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February 04, 2022 Practice Points

Prohibitions on Non-Compete Agreements for Low-Wage Workers

What employers of these and commission-based employees need to know.

By Ivy Waisbord

Over the last several years, numerous states have passed legislation to limit employers’ use of non-compete agreements, specifically for low-wage earners. Currently, 10 states ban non-compete agreements for low-wage employees, and there is a push for further regulation and legislation at both the state and federal level. However, in the context of non-compete legislation, there is no uniform definition of what constitutes “low-wage.” For example, in Maryland, non-compete agreements are null and void for employees who earn $15 per hour or $31,200 annually or less, while in Oregon, non-compete agreements are void and unenforceable against employees who earn no more than $100,533. In Illinois, the “magic number” is $75,000 annually. In yet another twist, the Virginia statute uses a complicated formula to set the income floor for non-competes but specifically exempts employees whose “earnings are derived, in whole or in predominant part, from sales commissions, incentives, or bonuses paid to the employee by the employer” from its definition of a “low-wage employee.”

To make matters even more complicated, many state statutes also require employers to provide advance notice of the terms of a non-compete agreement to its recruits, prior to the start of employment. However, “earnings” are generally evaluated at the time of separation. In many circumstances, this means that employers of commission-based employees may struggle to accurately predict at the start of employment whether a given employee will earn at or above the specific wage which would allow the employer to enforce the terms of a non-compete. How, then, are these employers able to protect their goodwill, safeguard their trade secrets, and prevent unfair competition while still providing the employee the required advance notice?

One option for employers to consider is the use of a springing non-compete provision, which would become operative only when the employee’s earnings exceed the statutory threshold. However, it is imperative that employers pay attention to state-specific requirements for these types of agreements. For example, in Washington, if the non-compete agreement becomes enforceable only at a later date due to the changes in the employee’s compensation, the employer must also specifically disclose that the agreement may be enforceable against the employee in the future.

Additionally, it is crucial for employers to have supplemental safeguards in place. Legislation relating to restrictive covenants with low-wage workers primarily—but not exclusively—prohibits non-compete agreements. Even in jurisdictions like Illinois, which also restricts the use of non-solicitation covenants for certain income levels (under $45,000 per year), employers should leverage available options. Lesser restrictions, such as non-disclosure agreements, still offer a measure of protection for employers in this context. Also, employers should consider practical measures, including stringent digital security and in-depth and continuous employee training.

Given the increasing focus on low-wage workers’ ability to freely compete, employers should be prepared for additional legislation pertaining to non-compete agreements for low-wage workers. Therefore, practitioners should be prepared with effective and compliant contractual restrictions, as well as practical solutions to ensure protection of their clients’ trade secrets and goodwill.

Ivy Waisbord is an associate with Fisher & Phillips LLP in Philadelphia, Pennsylvania.


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