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C2’s federal contracting clients often have employees working on contracts all around the country. One issue that frequently arises is how can clients effectively administer post-employment restrictive covenants (e.g., non-compete and non-solicitation agreements) across their entire workforce. This can be a challenge, since laws surrounding non-compete agreements are currently driven by state law. Many state legislatures have been active in this area over the past few years. In particular, Maryland recently joined a growing chorus of states that are restricting the use of a non-compete agreement for low wage employees.

A. The New Maryland Law

Generally speaking, “non-compete” agreements prohibit employees from going to work for a direct competitor of the former employer for a certain length of time after their employment ends. As of October 1, 2019, non-compete agreements under Maryland law now apply only to employees that earn more than $15 per hour or $31,200 annually. The law is not intended to apply to higher-paid employees. Put another way, the new law forbids employers from forcing employees who earn less than $31,200 per year or $15 an hour from agreeing to not work for a competitor after their employment ends.

Any agreements that violate this new Maryland law, even if freely entered into between an employer and the employee, will be null and void. The law applies to all employees working in Maryland — even if the agreement was executed outside of the state.
Also, the law is not limited to the post-employment conduct of an employee. This means the law would conceivably prohibit an employer from preventing a current employee from “moonlighting” for a competitor.

B. Maryland Employers Still Have Some Recourse

Even though the new law restricts which Maryland employees may now be subject to non-compete agreements, the law leaves open the possibility for other restrictions. For example, the law clearly states that it does not apply to agreements that restrict the taking of client lists or proprietary company information. This means that employers can still execute confidentiality agreements with any employee (regardless of their wage rate) that restricts their ability to take or use company proprietary information post-employment. In addition, the law does not appear to prevent employers from prohibiting former employees from soliciting their clients or employees via non-solicitation agreements.

Interestingly, the law does not provide an employee with the ability to sue his employer for making him enter into a prohibited non-compete agreement. There are no prescribed damages or penalties against employers. Accordingly, if the employer pursues a lawsuit to enforce the prohibited agreement, the employee’s only remedy will be to raise the new law as a defense to prohibit enforcement of those unlawful post-employment restrictions.

C. Other States are Enacting Similar Restrictions

Maryland is not the only state to try and limit the scope of enforceable non-compete agreements. On June 28, 2019, Maine enacted a new law making non-compete agreements null and void for any employee earning less than 400% of the federal poverty line – nearly $50,000 in 2019. Similarly, on July 10, 2019, New Hampshire enacted a non-compete restriction for low-wage employees who earn less than $24,280 annually. And Rhode Island also joined the chorus in 2019, passing a law that restricts non-compete agreements for employees whose annual earnings are less than 250% of the federal poverty level. Other states such as Utah, Idaho, California, and Illinois already have laws restricting to various degrees the use of non-compete agreements. And other states’ legislatures have made similar attempts to limit non-compete agreements, including Virginia and New Jersey. But as of yet, they have not been able to get anything passed into law.

D. Indecisive Action at the Federal Level

Currently, no federal law addresses the use of non-compete agreements among private employers. While laws restricting such agreements have gained traction at the state level, similar legislative attempts by the U.S. Congress have been unsuccessful. For example, in January 2019, Senator Marco Rubio (R-FL) proposed the Federal Freedom to Compete Act, which would prohibit employers from forcing entry-level, low wage workers to sign non-compete agreements and would void any non-compete agreements created prior to the bill’s enactment. In addition, in October the 2019 Workforce Mobility Act was introduced in the U.S. Senate by Senators Christopher Murphy (D-CONN) and Todd Young (R-IN). The proposed law would ban all non-compete agreements in the private sector, with limited exceptions regarding the sale of a business or dissolution of a partnership. On November 14, 2019, the Senate Committee on Small Business and Entrepreneurship reviewed both of the 2019 non-compete bills at a hearing entitled “Noncompete Agreements and American Workers.” Although many of the Senators in attendance appeared to support restricting the use of non-compete agreements to some degree, it seems highly unlikely that either measure will get passed into law before the conclusion of Congress’ 2019 term. While federal action in this area is certainly worth monitoring, it appears that, for now, Congress is content to let the states’ legislatures continue to impose their own non-compete restrictions.

E. Conclusion

An important aspect of the new Maryland law is that it does not grandfather existing non-compete agreements with employees whose earnings are low enough to bring them within the purview of the new law. This means agreements that may been lawfully executed months or even years ago, will now be unenforceable under the new law. Accordingly, those employers with Maryland employees should review their current non-compete restrictions to ensure they are enforceable under the new Maryland law and, where necessary, revise their agreements to bring them into compliance.

C2 provides strategic HR outsourcing to clients who want to develop optimal workforce strategies and solutions to allow them to be more competitive and profitable. C2 blog posts are intended for educational and informational purposes only.

 

[1] Some employers have handbook policies that completely prohibit employees from engaging in outside employment.  It is unclear how these policies may be impacted by the new Maryland law.
[2] This same bill was also introduced by senator Murphy in 2018.