A non-competition agreement (or "non-compete") is a legal contract designed to prevent an employee from competing with their employer. Generally, non-compete agreements must be no broader than necessary to protect the employer's legitimate business interests. Restrictions included in such agreements must also be narrowly drawn with respect to duration, geography, and the type of competitive activities prohibited.
Non-competes can be structured to prevent an employee from sharing proprietary information, sensitive information, or trade secrets with other parties. Employers in many industries also rely on non-compete agreements to protect their relationships with customers, suppliers, and other employees. Where employee turnover is common, non-compete agreements can protect businesses from unfair competition when an employee leaves to work for a competing business.
However, non-compete agreements are viewed as restraints on trade and are subject to a growing number of legal restrictions. On the federal level, President Biden issued an Executive Order in July 2021 urging the Federal Trade Commission to "curtail the unfair use of non-compete clauses or agreements that may unfairly limit worker mobility." While federal legislation is not likely any time soon, employers must continue to evaluate non-compete agreements under a patchwork of state laws. The following states recently passed laws restricting or limiting the use of non-competes:
Colorado: Effective August 10, 2022, Colorado law places limitations on newly executed non-compete agreements. Such agreements must be (1) entered into with "highly compensated workers" who annually earn at least $101,250, (2) be created to protect trade secrets, and (3) be no broader than necessary to protect the employer's legitimate interest in protecting trade secrets. For non-competes limiting an employee's ability to solicit customers, such agreements may only be entered into with employees earning over 60% of the highly compensated salary threshold ($60,750). The salary threshold must be met both at the time the contract was executed and at the time the agreement is enforced.
Additionally, Colorado law now requires employers to provide advance notice of non-compete agreements, and agreements must include clear and conspicuous terms. Colorado is also the first state to criminalize invalid non-compete agreements. Any person who unlawfully intimidates workers from engaging in any lawful occupation commits a class 2 misdemeanor. Further, an employer that attempts to enforce any void non-compete agreement may be subject to a penalty of up to $5,000 per worker.
Washington: Effective June 9, 2022, non-compete agreements are valid only for an employee whose annual income exceeds $101,390 (or for an independent contractor whose annual income exceeds $253,475).
Washington D.C.: Effective October 1, 2022, non-compete agreements are only lawful for (1) medical specialists earning $250,000 or more annually, or (2) any employee whose total compensation is (or is reasonably expected to be) more than $150,000 annually, unless that employee works for a television, radio, cable, satellite, or other broadcasting state or network. Employers must provide the non-compete to the highly compensated employee in writing at least 14 days before the start of employment or the execution of the agreement. Restrictive periods in agreements are further limited to only 365 calendar days (730 days for medical specialists) after the date of separation.
Non-competes have been and will continue to be heavily scrutinized, requiring careful consideration of applicable state law. Employers should revisit non-compete agreements to ensure they are compliant and consult with counsel when drafting or revising agreements.
Have questions about how these new law updates could impact you? Please give us a call at 765.423.7900 or send us an email at info@gutweinlaw.com.
