A Year in Review: Round-Up of Recent Changes in State Non-Compete/Restrictive Covenant Law
Updated: Apr 9
Transformation of some kind in the non-compete realm during the Biden Administration is an almost certainty. While campaigning, President Biden proposed a plan to “[e]liminate non-compete clauses,” on the basis that they purportedly hinder competition and employee’s bargaining power. Plan for Strengthening Worker Organizing, Collective Bargaining, and Unions (articulating a goal to “[e]liminate non-compete clauses and no-poaching agreements that hinder the ability of employees to seek higher wages, better benefits, and working conditions by changing employers”). The last few years have seen a trend of state laws imposing wage thresholds for noncompete agreements and otherwise limiting the types of employees who can be made to sign noncompetes. More recently, during the past year, Washington D.C., Virginia, and Indiana enacted new legislation limiting employers’ use of non-compete agreements. Furthermore, California courts have expressed a stricter interpretation of California’s existing statutory ban on non-competes to extend to employee nonsolicitation provisions.
Washington D.C.-Ban on Non-Competes
On January 11, 2021, the Washington, D.C., Mayor signed the Ban on Non-Compete Agreements Amendment Act of 2020. The new act prohibits employers from requiring or requesting individuals who will work in the District of Columbia to execute a non-compete agreement, with a few exceptions for unpaid volunteers, babysitters, and certain licensed physicians. Importantly, the act not only prohibits employers from restricting an employee from working for a competitor after their employment, but also prohibits employers from precluding employees from being contemporaneously employed elsewhere—thus invalidating no-moonlighting policies and potentially impacting duty of loyalty provisions.
The Ban on Non-Compete Agreements also makes it a violation of the law to retaliate against an individual for refusing to agree to a noncompete, allegedly refusing to comply with a noncompete agreement (or moonlighting policy),or challenging an agreement (or policy) that the employee believes violates the act.
Further, written notice to employees is required using specific language:
“No employer operating in the District of Columbia may request or require any employee working in the District of Columbia to agree to a non-compete policy or agreement, in accordance with the Ban on Non-Compete Agreements Amendment Act of 2020.”
Employers must provide this notice no later than: (1) ninety calendar days after the applicability date of the Act; (2) seven calendar days after an individual becomes an employee; and (3) fourteen calendar days after the employer receives a written request for notice from the employee.
The Ban on Non-Compete Agreements provides for administrative penalties of between $350-$1,000 per violation.
Although the Ban on Non-Competes has been signed by the D.C. Mayor, it will not apply until its fiscal effect is included in an approved budget and financial plan and the date of inclusion is certified (likely not until later in 2021 when D.C.’s new fiscal year begins—something to keep on your radar if you employ individuals in D.C.).
Virginia-No Non-Competes with Low Wage Earners
In April 2020, Virginia enacted House Bill (HB) 330, forbidding employers to enter into or enforce a non-compete agreement with low wage employees. The statute carries the highest state penalty to date - $10,000 for each violation and allows low wage employees to file a civil action against an employer who attempts to enforce a noncompete prohibited by the statute. The statute became effective on July 1, 2020. The statute contains the following definition of low wage earner:
"Low-wage employee" means an employee whose average weekly earnings, calculated by dividing the employee's earnings during the period of 52 weeks immediately preceding the date of termination of employment by 52, or if an employee worked fewer than 52 weeks, by the number of weeks that the employee was actually paid during the 52-week period, are less than the average weekly wage of the Commonwealth as determined pursuant to subsection B of § 65.2-500. "Low-wage employee" includes interns, students, apprentices, or trainees employed, with or without pay, at a trade or occupation in order to gain work or educational experience. "Low-wage employee" also includes an individual who has independently contracted with another person to perform services independent of an employment relationship and who is compensated for such services by such person at an hourly rate that is less than the median hourly wage for the Commonwealth for all occupations as reported, for the preceding year, by the Bureau of Labor Statistics of the U.S. Department of Labor. For the purposes of this section, "low-wage employee" shall not include any employee whose earnings are derived, in whole or in predominant part, from sales commissions, incentives, or bonuses paid to the employee by the employer.
The average weekly wage of the Commonwealth obviously fluctuates. Of late it has been about $1000-1100 a week. Employers in Virginia would be well-advised to pay close attention to the average weekly wage and not cut it to close.
Virginia employers must post a copy of the new law (or a summary approved by the Virginia Department of Labor and Industry) in the same location where other employee notices required by state or federal law are posted. Virginia is currently the only state requiring a workplace job posting relating to noncompete agreements.
Indiana-Physician Non-Competes Limited
Under Ind. Code § 25-22.5-5.5-2, enacted July 2020, restrictions are in place on non-compete agreements with physicians. For a non-compete to be enforceable against a physician, the agreement must contain various provisions that essentially protect the patients’ interests in maintaining continuity of care despite a doctor’s change in employment, including the ability for the physician to buy-out of the noncompete in certain circumstances, giving a physician access to medical records, and allowing patients to obtain updated contact information for the treating doctor.
California-Employee Non-Solicitation Restrictions May Run Afoul of State Law
California Business and Professions Code Section 16600 provides that "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." Based on this statute, California courts have for years voided non-compete covenants (except in very limited circumstances related to the sale of a business/partnership interest and related goodwill). Until recently, California employers relied on the 1985 decision in Loral Corp. v. Moyes, for interpretation of Section 16600 to allow the enforcement of employee non-solicitation agreements. In that case, the court used a reasonableness standard to allow a narrow exception to the ban on non-competes for employee non-solicitation agreements.
However, in 2018, a California court of appeal case (AMN Healthcare, Inc. v. Aya Healthcare Services, Inc.) and a federal district court case (Barker v. Insight Global, LLC.), effectively rejected Loral’s analysis. These courts determined that employee non-solicitation agreements are unlawful and cannot be enforced. Since then, other California courts have followed suit, including the Central District of California, who in October 2020 in Conversion v. Measured, struck down an employee nonsolicit as void and against Calfornia public policy, citing AMN. Although the California Supreme Court has yet to rule on this issue, employers are well-advised to reconsider the use of employee nonsolicitation provisions given the trend in California law.
So, what does the year in review mean for employers moving forward? If employers have not updated employment agreements in the last few years, they may be running the risk that non-compete and non-solicitation agreements will not be enforceable. Indeed, new legislation is on the horizon in many states. Given the rather rapid change in this area of law, employers are well-advised to consider updating their agreements. Jackie Johnson, P.C., is happy to help you with these needs. I have been helping employers navigate the tangled web of multistate noncompete law for over two decades and I can help your Company do so efficiently.