Many employers experienced whiplash in 2023 from the flurry of judicial, administrative and legislative activity aimed at restricting the use of employee non-competition, non-solicitation, and non-disclosure agreements. Can you still require your employees to sign a non-compete agreement? What about requiring your employees to assign their inventions to your business? What updates to your agreement templates are required to ensure compliance with the latest changes in your jurisdiction? We summarize the relevant legal changes below, forecast what employers can expect in 2024 (spoiler alert – expect even more change), and offer practical tips for how best to comply in the ever-changing landscape of employee restrictive covenants.
Federal Updates
Actions by the Federal Trade Commission and the National Labor Relations Board
The Federal Trade Commission (FTC) set the tone for 2023 by proposing a new rule to ban employers nationwide from using non-compete agreements with their employees and independent contractors, estimating that such a prohibition would increase wages by nearly $300 billion annually and expand career opportunities for over 30 million Americans. The FTC received over 27,000 comments during the public comment period earlier this year. Since then, it has taken no further action.
The FTC was not the only federal agency working to ban employment-based non-competes in 2023. The General Counsel of the National Labor Relations Board (NLRB) issued a memo in March 2023 opining that many types of non-compete and non-solicitation restrictions unlawfully interfere with employees’ protected rights under Section 7 of the National Labor Relations Act, reasoning that such restrictions they have a “chilling” effect on employees’ ability to quit or change jobs to seek out better working conditions. The NLRB has yet to adopt the General Counsel’s position.
Although there were a lot of pronouncements on the federal level about banning or significantly restricting employers from using non-competition agreements to restrict their employee’s post-termination job choices, no such restriction took effect in 2023. We expect to see an FTC vote on the final rule relating to the proposed non-compete ban by April 2024, and will likely see further activity on this issue by both the NLRB General Counsel and the Board in 2024.
State Updates
California
California has long been at the forefront of the movement to restrict the use of employer-employee non-competes. In 2023, California expanded its comprehensive ban on non-competes through two new laws that take effect on January 1, 2024. The first, AB 1076, goes beyond existing law that renders non-compete clauses void and unenforceable, now making them illegal as well. The second, SB 699, makes any non-compete agreement void and unenforceable regardless of when the contract was signed or whether it was signed in California. SB 699 further provides for current and former employees (those employed after January 1, 2022) or prospective employees to bring a private right of action to enforce the prohibition on non-compete agreements for injunctive relief, actual damages, and if they prevail, to recover reasonable attorney's fees and costs.
Employers should review employee files of those employed after January 1, 2022 for any relevant existing non-compete agreements. If such agreements exist, employers should review to confirm whether such agreements remain valid. If they do not or will not comply with California law as of January 1, 2024, employers should provide written notice to relevant employees that their noncompete agreements are void no later than February 14, 2024. Finally, employers should update existing employment agreement templates and remove noncompete provisions if they are no longer compliant with California law. Additional information about these changes to California law can be found here.
Connecticut
Building on the state’s already comprehensive non-compete law, the Connecticut legislature passed Public Act No. 23-97 on June 5, 2023, providing tighter regulation of physician, physician assistant, and advanced practice registered nurse non-compete agreements. The Act, which took effect on July 1, 2023, bans physician non-compete agreements that last longer than one year, limit their enforceability to a 15-mile radius from the physician’s primary practice site, and require that any such provision is no more restrictive than necessary to protect a legitimate business interest, including in time, geographic scope, and practice restrictions. The Act also changes the definition of “primary practice site” from one that is currently based on the physician’s main revenue center to a single, mutually agreed upon location as expressly defined in the non-compete agreement, and further rendered unenforceable any non-compete agreement entered into, amended, extended, or renewed after October 2023 if the physician does not agree to a proposed material change to the compensation terms of employment before extending or renewing and if the agreement expires or the employer terminates it, other than for cause.
Employers with non-competition agreements with physicians, physician assistants and advanced practice registered nurses in Connecticut should review their existing agreements to ensure compliance with these new requirements.
Georgia
The Georgia Court of Appeals issued a ruling in June 2023 impacting the enforceability of employee non-solicitation provisions. In North American Senior Benefits v. Wimmer, the court ruled that, to be enforceable under Georgia’s Restrictive Covenant Act, any employee non-solicitation provision must include an express geographical limitation. No. A23A0162, 2023 Ga. App. LEXIS 276 (Ct. App. June 13, 2023). Importantly, the court held that courts cannot amend or “blue-pencil” an agreement lacking such a term in order to include one.
While it is possible that the Georgia Supreme Court could overrule Wimmer or that another appellate panel could render a contrary decision, employers with Georgia-based employees should review their existing agreements to amend their non-solicitation agreements to include an express territorial limitation.
Indiana
Continuing the trend of restricting physician non-compete agreements, the Indiana legislature passed a law that bans non-compete agreements for primary care physicians, effective July 1, 2023. The new law renders a non-compete agreement unenforceable against primary care physicians regardless of whether the employer terminates the physician’s employment for cause or if the employment contract expires with both the physician and the employer fulfilling all of their obligations under the contract. Employers with non-competition agreements with physicians in Indiana should review their existing agreements to ensure compliance with these new requirements.
Maryland
Maryland expanded its non-compete protections in May 2023 to include a salary threshold. The new law prohibits non-competition restrictions for employees who earn less than or equal to 150% of the state minimum wage. Maryland’s prior law had a threshold equal to or less than $15 per hour or $31,200 annually. Because the state has tied the minimum earning threshold to the state’s minimum wage, any increase on that front must lead to a subsequent increase to the salary threshold for non-competes. Notably, this new law, which goes into effect on January 1, 2024, does not extend to employee non-solicitation agreements.
Because the law’s applicable salary threshold is a moving target that will be impacted by changes to the state’s minimum wage, employers should update their employee non-competition provisions to make clear that the prohibition does not apply to employees earning equal to or less than 150% of the state’s minimum wage rather than to a specific dollar amount.
Minnesota
On July 1, 2023, Minnesota became the fourth state to enact an outright ban employment non-compete agreements. Though the prohibition is not retroactive, it broadly covers all employees regardless of income. The law creates a narrow exemption that permits non-competition provisions in connection with the sale or dissolution of a business to restrict partners, members, shareholders, or other parties from carrying on similar businesses if the restriction is reasonable in geographic scope and duration. The ban does not apply to agreements that limit an employee’s ability to: (1) use a former employer’s client or contact lists; (2) solicit a former employer’s customers; or (3) use or disclose a former employer’s trade secrets or confidential information.
Given the ban on non-competes, employers should focus attention on protection of their confidential and trade secret information, such as ensuring that departing employees have returned all company property and information and restricting employees’ abilities to download, transfer or send company information to personal devices or personal accounts.
New York
2023 was a busy year for the New York legislature. First, in June 2023, both houses of the New York State Assembly passed legislation that broadly banned new employment non-compete agreements. After 6 months of silence, in December 2023, Governor Hochul signaled that she would not sign the bill into law unless it is revised to include certain carveouts, including exceptions for the sale of businesses and potentially a $250,000 salary threshold. You can read more about these developments here, here, and here.
Second, in September 2023, New York enacted a new law aimed at spurring innovation and encouraging inventors and creators to stay in the state. The new law renders employee invention assignment provisions inapplicable to inventions developed by employees on their own time without the use of employer resources or trade secrets. Though on its face, the law seems to expand employee rights and protections, we do not yet know it will be applied. The law’s carveouts for inventions relating to an employer’s current or potential future business and to an employer’s trade secrets could be interpreted by courts to effectively maintain the status quo on the matter.
Third, New York signed S4516 into law on November 17, 2023, which provides further instruction concerning the use of confidentiality clauses in employment discrimination, harassment, and retaliation settlements. The original law, Section 5-336 of the New York General Obligations Law and one of the original #MeToo statutes, required the employer and employee to execute a separate agreement recognizing the employee’s preference for confidentiality where the employee: (i) was executing a release seeking to resolve a claim, the factual foundation for which involves discrimination; and (ii) would be prohibited from disclosing the underlying facts and circumstances of the discrimination claim. The new law amends the requirement that the employee wait a full 21 days after being presented with the agreement to sign it. Now, an employee is entitled to take up to 21 days but is not required to wait the full term if they so choose. The new law retains the employee’s right to revoke their signature up to 7 days after signing. More information on this new law can be found here.
Moving into 2024, we can expect to see Governor Hochul continue to negotiate the scope of the legislature’s proposed non-compete ban with the bill’s sponsor, Senator Sean Ryan, who thus far has conveyed a willingness to compromise, specifically regarding the sale of business carveout. Given that these negotiations will likely result in limitations on the scope of noncompete agreements in New York, employers should take time now to evaluate and enhance existing measures to protect their confidential information and trade secrets, such as auditing employee non-disclosure agreements, conducting trainings, monitoring employee access to and handling of sensitive data, and conducting onboarding and offboarding interviews.
Key Takeaways
The new laws and regulations summarized above make it even more challenging for employers to roll out multistate restrictive covenant agreements and will require employers to tailor such agreements to ensure compliance with applicable requirements. Given the clear trend of restricting or banning employee non-compete agreements, employers should take steps to ensure protection of their confidential and trade secret information. For example, employers should review their current data protection measures, as well as onboarding and offboarding procedures to prevent the misappropriation of valuable proprietary information.
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