Hunton Retail Law Resource

The increase in the use of noncompetition agreements in industries such as retail and food service has caught the eye of several state legislatures, and they are beginning to take measures to curb the trend.

A Massachusetts law recently signed will limit employers’ ability to restrict hourly workers from engaging in competitive work after the end of their employment. The bill, signed by the governor on August 10, 2018, and effective October 1, 2018, prohibits employers from enforcing employment noncompetition agreements against employees who are classified as nonexempt under the Fair Labor Standards Act. In effect, the law will eliminate an employer’s ability to limit where hourly retail employees can work after the end of their employment, even if they want to go to work for a direct competitor.

Traditionally, employers used noncompetition agreements to prevent competitors from poaching high-level, management employees and to discourage those same employees from seeking competitive work. But the recent proliferation of post-employment restrictions imposed on unsalaried, lower-level employees has led many states to consider protective legislation for employees with less bargaining power than their executive-level counterparts.

Illinois began the trend to limit these types of agreements during 2016 when it passed a law that outlawed noncompete agreements with employees making $13 per hour or less. The Massachusetts law expands its protections a step further to include all nonexempt employees, which covers salaried employees earning less than $23,600 per year and most hourly employees, regardless of their hourly rate.

Other states, including Vermont, Maryland, New Hampshire and New Jersey, continue to consider legislation similar to the Massachusetts law to protect nonexempt workers’ freedom to seek other gainful employment, even if it is in competition with a former employer.

For retailers, the changes in the state law noncompetition landscape represent a potential hurdle worth monitoring. Even if the a retailer operates nationally and uses a standard noncompetition agreement for all of its employees, Massachusetts law would prohibit the application of the agreement to any nonexempt employees who live or work in the state.

Retailers may be able to work around the law and continue to protect their interests by using other restrictive covenants that do not limit an employee’s future job prospects. Under the Massachusetts law, employers may still enter into confidentiality agreements and employee and client nonsolicitation agreements with nonexempt employees. So, for example, by using an effective employee nonsolicitation agreement, a nonexempt product buyer may be able to leave to work for a competitor, but she would not be allowed to recruit her coworkers to join her.

Moving forward, retailers should monitor continued developments in noncompete laws in states where they operate to ensure any restrictive covenants with employees comply with applicable law. While the Massachusetts law is one of the first in this subject area to get all the way to the governor’s desk, it likely will not be the last.