Washington, D.C. bans all noncompete agreements, joining list of other states with restrictive noncompete legislation

The change of administration at the White House has created a whirlwind of speculation that noncompete agreements will soon become illegal. Could some noncompete agreements be outlawed in the near future? Sure. They already have been in many states. Will companies still be able to protect themselves against unfair competition? Absolutely.

Noncompete agreements are not universally legal now. Some states, like California, made them illegal years ago. Many more states have enacted laws in the last two to three years limiting the applicability of noncompete agreements. And, in most states where no recent statutes have been enacted, noncompete agreements will only be enforced to the extent they are reasonable. But there are other ways to protect your valuable business assets – your confidential information, customer relationships, and investment in people. Now is a good time to review the agreements and policies you have in place, or to put agreements and policies in place, to ensure they comply with current law and protect you when changes come in the future.

What is a noncompete agreement?

The term “noncompete” is often used to refer to a variety of post-employment restrictions that employers may require of employees.  A noncompete agreement, however, is actually a very specific type of restriction, and it is the primary target of most legislation. In a true noncompete agreement an employee agrees to not work for a competitor of a former employer, usually in a defined geographic territory, for a period of time. Other, less restrictive types of agreements are often grouped under the noncompete label, including non-solicitation and confidentiality agreements. Non-solicitation agreements restrict a former employee from soliciting a company’s customers, suppliers, or employees. Confidentiality agreements restrict a former employee from using or disclosing confidential information.

Non-solicitation and confidentiality agreements are not the target of most new state laws.

New state noncompete laws

California, Oklahoma, and North Dakota have had laws hostile to noncompete agreements for years. In the last four to five years more states have joined the club. None have gone as far as California, which prohibits noncompete and non-solicitation agreements, and where courts have even recently found confidentiality agreements to be unlawful. Most of the newcomers to noncompete legislation have focused on the use of noncompete agreements to restrict low wage employees or those who do not have access to a company’s confidential information. For example:

• In Illinois, noncompete agreements are illegal for employees making less than the greater of the minimum wage or $13 per hour (enacted 2017).
• In Maine, noncompete agreements are illegal for employees who make less than 400% of the federal poverty level (2019).
• In Oregon, noncompete agreements are not enforceable against employees whose total gross salary and commissions, calculated on an annual basis, at the time of the employee’s termination exceeds the median family income for a four-person family, as determined by the United States Census Bureau (2020).
• In Rhode Island noncompete agreements are illegal for employees making 250% or less than the federal poverty level (2020).
• In Washington, noncompete agreements are illegal for employees making less than $100,000 (2020).
• Most recently, Washington, D.C., has banned all noncompete agreements, both during and after employment (2021).

Similarly, multiple states require various types of notice both before a noncompete is signed or after employment ends. Massachusetts (2018) and Oregon require some form of “garden leave” or other compensation to be paid during the noncompete period if the agreement is enforced. In Washington, failure to follow the statute can provide the former employee a claim against the employer for damages.

What can you do?

It is critical that employers are aware of the laws that apply in each of the states where they have employees. Noncompete agreements should be tailored to comply with state laws and ensure enforceability. Employers should also consider the type of restrictions that they have in place and whether or not they properly protect the company’s valuable business assets.

McDonald Hopkins can assist with this analysis. Click here to learn about our trade secret, non-compete and unfair competition practice.