Is It Time to Reconsider Your Non-Compete Policy? It Might Be If You Employ Low-Wage Workers

Over the course of the past several years, several states have banned or severely restricted the ability of businesses to bind low-wage workers to post-employment restrictive covenants. Since 2007, Oregon has banned non-compete agreements for all employees except those who are exempt (as defined by the state’s overtime payment statute) and whose annualized compensation at the time of termination exceeds the median income of a four-person family, as determined by the United States Census Bureau for the most recent year available at the time of the employee’s termination ($56,119 per year based on most currently-available data). In 2016, Illinois passed a statute banning non-compete agreements with low-wage workers (defined in Illinois to be non-governmental workers making less than the greater of the prevailing federal, state, or local minimum wage or $13 per hour). In 2018, contained within a wider-ranging non-compete bill, Massachusetts also banned employers from entering into non-compete agreements with non-exempt employees, as those employees classification is defined by the Fair Labor Standards Act (“FLSA”), as well as employees under age 18, paid or unpaid student interns, or other short-term student employees who are enrolled in school.

While such legislation trickled out over the last several years, 2019 has seen five additional states enact prohibitions on utilizing non-compete agreements for certain low-wage employees, with at least seven other states and the District of Columbia considering similar non-compete legislation.

In particular, since May 2019, the following states have enacted the following restrictions:

• Maine: bans non-compete agreements preventing an employee “from working in the same or similar profession or in a specified geographic area for a certain period of time following termination of employment.” This applies to all employees earning at or below 400 percent of the federal poverty limit (which is $48,560 per year under current data). This law became effective as of September 18, 2019.
• Maryland: bans non-compete agreements that “restricts the ability of an employee to enter into employment with a new employer or to become self-employed in the same or similar business or trade.” This applies to all employees earning less than $15 per hour or $31,200 annually. This law became effective as of October 1, 2019.
• New Hampshire: bans non-compete agreements preventing an employee from “performing: (1) work for another employer for a specified period of time; (2) work in a specified geographical area; or (3) work for another employer that is similar to such low-wage employee’s work for the employer who is a party to the agreement.” This prohibition applies to all employees making less than or equal to 200 percent of the federal minimum wage (which is $14.50 per hour). This law became effective as of September 8, 2019.
• Rhode Island: bans non-compete agreements for a variety of employee types, namely: non-exempt employees under the FLSA, undergraduate or graduate students participating in an internship or short-term employment, employees aged 18 or younger, and low-wage workers. Low wage workers are defined as earning 250 percent or less of the federal poverty level ($31,225 per year under current data). This law will become effective as of January 15, 2020.
• Washington: as part of a broader non-compete bill, Washington banned non-compete agreements against employees making less than $100,000 per year and independent contractors making less than $250,000 per year. The minimum threshold for the prohibition will also be subject to annual adjustments to account for inflation. This law will become effective as of January 1, 2020, but arguably will apply retroactively.

Though each of these states have tackled the same issue—non-competes for low-wage workers—their approach differed substantially on issues that tangentially impact an employer’s non-compete program. For example, Rhode Island specifically excludes employee and customer non-solicitation agreements and confidentiality agreements from the scope of its ban, but New Hampshire and Maryland law are silent on the continued enforceability of some or all of these provisions. As another example, Washington spells out penalties associated with a violation of its new law, but other states are silent as to whether an employer can be otherwise penalized, beyond the agreement simply being unenforceable.

What these new laws do highlight, however, is a need for businesses to evaluate their current restrictive covenant programs to ensure that they comply with these newly enacted statutes, including even where they specify a law outside of one of these states, but employ low-wage employees subject to a non-compete agreement, working in any of Illinois, Massachusetts, Maine, Maryland, New Hampshire, Rhode Island, or Washington. Moreover, because certain state attorney generals—for example, those in Illinois and New York—have initiated suits against companies requiring low-wage workers to sign non-compete agreements, companies can potentially be at risk even in states that do not yet have such statutory prohibitions.

Given the nature of these statutes and given that a handful of other states currently are considering sometimes sweeping non-compete law changes, this is a good occasion to look at the employee population that has or will sign restrictive covenant agreements to ensure that no low-wage employees are included in that population that signs true non-competition agreements. In addition, because these new laws and other developments in restrictive covenant law over the past year may require changes to your company’s template restrictive covenant agreements, companies should consider reviewing and revising their template agreements more broadly by the end of the year.