United States: Key Trends From A Summer Of Non-compete Reform

The start of September means that summer is unofficially over. However, the end of beach season also means that big changes to state non-compete laws are on the horizon.

In the past three months, Maryland,¹ Maine,² New Hampshire,³ and Rhode Island⁴ have all passed legislation directly aimed at curtailing the use of non-compete agreements. This flurry of activity reflects a growing national concern about the fairness of non-compete restrictions and their impact on the U.S. workforce. For tangible evidence of this increasing concern, look no further than the preambles of the new laws in Maine and Maryland, both of which declare non-compete agreements as "against public policy."

In response to this shifting perspective, state lawmakers were busy this summer drafting new non-compete laws and as expected, common themes have emerged. Below are the key trends across the legislation recently enacted by Maryland, Maine, New Hampshire and Rhode Island, which reveal the general features we can likely expect from future laws in other states.

Prohibition Against Non-Competes for Low-Wage Workers

The most common area of reform has been the ban against employers entering into non-compete agreements with "low-wage" employees. Maryland, Maine, New Hampshire, and Rhode Island all now prohibit employers from entering non-compete agreements with "low-wage" employees, though the definition of "low wage" varies by state.

Maine's L.D. 733 sets forth the broadest definition of "low-wage" setting the threshold hold at employees earning at or below 400% of the federal poverty level ($49,960 in 2019).

Rhode Island and Maryland set their compensation threshold several thousand dollars lower, at employees earning at or below 250% of the federal poverty level ($31,225 in 2019) and employees earning at or below $31,200 per year or $15 per hour, respectively. Notably, Rhode Island's new law also prohibits non-compete agreements with (1) undergraduate/graduate students and (2) employees age eighteen (18) or younger.

Similar to Rhode Island and Maryland, New Hampshire's S.B. 197 defines "low-wage" employees as those earning an hourly rate less than or equal to 200% of the federal minimum wage (i.e., $14.50 per hour or $30,160 annually).

Enhanced Notice Requirements

Another common feature among the myriad of recently enacted non-compete laws is the imposition of new notice requirements before a non-compete restriction can be enforced against an employee.

For example, Maine's L.D. 733 requires employers seeking to enforce a non-compete agreement to (a) disclose the terms of the non-compete agreement prior to an offer of employment, and (b) provide a copy of the non-compete agreement at least three (3) business days before the employee is required to sign the agreement. Similarly, New Hampshire's S.B. 197 mandates that employers provide a copy of the non-compete agreement to any potential employee before the employee accepts an offer of employment. A non-compete agreement that has not been disclosed to an employee prior to his or her acceptance of employment is unenforceable under the new New Hampshire law.

Exemptions for Other Types of Restrictive Covenants

Despite taking steps to limit the use of non-compete agreements, the new laws in Maryland, New Hampshire, and Rhode Island contain language specifically exempting other types of restrictive covenants.

Specifically, the new laws in Maryland, New Hampshire, and Rhode Island do not cover non-solicitation restrictions, invention assignments, and non-disclosure/confidentiality restrictions. Maryland's M.D. 328, for example, broadly states that it doesn't apply to any "employment contract[s] or similar document[s] or agreement[s] with respect to the taking or use of a client list or other proprietary client-related information."

In contrast, Maine's L.D. 733 does not contain carve-out language explicitly exempting other types of restrictive covenants. However, L.D. 773's succinct definition of non-compete agreements implies that other types of restrictive covenants, including non-solicits, non-disclosure/confidentiality restrictions, are not subject to the terms of the law, provided that they don't limit the employee's ability to work post-employment.⁵

* * * * *

Employers that use non-compete agreements should continue to watch developments in the states where they have employees. The trends above will likely serve as a framework for state lawmakers seeking to join the wave of non-compete reform sweeping the country. 2019 has already demonstrated that non-compete reform is gaining momentum that will likely continue later this year and into 2020.

Footnotes

1 On May 28, 2019, the "Noncompete and Conflict of Interest Clauses Act" (M.D. 328) was signed into law. Maryland's new law becomes effective October 1, 2019.

2 On June 28, 2019, "An Act To Promote Keeping Workers in Maine" (L.D. 733) was signed into law. Maine's new law becomes effective September 18, 2019.

3 On July 10, 2019, New Hampshire amended its "Noncompete Agreements" law (S.B. 197). New Hampshire's new law amended becomes effective September 8, 2019.

4 On July 15, 2019, the "Rhode Island Non-Competition Agreement Act" (H.6019) was signed into law. Rhode Island's new law becomes effective January 15, 2020.

5 M.D. 733 defines a non-compete agreement as a "contract or contract provision that prohibits an employee or prospective employee from working in the same or a similar profession or in a specified geographic area for a certain period of time following termination of employment."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.