April 05, 2024
Which States Are Banning Noncompete Agreements and Why
Noncompete agreements restrict employees from working at similar jobs for a different employer, often for a year, sometimes longer. Employees often unknowingly sign these agreements at the beginning of their employment along with all of their other onboarding paperwork. They're excited about the new job and not thinking about what happens when they leave.
Employers use noncompetes because they believe it helps them protect their trade secrets and other confidential information from competitors. But that's what nondisclosure agreements are for.
Because noncompetes effectively make it far more difficult for employees to find work where they live and in jobs where they have direct experience, these agreements are unfair and basically, evil.
States have handled this problem in different ways. California makes noncompetes illegal and unenforceable except in very limited situations like the breakup of a business partnership. In that situation, the partners all have pretty equal power and it makes sense that they would all be okay agreeing not to open competing stores selling the same stuff in the same place at the same time.
Except coffee. Apparently, you can have multiple coffee shops right next to each other and you still have to wait 10 minutes behind the person whose coffee order involve pumps, whips, and Splenda.
Other states limit the geographic location, which doesn't make any sense in jobs that can be performed remotely. Most will limit the noncompete time to a year, sometimes two. Could your employees go a year or two without any income?
And then there's the question of how long a trade secret is really valuable. In tech it's probably about 15 minutes. Okay, maybe 25. I'm kidding, but the point is that people no longer do long apprenticeships with the only blacksmith in town where it's fair to make them do their blacksmithing so that doesn't compete with the person who trained them.
To get a sense of how noncompetes have been misused, a chain of sandwich shops made their minimum wage employees sign broad noncompetes that would effectively prevent them from working anywhere that made sandwiches for 2 years.
Noncompete agreements are nearly always an abuse of power. And that's why some states are severely limiting them or outright banning them. Here's more on what's happening with current legislation about noncompetes.
As we continue to report, noncompete agreements are an area of ever-increasing scrutiny and limitation. Last year we wrote about states with civil and criminal penalties for violations of noncompete law, which is just one aspect of the continuing trend toward restricting employee noncompete agreements.
Some states have gone a step further and banned such agreements (with some limited exceptions). As of now, four states have bans: California, Minnesota, North Dakota, and Oklahoma.* We expect this list to grow in 2024. The only question is which state will be next. Currently, six states (and New York City) have pending legislation that, if enacted as written, would ban employee noncompete agreements — Illinois, Maine, Massachusetts, Michigan, New York City, Rhode Island, and Wisconsin. Of these, Maine is posed to be the next state to enact a ban.
Employers expecting to enter noncompete agreements with employees in the above-listed states should work with counsel to consider the implications of the pending legislation, if any. This is a rapidly evolving area of noncompete law as more state legislatures (and the federal government) consider bans and other limits on employee-based noncompete agreements, including fines for companies that violate the law. It is anticipated that other state legislatures may propose similar bans in the near future. We will continue to monitor and report on developments in this area of the law.
*Although Mont. Code Ann. § 28-2-703 (enacted in 1895), reads like a ban on noncompete agreements, Montana courts enforce such agreements so long as they are carefully drafted to conform to the various state-specific requirements set forth in Montana’s common law.
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