More States Block Noncompete Agreements

Noncompete agreements used to be commonplace, particularly in employment sectors, but they have become increasingly rare in recent years. Employers historically have used noncompete and non-solicitation agreements to stop employees from competing with a company or soliciting that company’s customers for a specific period after they leave their employment.

State legislative changes and court rulings have limited or invalidated noncompete agreements, leading to steep declines in their usage. For example, California, North Dakota, Oklahoma, and Washington, D.C., all ban the agreements with a few narrow exceptions. Nine other states prohibit noncompete agreements unless the worker earns above a certain income level. The goal of legislation establishing income thresholds to use noncompete agreements is to protect low-income workers’ mobility. Many of the newest restrictions on noncompete agreements also occurred during the COVID-19 pandemic, when the labor market in many industries severely tightened, making jobs scarce.

Workers Subject to Noncompete Agreements

According to a 2021 article in the Journal of Law and Economics, about 18% of American workers have noncompete agreements, and 38% of workers had a noncompete agreement in the past. Only 10% of workers had negotiated a noncompete agreement, and about one-third of employees received a noncompete agreement after accepting a job offer.

The Federal Reserve Bank of Minnesota released research in 2021 stating that 12% of workers earning $20 per hour or less reported having a noncompete agreement in their current or most recent job. This figure compares to 18% of workers earning more than $20 per hour. The report also indicated that, particularly for lower-wage workers, the threat of enforcing noncompete agreements could adversely affect job opportunities.

Colorado’s Noncompete Agreement Law

The Colorado legislature passed one of the nation’s new laws restricting noncompete agreements; the new state law took effect on August 10, 2022. Although the law makes clear that reasonable confidentiality agreements between employer and employee are still perfectly legal, the law severely restricts the utilization of noncompete and non-solicitation agreements, except where they are required to protect trade secrets as specifically defined under state law.

Under the new law, noncompete agreements are unenforceable unless they accompany the sale of a business or involve an employee who earns more than $101,250 annually. Additionally, non-solicitation agreements are invalid unless they involve employees making more than $60,750 annually.

Colorado employers must notify job applicants about noncompete agreements and allow them to review the agreements before they accept any job offers. If employers wish to impose noncompete agreements on current employees, they must provide written notice to the employees at least 14 days before the agreement goes into effect.

Noncompliance with the Colorado law has severe consequences for employers, in that they can face penalties of up to $5,000 per worker. Violation of the law also can lead to class 2 misdemeanor criminal charges, which carry a potential penalty of up to 120 days of incarceration and a $750 fine.

HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 470-571-1007.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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