If yours is one of the many companies considering new employment incentives, enhanced benefits, and retention bonuses, you should also consider taking another look at your non-compete covenants at the same time. They might already be outdated and unenforceable.

The Current Landscape

The most recent jobs report confirmed what those of us in the industry already know: this is the tightest market for talent and the most competitive employment market in years, if not decades.^[1] Both employee resignation and employer hiring are reaching near-record highs while the layoff rate approaches a near-record low.^[2]

In this climate, smart companies are working hard to retain their talent, which creates often-overlooked opportunities. As companies offer employees new incentives to increase retention, those same incentives provide opportunities to seek enhanced covenants in return. In a competitive labor market, these agreements become all the more important—no one wants an employee using knowledge of their company as a sales pitch to a prospective employer (who just might also be their biggest competitor).

So What Do I Need to Know?

1. Your non-compete from just one year ago may no longer be enforceable.

The law in many states has changed and continues to change in ways that may already have rendered your current non-competes obsolete. Within just the past year, statutory changes in Illinois, Nevada, and Oregon have significantly limited the enforceability of restrictive covenants for certain employees. In Illinois and Oregon, non-competes may not be enforced if the employee makes less annually than $75,000 and $100,533, respectively. Nevada took a similar approach, invalidating all non-competes for employees paid solely on an hourly wage basis. In Illinois, even non-solicitation covenants (for employees or customers) are now unenforceable if entered into with employees making less than $45,000 annually.

The District of Columbia was also set to appear on this list, but as we previously noted, the District of Columbia’s Ban on Non-Compete Agreements Amendment Act of 2020—originally scheduled to take effect on April 1, 2022—has been delayed until October 1, 2022. If and when it goes into effect later this year, DC will join the few jurisdictions in the United States that have near-total prohibitions on non-competes.

2. Additional consideration may be required to make your restrictive covenants enforceable.

Through both case law and statute, more states are now requiring employers to pay extra for restrictive covenants. For example, the Wyoming Supreme Court recently held that an employer could not enforce a non-compete against its former employees because those employees had signed the agreement during (rather than at the beginning of) their employment without receiving any additional consideration.^[3] Going one step further, a federal court in Massachusetts held, on the very same day, that mere employment with a company—even at the start of the employment relationship—is insufficient to satisfy the requirement under the Massachusetts Noncompetition Agreement Act that covenants be supported by some mutually agreed consideration.^[4]

These are just two of many examples that illustrate the risk employers now face: some non-competes may now be invalid. But this cloud has a silver lining—if you are considering offering bonuses for retention or otherwise, it might be the perfect time to pair them with refreshed covenants.

3. A distributed workforce requires extra attention when employees live (and work) in locations other than the office location to which they are assigned.

For better or worse, some things will never be the same as they were before the start of the pandemic. Awkward handshakes, grocery delivery, and remote work are all here to stay. The rise of fully-remote employment positions means that some employees may never actually set foot into the physical office location to which they are assigned. This divergence can have far-reaching effects on the governing law and enforceability of restrictive covenants as well as the forum in which a dispute would be heard, should one ever arise.

Some states (like Massachusetts, California, and Washington) have gone so far as to enact legislation that restricts or prevents choice-of-law or forum-selection provisions from being enforced against their citizens. And in other states, these provisions may be unenforceable depending on certain public policy considerations.

To illustrate, if you have an employee working from home in California, who is assigned to an Arizona office, and who has agreed to covenants that include Arizona choice-of-law and forum-selection provisions, both of those provisions may be unenforceable. And given the previously discussed patchwork of state laws on restrictive covenants, the difference between Arizona and California law could mean the difference between an enforceable and an unenforceable agreement. It is essential to select carefully what law will apply and where disputes will be heard when addressing a remote workforce.

4. Do not forget the employee non-solicitation covenant.

It takes only one departing employee to turn into a recruiter for their new employer. To prevent competitors from picking off talent one-by-one, companies should consider including employee non-solicitation covenants in their employment agreements. These should not be confused with so-called “no-poach” agreements between employers that agree not to solicit the other’s employees, which can be void as against public policy and have come under increasing scrutiny from the Department of Justice.^[5]

In most states, the standard for enforcement of non-solicitation covenants between employers and employees is more lenient, employer-friendly, and subject to less scrutiny than non-compete covenants. Drafting these agreements requires careful consideration of the current case law and relevant statutes.

Conclusion

In this increasingly competitive market, it is more important than ever for companies to ensure compliance while maximizing the enforceability of their employment agreements. The competition for talent shows no signs of slowing—smart companies should consider how to revise potentially outdated agreements and how to maximize opportunities to seek enhanced covenants in connection with retention bonuses.

ENDNOTES

[1] Scott Horsley, Employers continue hiring spree even as war in Ukraine ratchets up economic fears, NPR (Apr. 1, 2022, 8:34 AM), https://www.npr.org/2022/04/01/1089989337/employers-continue-hiring-spr….

[2] See id.; Greg Iacurci, The Great Resignation is still in full swing. Here’s what to know, CNBC (Mar. 31, 2022, 1:28 PM), https://www.cnbc.com/2022/03/31/the-great-resignation-is-still-in-full-….

[3] Brown v. Best Home Health & Hospice, LLC, 491 P.3d 1021 (Wyo. 2021).

[4] KPM Analytics N. Am. Corp. v. Blue Sun Sci., LLC, No. 4:21-CV-10572-TSH, 2021 WL 2982866 (D. Mass. July 15, 2021).

[5] See, e.g., Pittsburgh Logistics Sys., Inc. v. Beemac Trucking, LLC, 249 A.3d 918 (Pa. 2021); United States v. DaVita, No. 1:21-cr-00229, 2022 WL 266759 (D. Colo. Jan. 28, 2022) (ultimately ending in acquittal).