State Laws Limiting Noncompetes Vary Significantly

​Because there is no federal law prohibiting or limiting an employer's use of noncompetition agreements and other restrictive covenants in employment contracts, states have "grown impatient" and are starting to pass their own laws, said Kelly Dobbs Bunting, an attorney with Greenberg Traurig in Philadelphia.

"There are legitimate reasons for employers to maintain restrictive covenants, but more states and courts are starting to say that it's not as legitimate as it once was," said Bunting, speaking at the Society for Human Resource Management's Employment Law & Compliance Conference on March 30 in Washington, D.C.

President Joe Biden's July 2021 executive order encourages the Federal Trade Commission "to curtail the unfair use of noncompete clauses and other clauses or agreements that may unfairly limit worker mobility." The action suggests that the Biden administration is focused on regulating restrictive covenants in employment contracts.

As employers await regulatory direction from the federal government, they should note that the enforceability of noncompete agreements is generally evaluated under state laws. And those laws vary significantly, from an outright noncompete ban in California, North Dakota and Oklahoma; to prohibitions on noncompetes with low-wage or nonexempt workers; to a controversial ban in Washington, D.C., on policies that prohibit current employees from simultaneously working for a competitor.

Array of State Laws

Bunting said that most state laws limiting noncompetes were passed fairly recently, and some come with unique provisions. A few examples include:

• Laws in California and Washington that void venue clauses that stipulate another state's law—usually the state in which the business is headquartered—is the governing law of the employment contract. "If you try to contract around California or Washington state law, you will get into trouble," Bunting said.
• State laws that ban noncompete agreements with low-wage workers. The tricky part is how each state defines a low-wage worker. In Washington, it's someone who makes less than $107,000 a year; in Illinois, less than $75,000 a year; whereas in Maine, low-wage workers are defined as anyone making under about $54,000 a year; and in New Hampshire, it's anyone making up to $14.50 an hour.  
• Rhode Island law prohibits noncompetes with nonexempt workers. Massachusetts goes further, not allowing employers to enforce noncompete agreements with any workers who were fired or laid off. Bay State employers also have the option to provide at least 50 percent of workers' highest salary to them during the time they are restricted by a noncompete. "It's a common practice in Europe, but truly unique in the U.S.," Bunting said.
• The law in Illinois includes a 14-day notice requirement, giving workers the opportunity to consider the agreement and the ability to take it to an attorney.
• The noncompetition law in Washington, D.C., is one of the most restrictive in the country, Bunting said. It is scheduled to go into effect Oct. 1 but is currently on hold as the D.C. business community seeks changes to it. "Businesses are trying to make the law a little more reasonable," she said.

Multistate employers must also be concerned about the enforceability of their restrictive covenants across state lines. One critical distinction in how states view noncompete agreements is whether a state court is willing to revise what it considers to be an overbroad covenant.

Bunting explained that in legal parlance, "blue-pencil" states are those where the court may strike out an offending provision in an agreement, making the rest of the policy enforceable, while "red-pencil" states may decide an overbroad provision in a noncompete dooms the validity of the entire agreement.    

Most states are "reformation" states, which may allow the reformation of an overbroad provision in an agreement. "Judges will actually sit there in court and rewrite the contract with the employer and employee right in the courtroom," Bunting said.

Best Practices

Bunting said that the top issue in-house counsel and HR practitioners should remember when crafting noncompete or nonsolicitation agreements is not to overreach.

"Be reasonable in all respects—courts will rule against employers if it looks like you're trying to keep someone from getting a job," she said.

She outlined some basic advice:

• Limit noncompetes to between six months and two years, tops. But be aware that some states have their own limits on the duration of noncompete agreements. Massachusetts, for example, limits the duration to one year.
  
• Limit noncompetes in geographic scope. The smaller the scope, the better: for example, within 50 or 100 miles of the office they worked in.
• Limit noncompetes to certain key customers or competitors, such as the company's biggest clients or the top clients the person worked with.

Bunting said that any policies on trade secrets should be distributed, discussed and signed during employee onboarding.

"Make sure employees understand that the company's trade secrets are protected," she said. "Show that they are real trade secrets by limiting access to proprietary information, and protect access with passwords and restricted sites. The more you can show to a court that you have real proprietary secrets, the more likely that the court will protect that information."

Bunting also recommended sending a letter reminding departing employees about their obligations related to noncompete agreements. Enclosing the agreements with their offboarding package puts them on notice, she said.

A chart showing how each of the states around the country handle noncompetes is available here.