Coauthor: Jessica Kriegsfeld, 2021 Lowenstein Sandler summer associate
Late last week, President Biden issued an executive order that made clear his administration will be scrutinizing noncompete agreements and viewing them unfavorably. The executive order encourages the Federal Trade Commission to ban or substantially limit noncompete agreements in employee contracts, citing a desire to increase competition among businesses as well as promote economic growth, innovation, and racial equality. In light of the executive order and the laws that many states have enacted recently regulating noncompetes, employers should familiarize themselves with the terms of their noncompete agreements and be strategic and thoughtful about whom they ask to sign them.
Historically, regulation of noncompete agreements has been left to the states. President Biden’s executive order follows the recent trend among states that have enacted legislation in favor of employee mobility, hindering the enforcement of noncompete agreements. For example, earlier this year, the District of Columbia passed a law (D.C. Code §23-209) banning noncompete agreements that will become effective later this year when it is included in an approved district budget and financial plan. Washington, D.C. joins California (Cal. Business & Professions Code §§16600-16602.5), Oklahoma (OK Stat. §15-219A), and North Dakota (N.D. Cent. Code §9-08-06) as jurisdictions that generally will not enforce post-employment noncompete agreements, subject to certain limited exceptions. In 2020, Virginia (Va. Code §40.1-28.7:8) restricted the ability of employers to enforce noncompete agreements against employees who earn less than the average wage in that state, and Washington (RCW §§49.62.005-900) restricted noncompete agreements for employees who earn less than $100,000 per year. In 2019, Maine (Me. Rev. Stat. Ti. 26, c. 7, §599-A), New Hampshire (RSA §§275:70, 275:70-a), Rhode Island (R.I. Gen. Laws §§28-59-1-3), and Maryland (Md. Code, Lab. & Empl. §3-716) passed similar restrictions for employees who earn below a certain threshold. As states continue to enact noncompete legislation, employers should be aware that these laws will continue to limit their ability to impose post-employment restrictions.
Impact of Remote Work
Employers that required their employees to sign noncompete agreements before the pandemic clearly did not contemplate how many employees would rapidly and abruptly begin working from home because of COVID-19. The Bureau of Labor Statistics found that 35% of employed workers in the United States were working from home in May 2020—five times the number of employees estimated to have worked from home in 2019. Employers that allow employees to work a flexible schedule may continue to have employees working remotely into perpetuity.
Pre-pandemic noncompete agreements likely included a choice of law provision based on the employer’s location. Now that many employees have moved their work locations, employers will need to reexamine their employment agreements to ensure they comply with the law where the employee works. Courts have analyzed the geographic restrictions in noncompete agreements and provided insight into two remote working scenarios: (1) when the employee works remotely within a restricted area for a competitor located outside the restricted area; and (2) when the employee works remotely in a state with different noncompete agreement laws than the state where the employer is located.
First, courts have relaxed geographic restrictions for former employees working remotely if their new employer is located outside the restricted area. A federal court in Pennsylvania found that an employee working remotely in a restricted area does not categorically violate a noncompete agreement so long as the employee does not work with customers who are located within the restricted area. Last year, a federal court in Illinois enforced a portion of a noncompete agreement that prohibited an employee from soliciting their former employer’s clients, but did not find that the noncompete agreement prohibited the employee from working remotely in the restricted area altogether. Employers should be aware that courts have not rigidly enforced the geographic restrictions in noncompete agreements when employees work remotely within the area prohibited by the agreement.
Second, more generally, courts have placed the burden on the employer to simultaneously know and comply with the noncompete laws both in the state where the employer is located and in the states where their employees work remotely. As employees continue working from home in different states than their employer, with potentially different noncompete agreement laws, employers must make themselves aware of all relevant state laws.
Assuming employers draft noncompete agreements that comply with applicable state law, courts are still reluctant to enforce noncompete agreements when an employee is terminated. To determine whether it will enforce a noncompete agreement, the court will balance the protection to the employer with the harm to the employee. Public interest, however, favors allowing employees to find work when they are laid off versus when they leave an employer voluntarily.
Within the past year, federal courts in New York and Pennsylvania have refused to enforce noncompete agreements when an employer laid off an employee due to COVID-19. In those cases, the courts found that the harm to the employee outweighed the protection to the employer “in a time when the COVID-19 pandemic has made employment opportunities scarce.” Likewise, an amendment to the Illinois Freedom to Work Act that is anticipated to become effective in January 2022 codifies the inability to enforce noncompete agreements if an employee is terminated because of COVID-19 or “circumstances that are similar to the COVID-19 pandemic.” Courts will be paying close attention to the reason that the employee is no longer working for the employer, including whether the employer terminated the employee for reasons related to COVID-19.
As states continue to impose restrictions on noncompete agreements and courts are hesitant to enforce them, employers should be cautious in their drafting and enforcement of noncompete agreements. Businesses should closely consider the level of the employee being asked to sign a noncompete, where they live and work, and what legitimate business interest the company is trying to protect. Companies should also ensure they are taking all necessary steps to protect their confidential information and trade secrets, both through their documentation and through actual business practices.
Reprinted with permission from the July 28, 2021, edition of the New York Law Journal. © 2021 ALM Media Properties, LLC. All rights reserved.Click here to view the full article