A growing number of states are tightening conditions on restrictive covenants. The start of 2016 saw Oregon and Alabama enact higher barriers to the enforcement of non-compete agreements in those states.1 As of March 22, 2016, Utah has now joined their ranks with its “Post-Employment Restrictions Act,” HB 251.
The Act voids any “post-employment restrictive covenant” entered on or after May 10, 2016, that exceeds one year from the date of separation of employment, subject to two exceptions.2 Those exceptions include non-compete provisions: (1) included in a severance agreement; or (2) related to the sale of a business if the individual receives value related to the sale.
The Act does not, however, affect non-solicitation, non-disclosure, or confidentiality agreements, which are specifically excluded from the definition of “post-employment restrictive covenant.”3
Of course, the Act also does not affect agreements currently in place. But it will limit any agreements entered into on or after May 10, 2016, including any renewals of currently existing agreements.
Employers should review any non-compete agreements to be entered into by Utah employees on or after May 10, 2016, to ensure they do not extend more than a year after the employee’s departure, and that they otherwise comply with Utah law.
Employers should also revisit their severance policies and agreements. The Act’s exception for severance agreements is potentially very broad. It requires only that non-compete restrictions accompanied by a severance agreement be “mutually and freely agreed upon in good faith at or after the time of termination.”4
Of course, such non-competes must still comply with the restrictions imposed by the common law, including that: (1) the covenant be supported by consideration; (2) the absence of bad faith in the negotiation of the contract; (3) the necessity to protect the goodwill of the business; and (4) the reasonableness in restrictions as to time and area.5
Adequate consideration will be a fluid concept. In fact, the final version of the Act excluded a proposed definition of “[a]dequate consideration” that was limited to “compensation, stocks, or anything of economic value that is paid, granted, given, donated, or transferred to an employee in a single transaction and that equals or exceeds 5% of the annual salary of the employee determined as of the day on which a post-employment restrictive covenant is signed.”
Nevertheless, employers must be cautious. The penalties for employers seeking to enforce non-compete agreements are steep “if it is determined that the post-employment restrictive covenant is unenforceable.”6 The employer is liable for the employee’s “costs associated with arbitration,” “attorney fees and court costs,” and “actual damages.”7
Employers should contact their employment counsel to obtain guidance on the impact the Act will have on their existing non-compete agreements that will be offered or renewed after May 10, 2016. Employers separating employees should also consult their employment counsel about the possibility of offering severance agreements that include non-compete provisions that would remain enforceable under the Act.