Commonly used non-compete restrictions often found in employment agreements are facing mounting scrutiny on a nation-wide level. Several states, such as California, North Dakota, and Oklahoma, have already largely banned the use of non-competes, and many other states are taking a similar approach to varying degrees. With recent statistics from the U.S. Department of Treasury suggesting that nearly 20% of the country’s workforce are subject to non-competes, these legislative initiatives could drastically impact employers and scale back these provisions that for decades have been used by businesses to protect human capital and confidential information. This article examines how our local jurisdictions are addressing this growing trend.
District of Columbia
Although there is currently no statute or regulation in the District of Columbia that explicitly governs non-compete agreements in employment generally, this is likely to change very soon.
In October 2019, a bill was introduced that would ban the use of non-compete provisions in employment agreements for workers that earn below a certain income threshold. As currently drafted, the bill would ban non-compete restrictions for employees earning less than $87,654 annually. If enacted, an employer who violates this law will be subject to a monetary penalty of an amount between $500 and $2,000, depending on the circumstances, for each violation.
This bill is titled the “Ban on Non-Compete Agreements Act of 2019” and appears to have a high chance of passing to the next stage according to legislative outlook reports. Notably, this particular bill is only limited to non-compete agreements and does not restrict the use of confidentiality or non-solicitation provisions.
Maryland recently enacted a new law that went into effect October 1, 2019 that forbids employers from entering into non-compete agreements with certain low-wage/low-income employees. Specifically, the Noncompete and Conflict of Interest Clauses Act prohibits and renders null and void any non-compete agreement between an employer and employee who earns less than $15 per hour or $31,200 annually.
Similar to the proposed law in D.C., the Maryland statute expressly reserves the rights of employers to enforce contracts that forbid “the taking of a client list or other proprietary client-related information,” which would presumably permit confidentiality provisions, however, the statute is silent on whether non-solicitation provisions are permissible with such low-wage employees.
Similarly, Virginia recently introduced several bills that would limit non-compete agreements with employees to varying degrees if enacted.
VA H.B. 1112 was introduced on January 7, 2020 and seeks to ban and void any covenant not to compete entered into on or after July 1, 2020 – regardless of income level or position held. This outright ban on all non-competes would naturally be a sea change to Virginia law if enacted.
VA H.B. 330 and VA S.B. 480 were also introduced in January and are further along in the legislative process than H.B. 1112. Rather than prohibit all non-compete agreements, these bills seek to prohibit employers from entering into non-compete agreements with low-wage employees similar to the law passed in Maryland and introduced in D.C. Specifically, a low-wage employee is defined is an individual one who earns less than the average weekly wage of the Commonwealth, which in 2019 was just over $1,100. The legislative outlook is pending as well, but these bills have passed first committee and are currently being debated in the first chamber session. If enacted, the new law will be applicable to non-compete agreements entered into on or after July 1, 2020.
Federal Level Action
Recent efforts have also been made to restrict the use of non-compete agreements at the federal level. In 2019, Senator Marco Rubio proposed the Federal Freedom to Compete Act which would prohibit an employer from entering into a non-compete agreement with entry-level, low wage workers and would void any non-compete agreements with those types of workers created before the enactment of this bill.
This proposed legislation would amend the Fair Labor Standards Act and prevent employers from using or enforcing non-compete agreements against most federally nonexempt employees. More specifically, the Freedom to Compete Act would prohibit non-compete agreements between an employer and an employee who does not meet the overtime exemptions for bona fide executive, administrative, professional or outside sales employees. This law would also preclude employers from enforcing, threatening to enforce, or renewing any non-compete agreements with employees who do not meet the exemptions mentioned above. The Freedom to Compete Act is currently pending before the Senate Committee on Small Business and Entrepreneurship.
Employers must take note of these legislative initiatives and brace for the imminent realization that non-competes are likely to be scaled back in the coming months or years. It appears unlikely that the DMV will see an outright ban like you see in some states, yet a more targeted effort focusing on employees earning lower wages seem likely, similar to what passed in Maryland. While this movement will certainly impact enforcement of non-competes, employers are not helpless as confidentiality restrictions and narrowly defined non-solicitation/non-servicing provisions can still provide effective tools to protect a company’s legitimate business interests in certain circumstances.
Nick Johnson is a Partner at Berenzweig Leonard, LLP. He can be reached at [email protected]. Nick wishes to thank Aleksey House and Madyson Hopkins, both 2Ls at George Washington University Law School, for their assistance on this article.