Last year, the Uniform Law Commission approved a new uniform law to consistently regulate restrictive employment agreements (i.e., employment agreements containing confidentiality, noncompete, or nonsolicit restrictions after the working relationship ends) in the United States. As of this writing, this Uniform Restrictive Employment Agreement Act (the Act) has been introduced in legislation in Colorado, Oklahoma, West Virginia, and Vermont, with more states sure to follow. Though some states may not adopt the Act in total, they are likely to use it as a springboard to strengthen existing state laws by adopting some of the provisions, language, or intentions of the Act. Our goal is to offer the reader a brief overview of the Act and thoughts about the Act from an employer and employee perspective.
The Act undoubtedly casts a wide net. The law applies to most restrictive post-employment agreements, including noncompetes, confidentiality agreements, no-business agreements, nonsolicitation agreements, no-recruit agreements, payment-for-competition agreements, and training reimbursement agreements. The Act prohibits noncompetes and all other restrictive agreements – except confidentiality agreements and training-reimbursement agreements – for “low-wage” workers, defined as those making less than the state’s annual mean wage.
Not all provisions of the Act affect a noncompetition obligation arising from the sale of a person’s ownership interest in a business entity. More deference is provided to the contracting parties in this circumstance as they are presumed to have similar bargaining power.
To enforce the most restrictive employment agreements, an employee must be provided with at least 14 days to consider the agreement before hire (or signature) and a separate notice explaining the employee’s rights under the Act. An employee can waive the 14-day consideration period before hire, but if the period is waived, the employee is entitled to a 14-day period with which to rescind the agreement after its receipt.
Type of Termination
Most restrictive employment agreements would become unenforceable under the Act unless the employee is terminated for substantial misconduct or voluntarily quits. The standard for “substantial misconduct” would be the same standard that is used for disqualification of unemployment insurance benefits in your state. This restriction would not apply to confidentiality restrictions or training repayment agreements.
Reasonableness of Restriction
A core tenet of the Act is that every restrictive employment agreement must be reasonable to be enforceable. This restriction requires a balancing of the employer’s interest, the worker’s interest, and the public interest. The Act provides reasonableness guideposts for the different types of restrictions. As to the length of the restriction, these guideposts are:
- Noncompete: no longer than one year if protecting a trade secret or customer relationship and no longer than five years if the employee was a substantial owner of a sold business;
- Nonsolicitation (limits a former employee from soliciting an employer’s customer for new business): no longer than one year if protecting a prospective or ongoing customer relationship with which the employee had worked personally;
- No-Business (limits a former employee from doing any business with an employer’s customer regardless of whether solicitation was involved): no longer than six months if protecting a prospective or ongoing customer relationship with which the employee had worked personally; and
- No-Recruit (limits a former employee from recruiting or soliciting former co-workers to leave their employment): no longer than six months if protecting an employment relationship with a current employee with whom the departing employee had worked personally.
Choice of Law and Venue
The law to be applied under the Act is the law of the state where the employee primarily worked and/or where the working relationship ended. The venue is similarly limited to the state where the employee primarily worked, where the working relationship ended, and/or where the former employee resides at the time of the dispute.
The Act provides alternatives to states to either (1) strictly prohibit the modification of a non-compliant restrictive employment agreement to make it enforceable or (2) allow modification in limited circumstances where the employer did not impose a time restriction greater than what is permitted under the Act and otherwise acted reasonably and in good faith.
Employers are subject to statutory damages per employee per agreement for each violation of the Act. States can set their own statutory damage penalty, but the Act suggests $5,000 as the ceiling per employee per agreement for each violation. Statutory prevailing party attorney’s fees are also available under the Act.
Though employers may embrace the idea of a uniform law for ease of implementation and increased predictability in enforcement, the Act still contains numerous hurdles that, if not cleared, will result in restrictive covenants becoming unenforceable. This is most evident in the notice requirements. When combined with statutory damages, fee-shifting penalties, and the potential for class actions, a chilling effect may cause many employers to do away with restrictive covenants except in exceptional and limited circumstances.
The Act is a giant step toward leveling the balance of power between employers and employees. The aspects of the Act that are the most employee positive seek to reform antiquated post-employment agreements that are offered without explanation or pushed on employees at the end of their tenure with an employer.
An employee must have notice of any restrictive covenant and be given a specific time period to rescind the acceptance of employment if any covenant is unacceptable. This should encourage employers to be more transparent in their end goals with these types of restrictive covenants.
With the enactment of the Act, employees will gain a remedy and enforcement section which introduces the “private right of action for individuals” so employees are not bound by waiting for a public entity (State Attorney General or the Department of Labor) to step up and act on their behalf. Overall, employees can consider the passage of the Act a long-deserved win.