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The Latest On State-Level Noncompete Reform

6.11.18

Earlier this year, Vermont legislators introduced House Bill 556, an outright ban on noncompetes and any other restrictive covenant that restrains an individual’s livelihood. This legislative overhaul of Vermont restrictive covenant law is one of several state-level reform efforts proposed in the wake of the White House’s 2016 “call to action” for state restrictive covenant reform. Indeed, since the call to action, over a dozen state legislatures from across the country have proposed and enacted legislation reforming employers’ use of restrictive covenants. As more and more states answer the “call” and alter an already inconsistent legal landscape, employers who use restrictive covenants should review their agreements to ensure compliance with the states’ laws in which they operate.

Federal Reform Efforts and the White House Call to Action

Federal restrictive covenant reform efforts began in 2015 with the introduction of the Mobility and Opportunity for Vulnerable Employees, or MOVE, Act. If enacted, the MOVE Act would have prohibited noncompete agreements between employers and low-wage earners.

Ultimately, the MOVE Act was not passed into law, but it did hasten the call for restrictive covenant reform, particularly by the Obama administration. The White House and the U.S. Department of Treasury analyzed the use of restrictive covenants across the country, and issued two reports on their “overuse.” In October 2016, these reports resulted in the White House’s call to action.

The call to action provided state legislatures with specific “best-practice policy objectives” aimed at curbing the misuse and overuse of restrictive covenants. The policy objectives suggested three potential areas of reform:

  1. Banning noncompetes for certain categories of workers (such as workers in public health and safety, low-wage earners and workers laid off or terminated for cause);
  2. Improving the transparency and fairness of noncompetes (through notice or consideration provisions or regulating the timing of execution); and
  3. Encouraging employers to draft enforceable agreements through the adoption of the “red pencil doctrine.”

Thereafter, state legislatures proposed restrictive covenant reform aimed at addressing these “best practices.”

State-Level Legislative Activity Since the Call to Action

Since the call to action was issued, eight states have enacted some type of restrictive covenant reform:


This wave of activity is likely only the tip of the iceberg, as there is an abundance of proposed legislation working its way through state legislatures.

Potential State-Level Legislative Activity on the Horizon

Five states have proposed legislation that would have a significant impact on the use of restrictive covenants in their borders:


It is almost certain that more states will follow the White House’s call to action.

Conclusion

Unless a federal solution ultimately prevails, which appears unlikely, employers will have to continue to wade through these differing state-by-state reforms. To do so successfully, employers first and foremost have to know the law in the jurisdictions where they operate and stay current on the ever-evolving legal landscape. Second, once up to speed, they need to review their existing agreements for compliance with the law.

For instance, if a noncompete runs contrary to existing law, employers should consider alternate protections in their state, such as nonsolicit provisions, confidentiality agreements or trade secret protections, to safeguard their legitimate business interests.

Finally, employers have to consider substantive differences in restrictive covenant law from state-to-state in crafting their employment agreements. For employers operating in multiple states, this may result in using two or more different agreements to ensure compliance with the laws of the various jurisdictions in which their employees work. Ultimately, state-by-state restrictive covenant law compliance is a constant challenge, and one that unfortunately does not appear to be going away any time soon as more and more states answer the White House’s call to action.

 This article was originally featured on Law360 on June 11, 2018. For more information on this topic, you can refer to these three articles by the authors:

State Legislatures Heed the Obama White House’s “Call to Action”: Part 1 of a 3-Part Series Examining State-Level Restrictive Covenant Activity

Part II: State Legislatures’ Initial Response to the Call to Action

Part III: State Legislatures’ Initial Response to the Call to Action - Proposed Legislation

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