Issue: States are becoming increasingly intolerant of broad, post-employment, non-compete and non-solicitation provisions and are enacting legislation to combat them. Provisions for Massachusetts, Illinois, California and Wisconsin are highlighted below:
Massachusetts: The front-runner
In August, Massachusetts enacted the Massachusetts Noncompetition Agreement Act ("The Act"). The Act became effective October 1, 2018 and places numerous limits on post-employment restrictive covenants. Most notable is a requirement that employers pay their employee half of their salary or some “other negotiated compensation” during the period they are barred from working for competitors. Other provisions of the Act preclude employers from entering into non-compete agreements with (or enforcing non-compete agreements against) non-exempt employees, part-time college and graduate school employees, employees who have been terminated without cause or laid off, or employees under the age of 18. The Act also requires that the non-compete agreements be presented in a formal letter and give the employee 10 days to review and consider, and if presented after the commencement of their employment, the agreement must be supported by consideration independent from the continuation of employment. Actions to enforce non-compete agreements must be brought in the employee’s county of residence or, if mutually agreed, in Suffolk County.
In order for a non-compete restriction to be found reasonable: (1) it cannot be longer than one year in duration, (2) it must be no broader than necessary to protect a legitimate business interest, (3) it must be reasonable in geographic scope, and (4) it must be reasonable in the scope of proscribed activities in relation to the interests protected.
Illinois: Applying the “janitor rule”
The janitor rule is premised on the following question: Is the agreement so overbroad that it would prevent someone from working as a janitor for a competitor? If the answer is yes, the agreement is overbroad and won’t be enforced. This year, an Illinois Judge examined a provision barring an ex-employee from working for nearby companies “engaged directly or indirectly in the business” of the company. The court, utilizing the “janitor rule,” found that the provision would preclude the ex-employee from even working as a janitor for another company, therefore it was overbroad and unenforceable.
California: Statutory ban on non-competes
Now, employee non-solicit agreements have been deemed an unenforceable restraint on trade.
Wisconsin: Partial ban
Employee non-solicit agreements are deemed unenforceable unless they are narrowly tailored to meet the business needs justifying the restraint.
Impact: There is a clear trend of states pushing back against what they consider to be overly broad restrictive covenants. Now the question is, what state will be next to jump on the bandwagon? Employers with operations in multiple states should remain vigilant of potential limitations and enforcement obstacles of a “standard” agreement with restrictive covenants.