Posted in Contracts
Noncompete Agreements and Nonsolicitation Agreements: What You Need To Know
What You Need to Know About Non-Competes and Non-Solicits as a Business Owner TodayIn this article, we will review (a) what is a noncompete? (b) what is a nonsolicit? and (c) how have some states changed their views of these agreements over time. With today’s employment landscape, many companies often have business identities, offices, and employees scattered throughout the country as well as globally. If you are one of these employers, there are several recent changes to employment laws as they apply to non-competes and non-solicits that you should be aware of in Illinois, Oregon, Nevada, and Washington, D.C. Even if you don’t conduct business or have employees in those states, it’s important to keep in mind that a national trend is brewing against these covenants that may affect you in the future.
How Non-Competes and Non-Solicits Are Treated Varies From State to StateNon-compete and non-solicit covenants are frequently found in employment agreements or separation agreements. They impose limits to what the former employee can do in the way of performing other work that competes with their employer’s business in terms of both geographic limitations and the types of work that can be done during the limitation time period. Most of these begin at employment and then last for a specific period of time after that employment ends. In the past, enforceability was subject to state contract laws, and courts had been flexible and discretionary in their enforcement. But now, more states are limiting non- competes and taking a more clearly defined stance to ensure little wiggle room for interpretation.
Many States Have Been Making Changes In Their Noncompete and Nonsolicit LawsAs mentioned above, the political winds are a-changin’ and with them are changing the laws governing noncompetes and nonsolicits. Below, we will discuss some of those legal changes. Please note (and I’ll remind you again below) that this is not legal advice, but just examining the statutes in these jurisdictions to provide some examples and hints of how noncompetes in other jurisdictions may change. At the end of this article, I’ll give some insight into how Texas’s noncompete and nonsolicit laws work.
Example 1: Changes in the Illinois Freedom to Work ActIllinois is one of the states that has made some significant changes to the way it approaches noncompetes and nonsolicits; we will briefly discuss these items. PLEASE NOTE THAT I AM NOT ADMITTED IN ILLINOIS, AND AM DISCUSSING THESE STATUTORY CHANGES FROM A “POPLITICAL LANDSCAPE” PERSPECTIVE ONLY. THIS IS NOT AN OPINION ON OR ADVICE REGARDING ILLINOIS LAW. As of January 1, 2022, the Illinois Freedom to Work Act was amended as follows:
- Definition of non-compete covenant – As of January 1, 2022, the IFWA amendment defines a non-compete covenant as one imposing financial consequences of any employee to perform work 1) for another employer for a specific time period, 2) for another employer in a specific geographical area, or 3) for another employer that is similar to work they are doing for the employer as part of the agreement.
- Definition of a not-to-solicit covenant – As of January 1, 2022, the IFWA amendment further defines a not-to-solicit covenant as one imposing financial consequences of any employee who 1) solicits others of that employer’s employees for employment elsewhere or 2) solicits services or products that interfere with the employer’s current or prospective relationships with employees, clients, vendors, suppliers, or other business relationships. It does not specifically address independent contractors, but loosely defines an employee as “any individual permitted to work by an employer in an occupation.”
- Non-compete salary requirements – Employers are prohibited from entering into non-compete agreements with employees earning $75,000 or less annually. This threshold will increase every five years by $5,000 until it reaches $90,000 in 2037.
- Non-solicit salary requirements – Employers are prohibited to enter into not-to-solicit covenants with any employees who make $45,000 or less annually. This threshold will increase every five years by $2,500 until it reaches $52,500 in 2037.
- Employer’s obligation – Any employer requesting a non-compete or not-to-solicit must 1) advise the employee in writing to consult with legal counsel before executing it, and 2) provide the employee with a copy at least two weeks prior to the start of employment. Any failure of these will render the covenants unenforceable.
- Limitations regarding terminated employees – Employers are prohibited from entering into any non-compete or not-to-solicit agreements with any employee who has been terminated, furloughed, or laid off as a result of circumstances related to COVID-19 unless compensation equal to the employee’s base salary is offered during that enforcement period.
- Limitations regarding collective bargaining agreement – Any non-compete entered into with employees covered under specific collective bargaining agreements or those broadly defined as the construction industry are unlawful and void.
- The employee is adequately compensated
- It is ancillary to the employment relationship only as far as the protection of the business or the employer
- Does not impose undue hardship on the employee and is not injurious to the public
Example 2: Modifications to Oregon’s Non-Compete LawsThe second state that has made some good changes to its noncompete laws is Oregon. AGAIN, PLEASE NOTE THAT I AM NOT ADMITTED IN OREGON, AND AM DISCUSSING THESE STATUTORY CHANGES FROM A “POLITICAL LANDSCAPE” PERSPECTIVE ONLY. THIS IS NOT AN OPINION ON OR ADVICE REGARDING OREGON LAW. Amendments made to Oregon’s non-compete statute ORS 653.295 also went into effect on January 1, 2022 and further clarify and restrict non-compete covenants in the state of Oregon.
- 12-month non-compete limits – While the former law called for the prohibition of non-compete covenants exceeding 18 months after termination, the new amendment changes that time limit to 12 months.
- Non-compete salary requirements – As of January 1, 2022, a non-compete covenant is void when the employee is not exempt under state wage and hour laws but does not earn over $100,533 per year, adjusted for inflation, at the time of termination. For those covenants entered into before the changes, the employee’s gross annual salary had to exceed the median income for a four- person family determined by the U.S. Census Bureau. If an employee is nonexempt or does not meet this salary requirement, non-compete covenants may only be enforceable if the employer agrees to the greater of 1) 50% of the employee’s gross annual base salary and commissions at the time of termination, or 2) 50% of $100,533, adjusted for inflation, whichever is greater.
- This salary requirement does not apply to those employees who are considered on-air talent.
- An employer must inform their employees of any non-compete requirements in their written employment offer at least 14 days prior to the beginning of employment or an employee’s advancement.
- The employer must provide the employee a copy of the executed agreement within 30 days of their termination.
- Non-competes do not apply to independent contractors.
- Non-competes do not apply to bonus restriction agreements.
Example 3: Modifications to Nevada’s Non-Compete LawsThe third state on our list is the Silver State – Nevada. AGAIN, PLEASE NOTE THAT I AM NOT ADMITTED IN NEVADA, AND AM DISCUSSING THESE STATUTORY CHANGES FROM A “POLITICAL LANDSCAPE” PERSPECTIVE ONLY. THIS IS NOT AN OPINION ON OR ADVICE REGARDING NEVADA LAW. On October 1, 2021, an amendment went into effect to Nevada’s NRS 613.195 governing non-compete covenants. The changes include:
- A ban on non-compete covenants for hourly workers who are “paid solely on an hourly wage basis, exclusive of any tips or gratuities.”
- Former employees who challenge and win in actions against non-competes can be awarded reasonable attorneys’ fees.
- NRS 613.195 already prohibited covenants that restricted former employees from working for former customers or clients of the employer if 1) they did not solicit them, 2) the customer or client voluntarily left the services of that employer and chose to seek the services of the former employee instead, and 3) the former employee is otherwise complying with any other limitations in their non-compete. The amendment further clarifies that the employer may not seek any action to restrict these.
- Judges in Nevada were required to revise unreasonable non-competes, but the revisions were only required when the employers brought the action. The new laws now extend the requirement of judicial revision in actions brought by an employee.