New England takes the lead on noncompete reform
The moves are part of larger nationwide trend to impose restrictions
More than a third of all workers in the United States have been subject to a noncompetition agreement at some point in their careers. Most states, with the notable exception of California, have long enforced noncompetition agreements. However, in recent years, difficulties experienced by employees subject to noncompetition agreements finding new work, and overreach by some employers, have led to increasing calls for noncompete reform.
The New England states have taken a leading role in this area, with four states recently enacting laws affecting noncompetition agreements and a fifth considering a bill on the subject.
Beginning on Sept. 8, New Hampshire employers will not be able to enter into noncompetition agreements with “low-wage employees,” defined as employees who earn an hourly rate less than or equal to 200% of the federal minimum wage. At the current rate of $7.25 per hour, this means that employers cannot enter into noncompetition agreements with employees earning less than $14.50 per hour, which translates to annual wages of $30,160.
This new restriction is in addition to a law already on the books requiring employers to inform prospective employees in advance if they will be required to sign a noncompetition agreement as a condition of employment.
Last year, after numerous failed attempts at noncompete reform, Massachusetts enacted sweeping legislation affecting noncompetition agreements in a number of significant ways.
First, the law prohibits enforcement of noncompetition agreements against non-exempt employees, employees under the age of 18, student interns and employees laid off or terminated “without cause.” Second, the law limits the duration of noncompetition agreements to twelve months, and requires that geographic restrictions be reasonable.
In order to be enforceable, a noncompetition agreement must be in writing and signed by both the employee and employer, and must state that the employee can consult with an attorney. For noncompetition agreements entered into with a new employee, the agreement must be provided by the earlier of the formal offer of employment or 10 business days before the commencement of employment. For existing employees, the agreement must be provided at least 10 business days before it becomes effective, and must be supported by fair and reasonable consideration independent from the continuation of employment.
Perhaps the most noteworthy provision of the Massachusetts law is the first-in-the-nation requirement that employees be provided with “garden leave” pay equal to at least 50% of their highest annualized base salary during the two years preceding termination. In lieu of garden leave, a noncompetition agreement can provide for “other mutually agreed-upon consideration.”
This law applies to any noncompetition agreement entered into beginning Oct. 1, 2018.
Maine’s new law states that noncompetition agreements are “contrary to public policy,” and will only be enforceable to the extent that they are reasonable and are no broader than necessary to protect an employer’s trade secrets, confidential information or goodwill.
The law prohibits noncompetition agreements with employees earning wages at or below 400% of the federal poverty level, which, based on current figures, translates to $49,960 per year.
The law permits noncompetition agreements for higher-wage earners, but with some restrictions.
First, employers must disclose, prior to making an offer of employment, that a prospective employee will be required to sign a noncompetition agreement as a condition of employment. Further, noncompetition agreements will not become effective until one year after the start of employment, or six months from the date the agreement was signed, whichever is later.
The statute goes into effect on Sept. 18 and applies to noncompetition agreements entered into or renewed after that date.
The Rhode Island Noncompetition Agreement Act, which goes into effect in January 2020, prevents employers from enforcing noncompetition agreements against nonexempt employees, student interns, employees under 18 and “low-wage employees,” which the statute defines as employees earning less than 250% of the federal poverty level, which equates to $31,225 per year based on current figures.
The law does not prevent employers from entering into non-solicitation agreements, nondisclosure and confidentiality agreements or agreements preventing disclosure of trade secrets. The law also includes exceptions for noncompetition agreements entered into in connection with the sale of a business or separation from employment.
The very first bill introduced in the current session of the Vermont legislature was a measure to sharply restrict noncompetition agreements. If passed, the bill, which is modeled on California’s statute, would outlaw most noncompetition agreements. The bill seeks to prohibit “agreement[s] not to compete or any other agreement that restrains an individual from engaging in a lawful profession, trade, or business.”
The bill makes exceptions for noncompetition agreements entered into in connection with the sale of a business, dissolution of a partnership, or termination of an interest in an LLC. The bill also exempts agreements preventing the disclosure of trade secrets.
The bill has been referred to the Vermont House Committee on Commerce and Economic Development. But, as of this writing, no further action has been taken.
These recent changes to noncompete law in New England are part of a larger nationwide trend toward more restriction on the use of noncompetition agreements. Employers, especially those with multi-state workforces, should keep a watchful eye on these developments, and confer with employment counsel to ensure compliance with applicable laws.
Adam M. Hamel, a director in McLane Middleton’s Litigation Department and vice chair of the firm’s Employment Law Practice Group, can be reached at 781-904-2710 or firstname.lastname@example.org.