The Rapidly Changing Landscape of Restrictive Covenants

Are you a company navigating the complexities of employee contracts and safeguarding your intellectual property? Let's talk about Employee Restrictive Covenants! There have been a variety of changes implemented regarding the validity and enforceability of these agreements within the last few years. For businesses that practice across multiple states, there may be different standards to consider as the country is a patchwork of varying laws.

Employee Restrictive Covenants serve as a crucial tool in protecting your company's interests while fostering innovation and growth. Historically, so long as the agreement was reasonable regarding duration and geographical scope, restrictive covenants were generally deemed valid and enforceable. However, the changes proposed recently are indicative of a shift toward significantly diminishing the utilization of such agreements.

The following agreements generally fall under the restrictive covenant umbrella:

1. Non-Disclosure Agreements (NDAs): NDAs typically prevent employees from sharing sensitive data with competitors or unauthorized parties.
2. Non-Compete Clauses: Prevent former employees from working for competitors within a certain time frame and geographic area in an effort to prevent unfair competition and protect your market share.
3. Non-Solicitation Agreements: Serve as a restriction on employees’ ability to solicit clients or colleagues post-employment.

Connecticut’s HB 6594 seeks to establish a general ban – among other restrictions – on all non-competes entered into, amended, extended, or renewed on or after July 1, 2023. A non-compete would have to satisfy the following requirements in order to be considered enforceable:

1. Non-compete does not last longer than one year after termination of employment. If termination is supported by additional, garden-leave compensation, agreement may last for up to two years.
2. Agreement is necessary to protect a “legitimate business interest” defined as “the protection of trade secrets or confidential information that does not qualify as a trade secret,” or an interest in “preserving established goodwill with the employer’s customers.”
3. Agreement is not more restrictive than is necessary to protect a legitimate business interest in terms of duration, geographic scope, type of work and type of employer.”
4. Agreement only applies to “exempt employees” including but not limited to those working in executive administration or professional capacity exercising discretion with certain compensation provisions.
5. Agreement is signed separately from an employment contract.
6. Notice is given to the employee within ten business days prior to either (i) the worker’s deadline to accept the offer of employment or enter into an independent contractor (IC) relationship, or (ii) the date the non-compete is signed, whichever occurs earlier.
7. The non-compete contains a statement of workers’ rights.
8. The agreement provides additional consideration if not executed at the beginning of the employment or IC relationship.
9. The employment or IC relationship is not terminated by the worker for good cause.
10. The agreement does not require the worker to submit to adjudication outside of the state of Connecticut.
11. It “does not unreasonably interfere with the public interest.”

New York’s S3100, if enacted, would broadly prohibit non-compete agreements and enable employees to bring civil actions for any violations of the statute. Agreements that prohibit disclosure of trade secrets, disclosure of confidential information, and the solicitation of clients learned during employment are considered exempted from the bill’s restrictions.

Rhode Island’s H5284 would prohibit the utilization of restrictive covenants seeking to limit a physician assistant’s right to practice. Specifically, the bill addresses non-competes and patient non-solicits but would be considered applicable to any agreement limiting the right to practice. Restrictive covenants associated with the sale of a practice are exempted, provided that they last for five years of less.

The state of Washington currently prohibits non-compete agreements for employees and ICs whose fall below a certain wage threshold in an effort to protect low-wage earners against unreasonable restraints on their ability to secure employment. In 2022, these thresholds increased to $107,301.04/year for employees and $268,525.59/year for ICs.

There may also be forthcoming change on the federal level. On July 9, 2021, President Biden issued an executive order encouraging the Federal Trade Commission (FTC) to ban or limit non-compete agreements. In January of 2023, the FTC proposed a rule that would proactively and retroactively invalidate any non-compete agreements between employers and employees. Many concerns were raised during the proposed rule’s comment period such as what implications the new standard would have on mergers and acquisitions. The proposed rule did not distinguish high-level/highly compensated employees from general “rank-and-file” employees. The only exception in this area was applicable to sellers that own a minimum of 25% ownership interest in the business. The comment period has now closed, and the final rule is projected to be released around April 2024.  

At Stanton, we understand the importance of balancing legal protection with employee rights. We also recognize that these rapidly changing regulations may pose a challenge to employers who operate across various states. Our experienced team, including Liz Sigler, can help you tailor restrictive covenants to your specific needs, providing peace of mind and enabling you to focus on driving innovation and success in your industry across the country. Together, let's ensure that your restrictive covenants are drafted carefully to be enforceable under applicable laws and regulations, while also being fair and reasonable to employees.