Non-Competes Will Continue to Be Under Attack in 2023

The U.S. Federal Trade Commission (FTC) recently issued a notice of proposed rulemaking that would dramatically change the playing field for employers who have post-employment non-compete agreements with employees or have a practice of requiring such agreements as a condition of employment. The FTC’s proposed rule is open for public comment until March 20, 2023. Whether the FTC’s proposed rule (once finalized) will survive legal challenges is a hotly debated topic among members of the legal community, many of whom believe that Congress did not clearly empower the FTC with the authority to enact such a broad rule, and therefore the rule will not survive given the U.S. Supreme Court’s 2022 decision in West Virginia v. EPA

Even if the FTC’s rule does not survive legal challenge, recent legislative activity on the state level indicates that employers who use non-compete agreements will continue to find those practices under attack in 2023, as they were in 2022. Indeed, there are bills pending in numerous states that may not go as far as the FTC has proposed (although some, like one pending in New York, would), but would impose new restrictions on the use of such non-compete agreements and certain obligations for employers related to those agreements (e.g., providing notice prior to requiring a non-compete agreement as a condition of employment and paying the worker during the restricted period). 

In this post, we will briefly address bills that are pending in New Jersey, New York and Minnesota.   

• New York: During the 2021-22 legislative session, State Senator Sean M. Ryan introduced a bill (S6425B) that would have banned non-compete agreements. On January 27, 2023, Senator Ryan introduced S3100, a new version of the prior bill. As proposed, S3100 would prohibit employers (or any officer or agent of a corporation, partnership, limited liability company, or other entity) from seeking, requiring, demanding, or accepting a non-compete agreement from any covered individual, and voids such agreements entered into or modified after the effective date of the bill. A covered individual is a person who “performs work or services for another person on such terms and conditions that they are, in relation to that other person, in a position of economic dependence on, and under an obligation to perform duties for, that other person.” The bill would not prohibit employers from entering into a non-disclosure agreement to protect trade secrets or proprietary client information, or prohibit an agreement restricting employees from soliciting clients who they learned about during their employment; however, the revised version of the bill qualifies that savings clause by adding “provided that such agreement does not otherwise restrict competition in violation of this section.” This qualification is similar to the FTC’s proposed approach to such agreements - i.e., those agreements are not banned unless they serve as a de facto non-compete agreement. S3100 also contains a liquidated damages provision that will certainly get the attention of employers if this bill makes it out of the Labor Committee, where it currently sits.

• Minnesota: Introduced on January 11, 2023, HF295 (and companion bill SF405, introduced on January 19, 2023) contain restrictions on the use of non-compete agreements that are similar to restrictions found in other states. For instance, HF295 would ban the use of non-compete agreements with any employee who is paid an annual salary “less than at least equal to the median family income for a four-person family in Minnesota, as determined by the United States Census Bureau, for the most recent year available at the time of the employee’s termination.” That amount is currently $77,706.This type of income-threshold provision is similar to non-compete laws in states like Illinois and Colorado. However, even if an employee satisfies the income threshold, the employee cannot be bound by a non-compete unless the employer agrees to pay the employee on a pro rata basis during the restricted time-period at least 50% of the employee’s highest annualized base salary during the preceding two years. This type of “garden leave” is similar to the non-compete law in Massachusetts (and, as discussed below, a component of bills pending in New Jersey). HF295 would also restrict employers from choosing the law of another state or imposing a venue outside Minnesota in a non-compete agreement, unless the employee is represented by counsel in negotiating the terms of the agreement. Choice of law and venue restrictions like this can be found in state law in places like California and Colorado. Notably, on February 7, 2023, the Senate Labor Committee passed an amended version of SF405 that would prohibit any non-compete agreement regardless of an employee’s income or providing garden leave and removed the representation of counsel exception to the choice of law restriction.This amended version of SF405 has been referred to the Senate Judiciary & Public Safety Committee.

• New Jersey: First introduced in May 2022, A3715 / S1410 would ban non-compete agreements with low-wage employees (as defined in the bill) and employees who are classified as nonexempt under the Fair Labor Standards Act. This ban, which differs from an income threshold, is similar to state law in Nevada (which bans non-competes with hourly workers) and shares some similarities with an earlier version of the Illinois Freedom to Work Act (prior to its expansion on January 1, 2022). For those employees for which a non-compete is not banned, these bills would limit a non-compete agreement to no more than 12 months, during which the employee subject to the non-compete agreement would have to be paid an amount equal to 100% of their pay plus any contributions that would be required to maintain the employee’s fringe benefits (a broadly defined term in the bill). Moreover, employers could not enforce an otherwise valid non-compete agreement if the employee is laid off or terminated without a determination of misconduct, or the employee has been employed for less than one year. The bills also require that the geographical scope of a non-compete agreement must be reasonable and narrowly drawn, as prescribed, and “shall not prohibit an employee from seeking employment in other states” (the latter of which could impact some employers given the proximity of other states like New York). Following a trend that we have seen in other states (like Illinois and Colorado), the bills impose a notice requirement – an employer must provide notice of the non-compete when making the offer of employment or 30 business days prior to commencement of employment, whichever date is earlier (or, for current employees, at least 30 business days before the agreement is to be effective) and notify the individual that they have the right to consult counsel prior to signing the agreement. The bills also contain a fee-shifting provision that would allow employees to recover their attorney’s fees (similar again to laws in other states, like Illinois). Notably, as proposed the bill would require an employer to notify an employee (except one terminated for misconduct) within 10 days of the employee’s termination if the employer intends to enforce the agreement, or the agreement will be void.

While the fate of each of these bills is not certain, we can say with some certainty that the future viability of non-compete agreements will be an important area to watch as we head into 2023.