The Employee Restrictive Covenant: A Local Scalpel, Not a National Broadsword

An employee restrictive covenant should be viewed by lawyers and employers as a legal scalpel, not a broadsword. Precise drafting, narrowly tailored restrictions, and attention to state-specific requirements are all key. In 2021, this maxim is more critical than ever. Indeed, in this year alone, we have seen numerous states exercise statutory authority to overhaul legal regimes once largely dictated by common law. In doing so, these states not only imposed substantial limitations on the use of certain employee restrictive covenants—noncompetition and nonsolicitation agreements in particular—but also created new risks for employers who fail to adapt to these changes.

For example, Illinois Governor J.B. Pritzker signed into law amendments to the Illinois Freedom to Work Act (IFWA), which will greatly limit the enforceability of employee restrictive covenant agreements in the State of Illinois and create substantial financial risk for employers who do not abide by these new limitations. Indeed, non-compliant employers will be faced with prevailing party attorney’s fee exposure, if an employee successfully defends against a restrictive covenant enforcement action. Further, the Illinois attorney general will be authorized to seek meaningful financial penalties, as well as equitable relief against employers who violate the IFWA’s new provisions.

Similarly, in Oregon, lawmakers recently passed legislation amending the state’s existing non-compete statute, Oregon Revised Statutes (ORS) 653.295. Through these changes, the state cut the maximum length of non-compete periods from 18 months to 12 months and raised the minimum earnings threshold required before an employee may lawfully be subject to a non-competition agreement.

We also have seen similar legislative actions in Nevada and Washington, D.C. in just this year, alone, and many more over the last several years. As such, it seems that these statutory actions to limit employee restrictive covenants may well become the standard across the country. However, “standard” may be a poor choice of words, insofar as each state statute creates a set of state-specific intricacies, and compliance in one jurisdiction does not at all guarantee compliance in another jurisdiction.

As many practitioners know, convincing national employer clients to use multiple forms of employee restrictive covenants can be challenging, given the administrative burden posed by the undertaking. However, given the growing risks of invalidation and negative litigation experiences posed by the enhancements in state-specific restrictive covenant laws, practitioners should continue to counsel our clients to err on the side of caution and tailored forms.