Evolving Landscape of Employee Restrictive Covenants

Published: Seacoast Online
December 7, 2023

Employee restrictive covenants, legal agreements between employers and employees, have long protected businesses. These covenants safeguard the employer’s legitimate interests related to trade secrets, IP, proprietary information, and customer relationships. However, recent debate is driving changes to how we use them.

Guardians of Business Interests
Three general types of restrictive covenants exist:
• Non-Compete Agreements: prevent employees from working for or starting a competing business in a specific geographical area for a certain period after leaving the employer.
• Non-Solicitation Agreements: prohibit employees from soliciting the company’s clients or employees for a specified time after their employment ends. This can include both current and prospective clients.
• Non-Disclosure Agreements (NDAs): require employees to maintain the confidentiality of sensitive company information, trade secrets, and proprietary data, even after their employment terminates. (Note that NDAs are very similar to Confidentiality Agreements, and the terms are often used together or interchangeably in a document.)

Changing Landscape: Federal and State Action
Well-drafted non-solicitation and NDA agreements remain legally enforceable because they balance necessary and legitimate protections in business relationships while respecting the rights and interests of both parties. However, non-compete agreements are encountering greater scrutiny. Critics, including some employers, believe they hinder job mobility, infringe on workplace rights, suppress wages, and stifle competition and innovation.

Various significant federal legislative and regulatory efforts have recently developed surrounding non-compete agreements this year:
• The Federal Workforce Mobility Act (FWMA) bill, with bipartisan support in Congress, would only permit non-competes in limited circumstances, including in connection with the dissolution of a partnership or the sale of a business.
• The Federal Trade Commission (FTC) proposed a rule prohibiting employers from entering into and enforcing non-compete clauses with workers, including independent contractors, and being required to notify affected employees that their non-compete agreement is void. Non-solicitation and NDA agreements would remain enforceable as long as they do not limit the worker’s ability to work in the same field or go into business for themselves. FTC Commissioners are expected to vote on the proposal in April 2024.
• The US Department of Justice (DOJ) Anti-Trust Division, in response to the FTC’s proposed rule, submitted a public response regarding its unequivocal support of the FTC’s efforts to address the harmful anticompetitive effects of non-compete clauses.
• The National Labor Relations Board (NLRB) General Counsel issued a memo to all of their Regional Directors in May 2023 with the position that non-compete agreements chill employee rights under the National Labor Relations Act by denying employees the ability to quit or change jobs by cutting off access to other employment opportunities for which they are qualified. The memo emphasized the NLRB’s commitment to interagency cooperation with the FTC and the US DOJ.

On the state legislative level, California, Colorado, Minnesota, North Dakota, and Oklahoma have passed laws voiding non-compete agreements, with narrow exceptions similar to the FWMA bill. Washington, D.C. banned non-compete agreements for workers earning less than $150,000 annually. Other states are addressing exclusions for lower-wage workers and certain occupations or requirements of advance disclosure or financial consideration, like Massachusetts’s garden leave provision in its non-compete law.
In New Hampshire, the pertinent law mandates that employers must provide a copy of a non-compete agreement to any potential employee before the employee accepts an offer of employment. Several years later, New Hampshire added the prohibition of non-compete agreements with low-wage workers earning an hourly rate less or equal to 200% of the federal minimum wage. The New Hampshire Supreme Court has consistently held that “Covenants are valid only to the extent that they prevent employees from appropriating assets that are legitimately the employer’s.”

Looking Ahead for Employers
As of today, the enforceability of existing noncompete agreements depends on various factors, such as the extent to which these agreements are reasonable in scope, supported by legitimate employer interests, and the jurisdiction in which they are applied. Remember that the jurisdictional analysis expands in complexity when an employer has multi-state locations and remote workplaces. Simply noting in the written agreement that the law of a particular state governs will not usually be the end of the analysis, and other considerations, such as where the work is actually performed, will also play a role.

Based on all the considerations discussed, some employers have reevaluated their approach to restrictive covenants, favoring non-solicitation agreements and NDAs, generally seen as less restrictive and more enforceable.

Consulting with legal counsel is crucial to navigating this complex landscape effectively and making informed decisions to protect your organization.