Noncompete Agreements: An Overview of the Law as it Stands . . . For Now

April 12, 2023

Noncompete Agreements: An Overview of the Law as it Stands . . . For Now

State law governs noncompete agreements between employers and their employees. While the Federal Trade Commission (FTC) is considering a federal rule that will preempt state laws and essentially ban noncompete agreements, this rule has yet to take effect. NFIB’s comments on the proposed rule, which requested the FTC withdraw the rule due to an absence of legal authority and the harm it would cause to small businesses, can be found here. You can learn more about the proposed rule from this NFIB SBLC summary. In the interim, employers should be aware of the many existing state restrictions on noncompete agreements.

What Is A Noncompete Agreement?

A noncompete agreement is an agreement between an employer and employee that the employee will not engage in competitive activity against the employer after the employment relationship ends. These agreements may state that the employee cannot work for a competitor or make a competing product, and typically include durational and geographical limits. More general information on noncompete agreements can be found here.

State Laws on Noncompetes

California, North Dakota, and Oklahoma broadly prohibit noncompete agreements between employers and employees, but each state’s prohibition contains narrow exceptions. For example, Oklahoma allows an employer and employee to agree that the employee cannot solicit sales or services from customers of the former employer after the employee’s departure. Both California and North Dakota allow noncompetes for the sale of a business (preventing the former owner from competing in the same geographic area) and the dissolution of Limited Liability Companies (LLCs) or Partnerships. A proposed New York law would also broadly prohibit noncompete agreements subject to very narrow exceptions. Of the remaining 47 states that generally allow noncompete agreements, 11 of them and the District of Columbia restrict their use based on the type of employee or employee’s income. The list below details which states have these income or employee classification restrictions as well as the worker threshold or employee classification restricted.

Income Threshold

Colorado – $101,250 Illinois – $75,000 Maine – 400% of federal poverty level Maryland – $15/hr or $31,200 annually New Hampshire – 200% of federal minimum hourly wage Oregon – $100,533 Virginia – Average weekly wage less than state average Washington – $100,000 District of Columbia – $150,000

Worker Classification Where Noncompetes Prohibited

Massachusetts – FLSA Nonexempt Workers Nevada – Hourly Workers Rhode Island – FLSA Nonexempt Workers

The past decade has seen a growing trend of state law restricting the use of noncompete agreements. One of these newer restrictions has been to require that employers provide employees prior notice that signing a noncompete agreement will be a condition of employment. States with these laws are Oregon, Maine, Massachusetts, New Hampshire, and Washington. An additional trend has been to restrict the use of noncompete agreements for certain occupations. For example, numerous states prohibit their use for physicians, healthcare workers, and broadcasters. Business owners in Massachusetts, Oregon, and Washington should be especially careful before using noncompete agreements. Not only do these states impose the income and worker classification restrictions listed above, but they also impose additional statutory restrictions on the use of noncompetes. Massachusetts and Oregon require employers to compensate former employees during the post-employment period in which the noncompete agreement is in effect. Additionally, each of these states limits the duration in which a noncompete will be effective—Washington imposes an 18-month limit, while Oregon and Massachusetts impose a 1-year limit. In the 47 states where noncompetes are generally permitted and there are no statutory restrictions, judicial decisions govern the use of these agreements. While each state’s test can differ, in simplest terms, courts often weigh the employer’s interest in the noncompete provision versus the interests of the former employee in continuing work. If courts determine that an employer has a legitimate interest in the noncompete agreement, they will then analyze whether the noncompete agreement is impermissibly broad to protect that interest. In judging the breadth of a noncompete, courts will consider factors such as the geographic reach of the noncompete, the scope of activity restricted, and the duration of the noncompete. For example, a noncompete that prevents a former employee from working in the entire State of Texas for 5 years will assuredly be found unreasonable, whereas one limited to a specific city or metropolitan area for 1 or 2 years may be permissible. Beck Reed Riden is a nationally-renowned Business and Employment law firm based out of Boston, Massachusetts. For more general guidance on each state’s approach to noncompete agreements, their State-by-State Survey is a great starting point. For additional questions reach out to the NFIB Legal Center at info@nfib.org. This information is provided for informational purposes only and should not be construed as legal advice. Because the law around noncompete agreements varies by state, the SBLC strongly urges businesses to work with a business or employment attorney in their state.

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