restricive-covenenat-legislation-trendsOver the past 10–15 years, we have seen an explosion of legislative activity related to restrictive covenants. This activity is happening not only in state legislatures but on the federal level as well. While each proposal is different, we’ve certainly seen trends emerge, including required notice provisions, fee shifting, and choice of law and venue requirements.

One of the most prevalent trends is the move towards banning non-competes (and sometimes, other restrictive covenants) for so-called “low-wage workers.” To date, 10 states have implemented a low-wage ban of sorts: Illinois, Maryland, Maine, Massachusetts, Oregon, Nevada, New Hampshire, Rhode Island, Virginia, and Washington.[1]

Notably, it’s not just blue states moving in this direction. Soon to join their ranks? Iowa and West Virginia, possibly. In Iowa, the Republican legislature is considering a bill that would prohibit the use of non-competes with employees who earn “an average monthly wage that is less than or equal to” $14.50 per hour. This prohibition would not apply to non-solicitation agreements, confidentiality agreements, or agreements prohibiting the use or disclosure of trade secrets or inventions. This bill has already passed the state senate.

In West Virginia, the legislature is mulling a bill that would go even farther. This bill would prohibit and render unenforceable “restrictive employment agreements” where an employee’s pay is less than the annual mean wage of employees in West Virginia as determined by the Bureau of Labor Statistics. Like some other states, this means that the wage threshold for enforceable covenants will fluctuate over time, making it arguably more challenging to draft, analyze, or enforce compliant agreements. For the low-wage ban provision of the bill, “restrictive employment agreements” include non-competes, employee and customer non-solicits, payment-for-competition agreements, and agreements prohibiting employees from working for customers of the employer. Notably, if the bill passes in its current form, the low-wage provision would apply retroactively to agreements entered into before the date the law goes into effect (unlike most of the other provisions of the bill). And the bill would permit a prevailing employee who successfully challenges or defends against enforceability of a restrictive covenant, or who proves a violation of the bill, to recoup statutory damages of $5,000 and reasonable attorneys’ fees.[2]

Why are legislators from both sides of the aisle making similar moves despite historical opposition? The low-wage bans in particular are seen as low-risk, especially in the face of recent negative press coverage when an employer requires its minimum wage workforce to agree to broad non-compete covenants. And while the sample size is small, it is unsurprising that the wage thresholds for non-competes tend to be lower in redder states (as compared with, for example, Oregon and Washington state, where non-competes are prohibited even for employees making approximately $100,000 annually). Additionally, last summer the non-partisan Uniform Law Commission enacted the Uniform Restrictive Employment Agreement Act (the “UREEA”), seeking uniformity of statutory and common law rules regarding restrictive covenants. Many of the new bills we’ve seen (including the bill out of West Virginia described above, as well as bills that have been introduced in Oklahoma and Colorado) are based on the UREEA.

Even in states where there is no such low-wage ban, employers should carefully consider which employees should be bound by restrictive covenants. Not only could a blanket non-compete applied to even the lowest-paid workers cause PR issues, but as more and more states move towards low-wage bans (including retroactivity provisions), it will be much easier to adapt to the shifting laws if restrictive covenants are only reserved for those employees who truly can impact the employer’s legitimate business interests following their departure.

[1] Each of these states have different wage thresholds, creating a confusing patchwork of state laws.

[2] In addition to the low-wage ban, the West Virginia bill also contains various other prohibitions on all sorts of restrictive covenants, including requiring specific advance notice of the employer’s requirement that an employee sign a restrictive covenants agreement and strict choice of law and venue provisions. If this bill passes, we will keep you informed on the new requirements.