Our journey starts with a sandwich.
In 2014, a Jimmy John’s employee leaked a copy of a noncompete agreement that the Sandwich of Sandwiches™ chain required employees at all levels (including store-level employees, such as sandwich makers and delivery drivers) to sign.
The noncompete provided as follows:
Employee covenants and agrees that, during his or her employment with the Employer and for a period of two (2) years after … he or she will not have any direct or indirect interest in or perform services for … any business which derives more than ten percent (10%) of its revenue from selling submarine, hero-type, deli-style, pita and/or wrapped or rolled sandwiches and which is located with three (3) miles of either [the Jimmy John's location in question] or any such other Jimmy John’s Sandwich Shop.
After word of the noncompete requirement became widespread, class action lawsuits were filed, seeking to nullify the requirement. In 2016, the Attorney General of Illinois also filed suit, arguing the requirements were both illegal and unconscionable.
Jimmy John’s eventually agreed not to support the enforcement of the noncompete against store employees. But the outrage over the matter spawned a deluge of state laws that have made noncompete provisions difficult, if not impossible, for employers to require.
Before we go: Restrictions and prohibitions to heed
It is generally understood that a noncompete agreement may not be enforced unless it is reasonable, and necessary to protect a legitimate business interest of the employer. The difficulty is in figuring out what is “reasonable” and “necessary” in any given case. This is made even more challenging by the ever-evolving state requirements and prohibitions that seem to pop up everywhere you look. Some of the trickiest aspects of noncompetes can be categorized as wage thresholds, notice requirements, and position-specific prohibitions.
One of the primary criticisms of the Jimmy John’s noncompete agreements was that they applied to low-wage earners. A few states have taken the position that all non-compete agreements are prohibited, but many others prohibit noncompetes only for employees who earn compensation below a certain threshold. The minimums vary by state and are also subject to change as the economy fluctuates.
The concept of notice may seem intuitive, but many states impose specific substantive and timing requirements that must be met if the employee is deemed to have sufficient notice. As with the wage thresholds, these requirements vary by state.
States have taken a variety of approaches in barring employers from imposing noncompetes on certain employees. For example, some states prohibit noncompetes based on factors like age, exempt/nonexempt status, and compensation levels. There are also many industry-specific exclusions in certain states. For example, in a number of states, noncompetes cannot be required of physicians, nurses, attorneys, computer professionals, or broadcasters.
As employers operating in multiple states are already aware, compliance with the various noncompete laws can be an arduous task. To understand how a sampling of jurisdictions treat noncompetes, let us embark on a road trip of sorts through the United States.
DISCLAIMER: This survey is only a summary. It does not address every state, nor does it address every aspect of noncompete law in the states that are covered. The following states were selected because their laws demonstrate emerging trends and the difficulty for employers to address the requirements and limitations.
- Noncompetes are enforceable only against key employees, such as employees with access to trade secrets or confidential or proprietary information, etc.
- No-solicitation provisions (solicitation of employees) may target only employees who are uniquely essential to the business.
- Alabama statute lays out presumptively reasonable temporal limitations (for example, two years for noncompetes in the employment context).
- Noncompetes are not enforceable and violate public policy.
- No-solicitation agreements for customers or clients, as well as employees according to some courts, are prohibited.
- Employers who violate the law may be subject to enforcement action by the attorney general’s office.
- Choice of law or choice of venue provisions as a condition of employment are generally unenforceable (except in certain negotiated agreements) if the law or forum is a jurisdiction other than California.
- For agreements entered into on or after August 10, 2022, noncompetes cannot be used against anyone who is not a “highly compensated employee.”
- A “highly compensated employee” is one who earns at least $112,500 for 2023.
- For a customer no-solicitation agreement, the employee must earn at least 60 percent of the “highly compensated” amount (for 2023, that would be $67,500).
- Employers must provide notice of the noncompete in a separate document, accompanied by the agreement, with “clear and conspicuous terms” and specific language identifying the noncompete agreement.
- For new employees, the notice document must be received by the employee before the employee accepts an offer of employment. For existing employees, the notice document must be provided at least 14 days before the earlier of (1) the effective date of the noncompete, or (2) the effective date of any additional compensation or change in the terms and conditions of employment that provides consideration for the noncompete.
- There are limitations on nondisclosure provisions, with exclusions for general knowledge, training, skills, publicly available information, or information that the employee has a legal right to disclose as part of protected conduct.
- Effective March 1, 2022, a violation of the noncompete statute is a crime punishable by up to 120 days in jail, a fine of up to $750, or both.
Geographic Limitations on Employee No-Solicitation Provisions
- Georgia’s Restrictive Covenant Act specifically provides that customer no-solicitation and trade secret protection provisions do not need to have geographic limitations. The Act does not address employee no-solicitation provisions in this regard. Therefore, restrictions on solicitation of employees must have a geographic limitation.
- North American Senior Benefits v. Wimmer
- The Georgia business court held that an employee no-solicitation covenant was void and unenforceable because it did not have a geographic limitation. It also rejected the employer’s request to “blue-pencil” the covenant under the Georgia Restrictive Covenant Act by adding a geographic limitation. According to the court, adding a geographic limitation went beyond “blue pencil” revisions and constituted rewriting the covenant.
- The state Court of Appeals affirmed and held that a restrictive covenant must have a geographic limitation unless it is a restriction on the solicitation of customers or the use of trade secrets. The court also found no error in the trial court’s refusal to use its “blue pencil” to modify the no-solicitation-of-employees restrictive covenant at issue.
- The dissent noted that numerous Georgia courts have upheld similar provisions lacking geographic limitations, reasoning that the covenant was specific enough as to who could be solicited and therefore provided fair notice of what was prohibited. However, for now there is authority in Georgia allowing former employees to solicit their co-workers if the no-solicitation provision does not contain a geographic limitation.
- Illinois imposes a wage threshold for 2023 of $75,000 per year for noncompetes and $45,000 per year for no-solicitation agreements. The thresholds will increase every year through 2037.
- Written notice must be given before entering the non-compete and, for new employees, at least 14 calendar days before employment begins. Current employees must be given at least 14 calendar days to review the agreement before it goes into effect. The notice must be given along with the noncompete agreement and must advise the individual to consult with an attorney.
- Courts will not enforce noncompetes against employees who have been laid off or furloughed for reasons related to the COVID-19 pandemic, unless the employee is paid the equivalent of their base salary at the time of termination for the period of enforcement, less earnings from new employment.
- Noncompetes are similarly unenforceable against certain workers, including broadcasters, government contractors, physicians, low-wage earners, certain nurses, and certified nurse assistants and employees covered by a collective bargaining agreement under the Illinois Public Labor Relations Act or the Illinois Educational Labor Relations Act (with exceptions for certain construction employees).
- Employers in violation of the noncompete standards in Illinois are subject to penalties of $5,000 for each violation, or $10,000 for each repeat violation within a five-year period.
- Noncompetes are enforceable only against key employees, employees with access to trade secrets or confidential or proprietary information, etc.
- No-solicitation provisions (solicitation of employees) are limited.
- Both noncompetes and no-solicitation provisions must identify the parishes/counties encompassed in the agreement(s) by name. There is one Court of Appeals decision to the contrary, but it is an outlier.
- Noncompetes are unenforceable against low-wage earners who earn less than or equal to 400 percent of the federal income poverty level (the poverty level for 2023 is $14,580 for an individual, so an individual would have to earn in excess of approximately $58,320 for 2023). It should be noted that the poverty levels – and, therefore, the Maine wage threshold – are higher depending on the size of the individual’s family.
- Notice must be given along with the noncompete by the time an offer of employment is presented and at least three business days before the deadline for the individual to sign.
- With the exception of certain physicians, the noncompete will not be enforceable against an employee who has not remained employed for at least the longer of the following: (1) one year, or (2) six months after the employee signed the noncompete.
- A new amendment to Maine’s noncompete statute bans noncompetes for licensed Maine veterinarians, with a carveout for those with an ownership interest in a practice.
- Maryland imposes the lowest wage threshold of states with wage requirements. The wage threshold is $15 per hour (or $31,200 annually). Effective October 1, the threshold will increase to $19.88 per hour generally ($19.20 per hour for small employers).
- Noncompetes are not enforceable against workers who are (1) nonexempt under the federal Fair Labor Standards Act, (2) 18 years old or younger, or (3) undergraduate or graduate students in an internship or other short-term employment relationship while enrolled in college or graduate school.
- For new employees, notice must be given by the earlier of (1) 10 business days before work begins, or (2) before a formal offer is made. For existing employees, notice must be given at least 10 business days before the noncompete becomes effective. The notice must include the individual’s right to consult with an attorney. Both the employer and the individual must sign the noncompete agreement.
- All noncompetes must be supported by a “garden leave clause,” providing for pro-rata payment during the restricted period of at least 50 percent of the employee’s highest annualized base salary, or other reasonable consideration. In general terms, a garden leave clause provides that the employer will pay the employee during the restricted period, starting when the employee leaves the company and ending when the noncompete period expires. If the employee competes with the employer during the restricted period, garden leave payments may stop.
- Noncompetes are not enforceable against employees who were terminated without cause. No noncompete is enforceable for more than 12 months.
- Like California, Minnesota prohibits post-employment noncompetes. However, agreements signed on or before July 1, 2023, remain enforceable.
- Nebraska courts will not under any circumstances modify or “blue pencil” a noncompete to make it enforceable.
- Nebraska cases appear to enforce only narrow restrictions on solicitation of the employer’s customers. The no-solicitation provision must apply only to those customers with whom the employee did business and had personal contact.
- Noncompetes are not permitted if the employee is paid solely an hourly wage, (disregarding tips and gratuities).
- Noncompete agreements cannot preclude an employee from providing services to any former client or customer of the employer if (1) the employee did not solicit the former customer or client; (2) the customer or client voluntarily chose to leave the employer and seek services from the employee; and (3) the employee is otherwise complying with the limitations in the agreement as to time and scope of activity to be restrained.
- The statute allows employees to recover attorneys’ fees in civil actions for noncompete violations.
- Noncompetes are unenforceable against low-wage earners who earn less than or equal to two times the federal minimum wage of $7.25 per hour ($14.50 per hour), or the state tipped minimum wage, whichever applies.
- Employers must provide the noncompete agreement to candidates before they accept the offer of employment.
- A bill recently passed by both chambers of the New York State legislature provides for a complete ban on noncompetes. It is awaiting the signature of Gov. Kathy Hochul (D). It remains unclear whether the legislation would apply to noncompete agreements entered in the context of the sale of a business. The bill will not be retroactive.
- No-solicitation agreements or provisions should exclude clients or customers who came to the employer as a result of the employee’s independent contact and business development efforts before, and independent from, the employee’s employment.
- Case law is often (incorrectly) cited as precluding enforcement of noncompetes with employees who were terminated without cause.
- Noncompetes are not enforceable in North Dakota.
- Noncompetes are not enforceable in Oklahoma.
- For agreements entered into before January 1, 2022, an employee’s annual gross salary and commissions must exceed the median family income for a four-person family.
- For agreements entered on or after January 1, 2022, the employee’s annual gross salary and commissions must exceed $108,576 for 2023 (adjusted annually).
- Notice must be contained in a written offer of employment and received two weeks before the individual begins work.
- Noncompetes may be entered into only with employees who handle administrative, executive, or professional work, and who perform predominantly intellectual, managerial, or creative tasks, exercise discretion and independent judgment, and earn a salary or are otherwise exempt from Oregon’s minimum wage and overtime laws.
- The restricted time period in noncompetes entered on or after January 1, 2022, cannot be more than 12 months.
- An employer must have a “protectable interest,” which the statute defines as (1) where the employee has access to trade secrets; (2) where the employee has access to competitively sensitive confidential information; or (3) where the employee is employed as an on-air talent by an employer in the business of broadcasting, subject to additional qualifications related to the resources expended on the employee’s development and training and required payment to the employee during the restricted period.
- Noncompetes are not enforceable against workers who (1) are nonexempt under the FLSA; (2) undergraduate or graduate students in an internship or short-term employment relationship; (3) 18 years old or younger; or (4) low-wage earners (defined as earning less than 250 percent of the federal poverty level, or approximately $36,450 in 2023).
- Employees must earn a minimum of approximately $70,000 per year for 2023 (tied to average weekly wage in Virginia). This wage threshold does not apply to employees whose earnings are derived from sales commissions, incentives, or bonuses.
- Employers in Virginia must post a copy of Virginia Code § 40.1-28.7:7, or a summary approved by the Virginia Department of Labor and Industry, to notify employees that noncompetes are not enforceable against low-wage earners. The notice must be posted wherever other required employee notices are posted. Failure to post the required notice can result in civil penalties.
- Noncompetes cannot preclude an employee from providing services to any client or customer of the employer if the employee did not initiate contact with or solicit the former customer or client.
- Noncompetes are not enforceable against employees earning (in 2023) less than or equal to $116,593.18 per year, or $291,482.95 for independent contractors.
- Notice must be given in writing before the individual accepts an offer of employment. If the noncompete agreement will become enforceable only at a later date, the employer must disclose that the agreement may be enforceable against the employee in the future.
- Noncompetes are not enforceable against employees who were laid off or terminated without cause unless they are paid during the restricted period.
- The wage threshold is $150,000 per year, or $250,000 per year for “medical specialists.”
- Written notice of the noncompete must be provided within 30 days of an individual’s acceptance of employment as well as any time the policy changes.
- The following notice language must be used for highly compensated employees:
The District of Columbia Ban on Non-Compete Agreements Amendment Act of 2020 limits the use of non-compete agreements. It allows employers to request non-compete agreements from “highly compensated employees” under certain conditions. The Company has determined that you are a highly compensated employee. For more information about the Ban on Non-Compete Agreements Amendment Act of 2020, contact the District of Columbia Department of Employment Services (DOES).
- Noncompetes are enforceable only against key employees, employees with access to trade secrets or confidential or proprietary information, etc.
- No-solicitation provisions (solicitation of employees) should be limited to targeting employees in whom the company has a legitimate interest.
Detour to the Feds: FTC, NLRB, DOL
- Noncompete restrictions are under attack, not only from various state legislatures, but also from the U.S. Federal Trade Commission and the National Labor Relations Board.
- For example, the FTC in early 2023 issued a proposed rule that would broadly ban noncompetes and no-solicitation agreements, arguing that they were anticompetitive and unfairly restricted trade. Similarly, the NLRB’s General Counsel has issued recent guidance announcing that noncompete agreements violate the National Labor Relations Act by chilling protected concerted activity, unless they are narrowly tailored. The NLRB guidance does not affect noncompetes for employees who are excluded from NLRA coverage, including "supervisors" as defined by the Act.
- Constitutional challenges are anticipated in response to these sweeping attacks against noncompetes by federal agencies.
The Scenic Route: Confidentiality
A final, but critical, consideration to be visited on our noncompete road trip is the all-important confidentiality provision. Restrictive covenant agreements often contain such provisions to protect the Company’s confidential information when the employee leaves.
Subject Matter and Time Limitations
Confidentiality provisions typically are not scrutinized as critically as non-competition provisions. However, the confidentiality and nondisclosure language should be drafted carefully so as not to be interpreted as preventing the employee from earning a living indefinitely. For example, confidentiality provisions should be drafted to specifically define the information that is considered “confidential.” A number of states require that nondisclosure provisions have time limitations (at least as to information that does not qualify as a trade secret) in order to be enforceable.
Confidentiality provisions should explicitly carve out whistleblowing activities, meaning that the agreement does not interfere with an employee’s ability to exercise rights under applicable whistleblower laws.
California STAND Act and Other State Law Concerns for Confidentiality Provisions in Connection with Settlement Agreements
Although noncompete agreements are largely unenforceable in California, employees may still be subject to confidentiality provisions in other aspects of their employment or separation, including in settlement and separation agreements.
California’s Stand Together Against Non-Disclosure Act (the “STAND Act”) was passed in 2018 and prohibits confidentiality provisions contained in settlement agreements from preventing the disclosure of factual information relating to claims of sexual assault, sexual harassment, or harassment or discrimination based on sex. Other states, such as Illinois, New Jersey, New York, Oregon, and Washington, have similar laws. Some states impose penalties for noncompliance. Washington allows employees to bring a civil action for actual damages, or statutory damages of $10,000 (whichever is greater), plus reasonable attorneys’ fees and costs. Oregon allows a civil action with a penalty of up to $5,000 and the ability to recover compensatory and punitive damages, along with attorneys’ fees.
The Defend Trade Secrets Act extends federal protection to trade secrets and allows companies and individuals to file private lawsuits in federal court to remedy a wrongful taking of their trade secret information. The DTSA has a notice provision that requires employers wishing to avail themselves of all of the remedies available under the DTSA to include a notice of whistleblower immunity in any contracts with employees, contractors, or consultants that include provisions restricting the use or disclosure of trade secret or other confidential information.
The notice must state that no individual may be held civilly or criminally liable for the disclosure of a trade secret in confidence to a federal, state, or local government official, or to an attorney, when such disclosure is made to investigate or report a suspected violation of law, or in a complaint or other document filed in a lawsuit or other proceeding if the filing is made under seal. The notice should also advise that an individual suing an employer for retaliation based on the reporting of a suspected violation of law may disclose a trade secret to their attorney and use the trade secret information in the court proceeding, so long as any document containing the trade secret is filed under seal and the individual does not disclose the trade secret except pursuant to court order.
Any employment agreements that govern the use of a trade secret or other confidential information must include this notice. Failure to have the required notice language may prevent an employer from obtaining exemplary damages or attorneys’ fees in trade secret litigation. However, because the DTSA does not preempt state trade secret law, these remedies might still be available if a state law trade secret is included in the complaint.
Home Sweet Home: Don’t miss the turn!
Having an out-of-compliance restrictive covenant agreement can sometimes stop enforcement actions immediately. Although some courts will reform a noncompete agreement that contains an invalid or illegal term, others will refuse to do so, rendering the entire agreement invalid and unenforceable. Some courts may also penalize businesses for even presenting an unenforceable noncompete agreement to an employee, regardless of whether the businesses actually seek to enforce them.
Employers seeking to enforce noncompete agreements must plan to ensure that they make it back home in one piece. Multistate employers should avoid generic “one-size-fits-all” template agreements without considering how state and local laws may apply. If it has been a while since you have reviewed your noncompete, recent changes in the law may warrant a tune-up of these important agreements to get you back safe and sound.