Another Minnesota Noncompete Ban: Restrictive Covenants in Service Contracts

At a Glance

• Minnesota Statute § 181.9881 — Restrictive Employment Covenants; Void in Service Contracts — prohibits on a go-forward basis service providers from restricting “in any way a customer from directly or indirectly soliciting or hiring an employee of a service provider.”
• The only exemption is for computer software development consultants seeking employment through a service provider with the knowledge and intention of being considered for a permanent position with the customer as their employer at a later date.
• Employers should consult with an attorney and update their agreements with customers and employees to remove prohibitions barred by this new law.

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Minnesota continues to expand its restrictions on noncompete agreements and similar restrictive covenants. Last year, the legislature banned noncompete agreements between an employer and an employee. Now, a new law that went into effect July 1, 2024, prohibits agreements between service-provider companies and their customers that would prevent customers from hiring employees of those service providers. 

Minnesota Statute § 181.9881 — Restrictive Employment Covenants; Void in Service Contracts — prohibits on a go-forward basis service providers from restricting “in any way a customer from directly or indirectly soliciting or hiring an employee of a service provider.” The law is not limited to just employees, but also explicitly applies to independent contractors. Similarly, “service provider” broadly covers any person or entity “acting directly or indirectly as an employer or manager for work contracted or requested by a customer.”

The law prohibits and renders void such provisions in agreements entered into on or after July 1, 2024. In addition, when an employer enters into an agreement on or after July 1 that violates this new law, the service provider must notify its employees of the new law and the section in the agreement that violates it. 

There is only one narrow exemption to the new law: it does not apply to workers providing professional business consulting for computer software development and related services who are seeking employment through a service provider with the knowledge and intention of being considered for a permanent position of employment with the customer as their employer at a later date.

For enforcement, unlike the prohibition on noncompetes passed in 2023 (Minnesota Statute § 181.988), the new law does not explicitly give employees a right to recover attorney’s fees incurred from enforcement. However, the attorney general is authorized to enforce the laws in Chapter 181 under Minnesota Statute § 181.1721.

Takeaway

Employers should consult with an attorney and update their agreements with customers and employees to remove prohibitions barred by this new law.