Restricting the Restrictive Covenant

1. A.B. 47 bans the use of non-competition provisions against employees “paid solely on an hourly basis, exclusive of any tips or gratuities.” A.B. 47, Sec. 22.5.
2. It now bars employers from suing former employees to prevent them from providing services to an employer’s customer unless the former employee solicited the customer or is otherwise violating their non-competition covenant. Id. As a result, employees now have a stronger basis to seek dismissal of enforcement suits or to seek sanctions or fees against employers who bring suit in violation of the statute.
3. The revised law inserts a new requirement that any blue-pencil revisions by a court must “not impose undue hardship on the employee.” Id. In other words, when revising an overbroad non-competition covenant, Nevada courts must now take into account the equitable interests of the employee.
4. A.B. 47 adds a new basis for employees to seek attorney fees and costs, even if they are the ones who initiated a suit seeking to declare a non-competition covenant invalid. The new provision provides for a mandatory fee award to an employee in any case where a court finds that a non-competition covenant violated the prohibition against application to an hourly employee or where an employer has attempted to enforce a non-competition covenant against an employee who has not solicited a customer. Id. (codified at NRS 613.195(7)).

These changes all add up to making Nevada’s statutory regime more friendly to employees and more hostile to even the filing of an action to enforce an overbroad non-competition covenant. Employers doing business in Nevada should pay careful attention to the revisions in A.B. 47 when drafting new employment agreements and when deciding how and whether to bring suit to enforce existing restrictive covenants.

Nevada’s statutory revisions are just the latest in a string of efforts by legislatures across the country to hem in employers’ use of non-competition covenants. The following jurisdictions have enacted new limits on non-competes this year:

Washington, D.C.

Effective March 16, 2021, the City Council for Washington, D.C., banned non-compete provisions for all employees except certain highly compensated medical specialists. D.C. Act 23-563 § 102(a).

Oregon

On May 21, 2021, the governor of Oregon signed Senate Bill 169, which made four major changes to the state’s existing regulations of non-competition covenants. The new law: (1) makes overbroad non-competition covenants void, rather than voidable; (2) reduces the allowed applicable post-employment period for a non-competition covenant from 18 months to 12 months; (3) limits the use of non-competition agreements to employees whose gross salary and commissions exceed $100,533 per year; and (4) requires an employer who wants to impose a non-compete on an employee making less than the income threshold to agree in writing to provide that employee with either 50 percent of the employee’s gross salary and commissions at the time of termination or $100,533 for the full time the covenant applies. S.B. 169 § 1. The new law is effective January 1, 2022.

Illinois

On August 13, 2021, the governor of Illinois signed into law Public Act 102-0358, which, like Nevada’s law, overhauls Illinois’s statutes governing restrictive covenants. The law prohibits the use of non-compete covenants for employees making less than $75,000 or employees who are subject to union contracts. P.A. 102-0358 § 10. It also prohibits the use of non-solicitation covenants for employees making less than $45,000 per year. Id. The law prevents employers from enforcing both non-competition and non-solicitation covenants against employees who were furloughed or laid off due to business circumstances or related to the COVID-19 pandemic. Id. Illinois’s statutory revisions go into effect January 1, 2022.

As always, practitioners should make sure to consult the relevant state law whenever advising clients on the applicability and enforceability of such restrictive covenants. As the spate of revisions discussed in this article show, these laws are ever-evolving, particularly given the growing trend toward limiting the use or scope of non-competition agreements. Make sure to base any legal analysis of a restrictive covenant on the most recent version of state laws, and consider proactively advising clients of these changes in state laws if they utilize or are subject to non-competition agreements in Nevada; Washington, D.C.; Oregon; or Illinois.

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