Noncompete Law: A Look Back and a Glance Ahead

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Businesses across almost all major industries use restrictive covenants for a variety of reasons. For example, nondisclosure agreements ensure that employees do not disclose a company’s confidential information to its competitors. Nonsolicitation agreements, in contrast, prevent a company’s former employee from soliciting current company employees for a specific period of time. Finally, noncompete agreements prohibit a recently departed employee from working for a direct competitor for a specific time period and within a certain geographic area.

Noncompete agreements, in particular, have come under increasing federal and state scrutiny in recent years. While only three states prohibit noncompete agreements almost entirely (California, North Dakota, and Oklahoma), the trend has been for states to limit the use of noncompete agreements by imposing minimum salary thresholds, notice provisions, and other requirements. This article examines some of the major changes to noncompete law enacted at the federal and state level in 2022 and will conclude with a forecast for 2023.

On the federal level, the Federal Trade Commission recently proposed a sweeping new rule that would, with very limited exceptions, ban noncompetes across all industries—regardless of worker salary level or status as employee or independent contractor. The proposed rule would have a retroactive effect, requiring employers to rescind any noncompetes entered into prior to its effective date. Significantly, however, the rule would not nullify nonsolicitation or nondisclosure agreements. While the proposed rule is ambitious, ASA expects significant legal and political pushback from the business community and certain state governments. Accordingly, ASA does not expect that the FTC’s rule, if adopted, will become effective in 2023.

At the state level, Illinois; Oregon; Nevada; Colorado; and Washington, DC, all made important changes to their existing noncompete laws. In Illinois, a new law states that noncompete agreements are invalid for employees whose yearly salary is less than $75,000 per year. The law also requires that new employees be provided notice of their right to consult an attorney prior to signing a noncompete agreement, and further, that they have up to 14 days to review such an agreement prior to signing. Additionally, employers cannot require nonsolicitation agreements with employees who earn less than $45,000 per year. Thus, if a staffing firm pays a worker less than $45,000 annually, it cannot restrict his or her ability to later solicit other employees of the staffing firm to work for a different company.

Similarly, in Oregon only employees earning above $100,533 per year, and who do not perform predominantly intellectual, managerial, or creative tasks, may be subject to a noncompetition agreement. Further, valid noncompete agreements may only be effective for up to 12 months after employment ends.

Under Nevada’s Unfair Trade Practices Act, Nevada employers are prohibited from asking employees paid solely on an hourly basis to sign a noncompete agreement. In the staffing context, this means that workers paid on an hourly basis who do not receive any tips or gratuities cannot be subject to a noncompete agreement.

In Colorado, a new law restricts noncompetition agreements, with limited exceptions, to employees who earn more than $101,250 annually. Similarly, customer nonsolicitation agreements—which prohibit recently departed employees from soliciting their former employers’ customers—are only valid for employees who earn more than $60,750 annually. Employers must also provide notice of a noncompete requirement to prospective employees prior to their accepting an offer of employment. For current employees, such notice must be provided at least 14 days before the effective date of the noncompete. Any violation of the noncompete and customer nonsolicitation restrictions is classified as a Class 2 misdemeanor, which can lead to up to 120 days in prison and/or a $750 fine.

Finally, Washington, DC, prohibits noncompete agreements for certain DC-based employees who are not medical specialists and whose annual compensation is less than $150,000. Employers who violate this new law may be subject to penalties of up to $3,000 per violation.

In 2023, staffing firms can expect to see states continue to take aim at noncompete agreements through the legislative process. Similarly, given the political climate, employers may see employees more brazenly violating the terms of even valid noncompete agreements. Staffing firms should review their existing noncompete agreements and other restrictive covenants with a legal professional to ensure they are in compliance.

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