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More states are passing or introducing legislation that will make it harder to enforce noncompete agreements on departing employees.
Employers should examine the new laws in states where they operate to ensure they comply with the requirements, which sometimes include salary limitations on employment restrictions, experts say.
Last month, Colorado became the latest state to enact a law curbing noncompete and nonsolicitation clauses in employment agreements.
Colorado H.B. 22-317, “Concerning Restrictive Employment Agreements,” which was signed in June and takes effect Aug. 10, eliminates noncompete agreements for employees earning less than $101,250 a year and provides for the protection of trade secrets. Some of the laws introduced elsewhere also ban noncompetes against lower-paid workers. Other states that have recently enacted similar laws are Illinois, Nevada and Oregon.
The Colorado law, which applies prospectively, also applies to customer nonsolicitation agreements unless they are entered into by someone who earns at least 60% of the threshold for highly compensated workers, or $60,750. Workers must also be provided notice of the law before they accept employment.
Companies that apply noncompetes that do not meet statutory requirement are subject to penalties of $5,000 per worker.
Separately, a law approved in January, which experts say is unique to Colorado, criminalizes restrictive covenants, which include noncompetes, by making it a misdemeanor that provides for a $750 fine per violation, a possible punishment of 120 days in prison, or both.
Experts say that except for the misdemeanor charge, the Colorado law falls “in the middle of the pack” in terms of its stringency among the states that have enacted similar legislation. More states are expected to address the issue.
There are 39 such bills pending in eight states, said Erik W. Weibust, a partner at Epstein Becker Green P.C. in Boston.
Colorado’s “falls within a trend that has been occurring within the states to set wage floors for noncompetes,” he said.
While President Biden issued an executive order a year ago ordering the Federal Trade Commission to explore the issue of noncompetes, there has been little federal action.
Legislative activity in the area of noncompetes will likely remain focused on the state level for at least the next four to five years, said Jeanne Fugate, a partner with King & Spalding LLP in Los Angeles.
Observers say insurance brokers are among the types of business most likely to be affected by the laws.
Numerous brokers have sued former employees that joined rivals in the past several years. For example, last month a court barred former Willis Towers Watson PLC employees who had move to Alliant Insurance Services Inc. from working on their former accounts and soliciting business from Willis clients. Earlier this month , USI Insurance Services LLC filed a request for expedited discovery in noncompete litigation it filed against a former employee who formed his own brokerage.
Other industries most affected by the laws include health care organizations, financial advisers and data-oriented companies.
“It’s always a difficult balance, with employers seeking to protect their business, trade secrets and goodwill on the one hand and on the other the employee’s right to work freely wherever they choose,” said Amber Gonzales, a litigator with Crowell & Moring in Denver.
States updating their restrictive covenant laws often do not want to eliminate noncompetes but also want to avoid having individuals railroaded by them, said Eric Barton, a partner with Seyfarth Shaw LLP in Atlanta.
Pointing to the salary restrictions, Bennett Pine, a shareholder with Anderson Kill in New York, said, “It’s one thing to restrict an executive making $500,000. It’s another thing to prevent a file clerk making $35,000 a year from going to a competitor.”
Employers in Colorado should review the noncompete agreements they introduce after August and examine their current noncompetes and the extent to which they are reviewed annually, said Michael Freimann, a partner with Armstrong Teasdale LLP in Denver.
It is going to be a challenge for employers to comply with the legislation, which requires “some pretty complex notice requirements,” such as calling for employers to inform prospective employees of the rules before they accept an offer, said David C. Roth, an associate with Fisher Phillips LLP in Denver.
Multistate employers should also introduce tracking mechanisms to be sure they know each state law and what to do in response, he said.
“Employers need to get creative about how to impose restrictions to protect themselves against individuals” in whom they have made significant investments, or who have been allowed access to trade secrets, to protect themselves against such employees leaving, said Maxwell N. Shaffer, a partner with Holland & Knight LLP in Denver. Some noncompete agreements he has reviewed are “lazy and generic,” he said.