictive Covenants in Employment Agreements” available online at http://www.legis.state.pa.us//cfdocs/Legis/CSM/showMemoPublic.cfm?chamber=H&SPick=20170&cosponId=23362

 

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