More states are adopting or introducing legislation that will make it more difficult to enforce non-compete clauses for outgoing employees.
Employers should review the new laws in states where they operate to ensure they comply with the requirements, which sometimes include wage restrictions for employment restrictions, experts say.
Last month, Colorado became the latest state to pass a law restricting non-compete and non-recruitment clauses in employment contracts.
Colorado HB 22-317, “Concerning Restrictive Employment Agreements”, which was signed in June and enters into force on August 10, eliminates non-compete clauses for employees who earn less than $ 101,250 per year and provides protection for trade secrets. Some of the laws introduced elsewhere also prohibit non-competition against lower paid workers. Other states that have recently enacted similar laws are Illinois, Nevada and Oregon.
The Colorado Act, which is applicable in the future, also applies to non-recruitment agreements for customers unless they are entered into by someone who earns at least 60% of the threshold for highly compensated workers, or $ 60,750. Employees must also be informed of the law before accepting employment.
Companies that apply non-competition that do not meet statutory requirements are subject to penalties of $ 5,000 per worker.
Separately, a law passed in January that experts say is unique to Colorado criminalizes restrictive unions, which include non-competition, by making it a misdemeanor that carries a $ 750 fine per violation, a possible sentence of 120 days in prison , or both.
Experts say that in addition to the charge of misconduct, Colorado law is “in the middle of the pack” in terms of its severity among states that have enacted similar legislation. More states are expected to address the problem.
There are 39 such bills pending in eight states, says Eric W. Weibust, a partner at Epstein Becker Green PC in Chicago.
Colorado “falls within a trend that has occurred within states to set wage floors for non-competitors,” he said.
While President Biden issued an executive order a year ago ordering the Federal Trade Commission to investigate the issue of non-competitors, there has been little federal action.
Legislative activities in the area of non-competitors are likely to remain focused at the state level for at least the next four to five years, says Jeanne Fugate, a partner with King & Spalding LLP in Los Angeles.
Observers say insurance brokers are among the types of companies most likely to be affected by the laws.
Many brokers have sued former employees who have joined rivals in recent years. For example, last month, a court barred former Willis Towers Watson PLC employees who had moved to Alliant Insurance Services Inc. from working on their previous accounts and asking for deals from Willis customers. Earlier this month, USI Insurance Services LLC filed a motion for speedy detection of non-compete obligations against a former employee who formed his own brokerage firm.
Other industries most affected by the law are healthcare organizations, financial advisers and data-oriented companies.
“It’s always a difficult trade-off, with employers trying to protect their companies, trade secrets and goodwill on the one hand and the employee’s right to work freely wherever they choose,” said Amber Gonzales, a Crowell & Moring litigant in Denver. .
States that update their restrictive federal laws often do not want to eliminate non-competitors but also want to avoid individuals being run by them, says Eric Barton, a partner with Seyfarth Shaw LLP in Atlanta.
Bennett Pine, a shareholder in Anderson Kill in New York, pointed to the salary restrictions, “It’s one thing to restrict a manager who earns $ 500,000. It’s another thing to prevent an archivist who earns $ 35,000 a year from going to a competitor. ”
Employers in Colorado should review the non-compete clauses they introduce after August and examine their current non-competitors and the extent to which they are reviewed annually, says Michael Freimann, a partner with Armstrong Teasdale LLP in Denver.
It will be a challenge for employers to comply with the legislation, which requires “some rather complicated notice requirements”, such as requiring employers to inform potential employees about the rules before accepting an offer, says David C. Roth, a partner with Fisher Phillips LLP in Denver.
Multi-state employers should also put in place tracking mechanisms to make sure they know each state law and what to do in response, he said.
“Employers need to be creative about how to impose restrictions to protect themselves from individuals” in which they have made significant investments, or who have gained access to trade secrets, to protect themselves against such employees leaving, says Maxwell N. Shaffer, a partner with Holland & Knight LLP in Denver. Some non-compete clauses he has reviewed are “lazy and generic,” he said.