New England States Lead The Way In Noncompete Reform
Noncompete reform is on the rise. Last year, Massachusetts enacted comprehensive legislation establishing new requirements for employee noncompetition agreements. More recently, three other New England states - Maine, New Hampshire, and Rhode Island - enacted similar legislation affecting noncompetition agreements.
Employers that operate in these states should review the new statutes carefully and consider how their current practices regarding noncompetition agreements may be affected.
In general, noncompetition agreements - commonly referred to as "noncompetes" - restrict employees from working in a capacity competitive with their employer for a defined period of time after their employment ends. A noncompete may be limited to a specific geographic area, or it may extend to wherever the employer does business, depending on the nature of the employer's industry and the employee's job.
In most states, the validity of noncompetition agreements has been determined under judge-made common-law standards. Typically, for such an agreement to be enforceable, the employer must show that the noncompete is needed to protect some important business interest, such as trade secrets or customer goodwill.
Some states, however - including, most notably, California - prohibit virtually all employee noncompetition agreements. And an increasing number of states - now including four of the six New England states - have enacted statutes that significantly limit the circumstances under which noncompetes may be enforced.
In 2018, after several failed attempts, Massachusetts enacted legislation dramatically changing the legal landscape surrounding noncompetition agreements.
The new statute applies only to noncompetition agreements entered into after October 1, 2018. It does not apply to nonsolicitation agreements, nondisclosure or confidentiality agreements, or noncompetes entered into in connection with the sale of a business.
The Massachusetts statute expressly prohibits the enforcement of noncompetition agreements against non-exempt employees, student interns, employees under the age of 18, and employees laid off or terminated without cause. It also limits the duration of noncompetition agreements to twelve (12) months and requires that reasonable geographic restrictions be included.
Under the new law, a noncompetition agreement must be in writing, signed by both the employer and the employee. The agreement also must state that the employee may consult an attorney.
With respect to new hires, the employer must provide the noncompete to the prospective employee at or before the time a formal job offer is made, or at least 10 business days before the commencement of employment, whichever is earlier. For current employees, the employer must provide at least 10 business days' notice for the agreement to be effective.
The Massachusetts law also provides that a noncompete must be supported either by "garden leave" pay - in the form of continued payment of at least 50% of the employee's highest annualized salary for the duration of the post-employment restricted period - or by some "other mutually-agreed upon consideration." In either case, the consideration to be provided must be set forth in the noncompetition agreement.
In June 2019, Maine's governor signed into law a noncompetition agreement reform statute. The new law took effect on September 18, 2019 and applies to noncompetes signed or renewed on or after that date.
Most notably, the Maine statute offers new protections to low wage-earners by prohibiting noncompetition agreements with employees earning at or below 400 percent of the federal poverty level. In 2019 dollars, this translates into $49,960 annually.
An employer must satisfy strict notice requirements with regard to employees who satisfy the requisite salary thresholds. For a new hire, the employer must disclose the requirement of a noncompete prior to making an employment offer. An employer must also provide a current or prospective employee with a copy of any noncompetition agreement at least three business days before the individual will be required to sign the agreement.
Even after an employee signs a valid noncompete, the agreement does not immediately become enforceable. Under the Maine statute, a noncompetition agreement does not take effect until (i) the employee has been employed for one year, or (ii) at least six months have passed since the employee's execution of the agreement, whichever is later.
The new law does not preclude an employer from protecting its legitimate business interests through other means, including a nonsolicitation or confidentiality agreement.
New Hampshire's new legislation on noncompetition agreements took effect on September 8, 2019. The legislation amended the state's existing noncompete statute, which mandated that a prospective employee be notified in advance of any requirement that he or she sign a noncompetition agreement.
Like the Maine law, New Hampshire's amended statute specifically prohibits noncompetition agreements with low-wage earners - defined as employees paid at an hourly rate less than or equal to 200% of the federal minimum wage. At the current federal minimum hourly rate of $7.25, this means that employers cannot enter into noncompete agreements with employees who earn less than $14.50 per hour (equivalent to $30,160 annually).
As with its previous version, the New Hampshire law requires an employer to notify a prospective employee either prior to or in conjunction with an offer of employment that the individual will be required to sign a noncompetition agreement.
The Rhode Island noncompete reform statute goes into effect on January 15, 2020.
Like the Maine and New Hampshire laws, the Rhode Island statute precludes enforcement of noncompetes against low-wage earners, which the statute defines as employees earning less than 250 percent of the federal poverty level (currently, $31,225 annually). It also prohibits noncompetition agreements with undergraduate and graduate students, or with employees under age 18.
Specifically excluded from the new law are customer and employee nonsolicitation agreements, nondisclosure and confidentiality agreements, noncompetition agreements entered into in connection with the sale of a business, and noncompetition agreements entered into in connection with a separation from employment (i.e., severance agreements).
The new statutes in Maine, New Hampshire, and Rhode Island also raise some important questions that the states' courts may need to resolve.
For instance, the Rhode Island statute simply provides that, as of its effective date (January 15, 2020), noncompetition agreements with low-wage earners, undergraduate and graduate students, and employees under 18 "shall not be enforceable." Based on that cursory language, the statute arguably might encompass not only noncompetes signed after January 15, 2020, but also pre-existing agreements with those categories of employees.
Similarly, while these new statutes were clearly intended to prevent employers from requiring low-wage employees to sign noncompetes, the language of the New Hampshire and Rhode Island laws potentially could be interpreted more broadly - i.e., as also prohibiting enforcement of a noncompete against an individual whose income level falls below the applicable salary threshold at the time the employer seeks to enforce the agreement.
Recommendations For Employers
We recommend that employers in these New England states carefully review the new statutes and, with the assistance of experienced employment counsel, consider how their operations may be affected.
In addition, employers outside New England should stay alert for similar noncompete reform measures in their states.
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Our employment attorneys have extensive experience advising employers across the nation on noncompetition agreements and related issues. We would be happy to assist your organization.