Articles

Employment Law Update: The Latest on Non-Compete Agreements

Maryland and New York Perspectives

Non-compete agreements have been the subject of much discussion and scrutiny across the country. While some states and federal agencies push for prohibition of these types of restrictive covenants altogether, Maryland and New York continue their trends of narrowing the class of workers who may be lawfully subjected to a non-compete. 

Maryland Law on Non-Compete Agreements

Maryland’s statutory limitation on non-compete agreements expanded its reach last month, with more changes in this area of the law likely to follow in 2024. More specifically, the State has tied enforceability of non-competes to an employee’s earnings as a factor of state minimum wage. Workers who fall below the threshold are protected from employer mandated non-compete agreements.

On October 1, 2023, Maryland’s minimum wage statute was amended to reflect a trend toward the goal of reaching a $15 minimum wage by January 1, 2024. This change is important, because the statute prohibiting non-compete agreements was also amended on October 1, 2023, with the earnings limit now tethered to a multiple of 150% of the state minimum wage currently in effect. Maryland Labor & Empl. Code Ann. § 3-716.

The statute prohibiting non-competes for certain employees currently applies to, “an employment contract or a similar document or agreement concerning an employee who earns equal to or less than 150% of the State minimum wage rate established under § 3-413.”

Maryland’s minimum wage statute (§ 3-413) provides that during 2023, most employers with 15 or more employees will be required to pay a minimum wage of $13.25 per hour, while employers with less employees will be required to pay $12.80 per hour. Through December 31, 2023, 150% of the state minimum wage will be about $19.875 and $19.20, respectively for large and small employers.

Thankfully, those hard-to-remember numbers won’t be relevant for long, as starting January 1, 2024, 150% of the state minimum wage will be $22.50 per hour following the $15 per hour minimum wage hike across the board.

How Has The Statute Evolved?

The change signals a recognition of the changing economy by raising the threshold level in which Maryland, as a matter of public policy, wants to encourage the free movement of workers. The law reflects Maryland’s desire to keep low wage earners from being restricted from seeking new work, even if it is in competition with a former employer.

Additionally, the prior version of the statute, which was in place from October 1, 2019 to September 30, 2023, there was no tie-in to the state’s minimum wage. The prior language simply stated noncompete agreements were null and void where employees made either, $15 per hour; or $31,200 annually. It is unclear whether the statute still contemplates an annualized amount of the threshold amount, which by the same calculation method of the earlier version would now be $46,800.

Without additional interpretation of the statute, the annualized calculation may provide a guidepost. Otherwise, employers are left to ponder how the law might apply to salaried workers. A straight reading would appear to imply the intended threshold is simply a calculation based on the then current minimum wage rate; however, until an administrative agency or court weighs in, alternative readings are likely to occur, particularly in the case of exempt employees.

Practical Effects and Takeaways

Employers should review early on whether the employee they want to sign a non-compete agreement is being paid at a rate above the threshold set by Maryland law. Practically, hourly workers making between $15.00 (starting January 1, 2024) and $22.50 should not enter non-compete agreements, and the desired effect of any such agreements should be evaluated beyond traditional non-compete language. Such employees may still be bound by non-solicitation agreements and other covenants to protect trade secrets or confidential information.

There are also no statutory safeguards providing a private cause of action or remedy for low-wage earners who enter into these agreements. Essentially, there is nothing stopping an employee from entering into an agreement which, by statute, is “null and void.” The only deterrence would be to provide the affected employee with a defense to an enforcement action. The statute itself has no real enforcement mechanism short of testing agreements through the courts.

Employers are also reminded that outside of this statutory limitation, Maryland courts have a long history of deciding on the enforceability of non-compete agreements for all employees based on factors developed over many years through case law. These factors include the business necessity for the non-compete, as well as reasonableness of the scope and duration of limits imposed by such agreements. Current trends indicate an even more critical approach being taken by the courts, particularly as opinion turns against non-competes as one means for an employer to protect its business from unfair competition.

New York Bill on Non-Compete Agreements

In June 2023, the New York State Assembly and New York State Senate passed a bill (S.3100A/A.1278B) that would prohibit employers in New York from the use of non-compete agreements and certain other restrictive covenants with employees and would amend New York’s Labor Law (“NY Non-compete Bill”). According to Bloomberg Law News, on November 30th, Governor Hochul informed reporters that she would be amenable to a non-compete law narrower in scope that protects “low- and middle-income workers,” suggesting that she will be requesting revisions to the NY Non-compete Bill before agreeing to sign it. This pronouncement is consistent with earlier statements regarding her intentions.

Background

In 2022, Governor Hochul announced that she would propose legislation to “eliminate non-compete agreements for workers making below the median wage in New York State and explicitly ban all ‘no-poach’[1] agreements under State antitrust law.”  In recent years, the New York State Attorney General has investigated employers for requiring “rank-and-file” employees to sign non-compete agreements and reached settlements with employers who required employees without access to trade secrets or confidential information to sign such agreements. See https://ag.ny.gov/sites/default/files/non-competes.pdf.

What Does the Bill Specifically Provide and Who is Covered by It?

The NY Non-compete Bill would prohibit employers, their agents or other entities from seeking, requiring, demanding or accepting a non-compete agreement from “covered individuals” who are defined as “any other person who, whether or not employed under a contract of employment, performs work or services for another person on such terms and conditions that they are, in relation to that other person, in a position of economic dependence on, and under an obligation to perform duties for, that other person.” 

The NY Non-compete Bill defines a “non-compete agreement” as “any agreement, or clause contained in any agreement, between an employer and a covered individual that prohibits or restricts such covered individual from obtaining employment, after the conclusion of employment with the employer included as a party to the agreement.” Any contract provision restraining an individual from engaging in a lawful profession, trade, or business of any kind would be void under this bill.

Is There a Private Right of Action?

Yes. Under the bill, if signed into law, any covered individual would be able to sue in court within two years of the later of: (i) when the prohibited non-compete agreement was signed; (ii) when the covered individual learns of the prohibited non-compete agreement; (iii) when the employment or contractual relationship is terminated; or (iv) when the employer takes any steps to enforce the non-compete agreement. A court is authorized to void the non-compete agreement and order all appropriate relief, including injunctive relief, liquidated damages up to $10,000, lost compensation, damages, reasonable attorneys’ fees, and costs. Notably, the bill states that the court “shall” award liquidated damages to “every covered individual affected…in addition to any other remedies permitted by this section,” making such an award mandatory.

Are There any Carve-Outs or Other Considerations?

The bill does not affect any federal, state, or local law, rule or regulation relating to an employer’s ability to enter into fixed-term employment contracts or agreements prohibiting the disclosure of trade secrets or confidential or proprietary information.

Furthermore, it does not affect agreements prohibiting solicitation of clients that a covered individual learned about during employment, “provided that such agreement does not otherwise restrict competition in violation of this section.” It does not address whether provisions prohibiting solicitation of co-workers would be barred by this bill. If the bill becomes law, the language prohibiting restrictive agreements that “otherwise restrict competition in violation of this section” means New York employers will need to take care in crafting future agreements to minimize the risk of litigation. Notably, there is no carve-out in the NY Non-compete Bill that would allow owners or partners selling or merging a business to sign noncompete agreements unlike California and the Federal Trade Commission’s (“FTC”) proposed non-compete ban.

Would the Law Apply Retroactively?

No. The bill, if signed into law in its current form, would apply prospectively to agreements executed or modified on or after the law’s effective date (which is 30 days after the Governor signs it).

Takeaways

As noted above, Governor Hochul has indicated to reporters that she will not sign the NY Non-compete Bill in its current form. She has suggested that she may be willing to sign a narrowed version of the NY Non-compete Bill that prohibits non-competes for low- to middle-wage workers but allows non-compete bans for higher wage workers earning, as she suggested, at least $250,000. She has until December 31 to “call up” the bill and to sign, veto, or request changes to the bill. Once the NY Non-compete Bill has been delivered to Governor Hochul, she has 10 days to sign or veto it. She may sign the bill but request a “chapter amendment” which is a bill that the Legislature agrees to pass in exchange for the Governor signing another bill amending the same law.  Any such amendments would need to be passed by the Legislature and typically they are passed and signed into law between January and March. 

Even if Governor Hochul does not sign the NY Non-compete Bill or other legislation restricting the use of non-competes, there is a growing groundswell throughout the United States to eliminate or limit non-compete agreements, including initiatives at the federal level to restrict the use of non-compete agreements in at least some respect. For instance, the National Labor Relations Board’s (“NLRB”) General Counsel recently issued an Advice Memo advising that non-compete agreements violate workers' Section 7 rights under the National Labor Relations Act and the FTC recently proposed a rule that would prohibit employer use of most non-compete agreements.

Regardless of whether Governor Hochul signs the NY Non-compete Bill, employers with New York workers (and independent contractors) may want to: (1) review existing non-compete/non-solicitation agreements for employees, independent contractors and others who provide services to those employers, and confer with their employment counsel; (2) stay abreast of developments at the federal level, both at the NLRB and FTC, regarding employer use of non-competes; and (3) be prepared for an expected increase in litigation (and unfair labor practice charges) challenging non-compete agreements and provisions that restrict competition.

Conclusion

Employers should expect to see further legal developments in the expansion of employee rights, workplace transparency and employee privacy in the United States in the coming years. Employers seeking to attract talent may want to consider how they might stay ahead of that trend while also considering with their legal counsel creative, alternative ways to protect trade secrets, confidential and proprietary information so their organizations continue to thrive and grow. Whiteford’s Labor & Employment Law Group is continuing to monitor developments in this area and will provide updates as they develop. Please feel free to reach out to our Department with any questions.