Employee Restrictive Covenants: Becoming Increasingly Difficult to Implement and Enforce

As state legislatures continue their fervor for enacting employment-related laws, they simultaneously create ever more complex webs of legal compliance challenges for employers.  In that vein, one trend that continues to obscure the lines of what is or is not a lawful employment practice is the use restrictive covenant agreements.  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, with California leading the way, employers now need to have their fingers on the pulse of law changes in the various states in which they operate before deciding to implement new restrictive covenant agreements or consider enforcing an existing one.

Before jumping into which states are doing what, 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” actually 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 of time.  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 outright prohibit non-compete and non-solicitation clauses and only allow employers to enforce trade secret protections in limited circumstances.  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 into 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, 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 with more the non-competes more enforceable cousins: non-solicitation and confidentiality clauses.  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.

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