Home | Non-compete Agreements - Big Changes in Federal and State Law
Non-compete Agreements - Big Changes in Federal and State Law
REMEMBER WHEN “LOCK ‘EM UP” RELATED TO EMPLOYMENT LAW, NOT POLITICS? BIG CHANGES IN FEDERAL AND STATE LAW
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Big changes to federal and state laws have changed the landscape of non-compete clauses in employment contracts in Minnesota and nationwide.
Decades ago, non-compete covenants were mostly used to stop scientists, inventors, or top executives from usurping confidential information or inventions of a company. The employment contracts were generally between highly-paid professionals, who were compensated for agreeing not to compete.
In recent years, this changed. As of a few years ago, an estimated 30 million Americans—or 1 in 5 employees—were bound by noncompete clauses. Dog sitters, tree trimmers, trash haulers, laborers, hair stylists, day care workers, doctors, sales people, mid-level financial professionals, and even sandwich shop makers and warehouse workers have all been required to sign noncompete clauses that limit their ability to work for competing businesses.
In 2023 the state of Minnesota and in 2024 the Federal Trade Commission (“FTC”) took action to sharply limit employment non-competes. The federal and state rules are similar but not identical. Generally speaking, the laws prohibit most employers from entering into non-compete clauses with most employees.
Effective Date. The Minnesota state-level restrictions took effect in 2023. The FTC restrictions are set to take effect on September 4, 2024 but are being challenged in the courts.
Legal Challenges. In Minnesota, the state legislature enacted the non-compete ban. At the federal level, the FTC promulgated federal rules to adopt the non-compete ban. After the FTC’s final rule was published, lawsuits were filed challenging the FTC’s legal authority to promulgate the rule. Initial legal rulings are expected this summer. If these lawsuits succeed, the FTC rule could be enjoined or stayed from becoming effective in September.
Contracts Impacted. The Minnesota statute applies to employment non-competes adopted after July 1, 2023. The FTC rule ban new non-competes after the rule becomes effective and also invalidates most existing non-competes at the time the rule becomes effective, but it does not prohibit employers from enforcing non-competes if the legal claim arose before the rule becomes effective.
Independent Contractors. The Minnesota statute and the FTC rule apply to independent contractors.
Senior Executives. The FTC rule does not apply to “senior executives,” meaning employees who earn more than $151,164 per year and who serve in a “policy-making” position. A “policy making” position is generally one that controls a significant aspect of a business without needing the approval of a higher-level executive.
Non-profits. The FTC generally does not apply to non-profit organizations, although the FTC retained discretion to determine if the organization is truly acting as a non-profit corporation so as to warrant an exemption.
Sale of Business. Neither the state nor federal law prohibits non-competes that are negotiated during the sale of a business.
Notice to Employees. The federal rule requires employers to provide clear and conspicuous notice to employees who have a non-compete clause that falls within the rule’s prohibitions that it will not be enforced.
Service Contract Providers. In addition to the employment non-compete laws, in the spring of 2024, the Minnesota Legislature enacted a new provision prohibiting service contract providers from prohibiting most customers from soliciting or hiring its employees. This provision applies to agreements made on or after July 1, 2024.
Provisions Still Allowed. While the change in law at both the federal and state level represents significant change, employers may still use carefully-crafted contractual provisions to protect the confidentiality of their proprietary information and the solicitation of their customers by former employees:
Confidentiality agreements protect an employee from using propriety information of the employer, both during employment and afterward. A well-written confidentiality agreement can help to protect an employer’s bona fide confidential information and trade secrets.
Non-solicitation agreements prohibit an ex-employee from soliciting the employer’s customers after employment ends.
That said, an employer may not have a confidentiality or non-solicitation agreement that is so broad that it effectively functions as a non-compete agreement.
Lori Swanson and Mike Hatch practice law at Swanson Hatch, P.A. They sequentially represented Minnesota as Attorney General for 20 years. Mr. Hatch was Minnesota Commissioner of Commerce from 1983 to 1990, where he regulated the insurance, real estate, securities, banking, and financial services industry. Ms. Swanson was Chair of the Federal Reserve Board’s Consumer Advisory Council. Ms. Swanson and Mr. Hatch have been involved in dozens of cases involving restrictive competition agreements.
www.swansonhatch.com
431 S Seventh Street, Suite 2545
Minneapolis, MN 55415 612-315-3037
The materials in this article are for informational purposes and do not constitute legal advice, nor does your unsolicited transmission of information to us create a lawyer-client relationship. Sending us an email will not make you a client of our firm. Until we have agreed to represent you, nothing you send us will be confidential or privileged. Readers should not act on information contained in this article without seeking professional counsel. The best way for you to inquire about possible representation is to contact an attorney of the firm. Actual results depend on the specific factual and legal circumstances of each client’s case. Past results do not guarantee future results in any matter.
Big changes to federal and state laws have changed the landscape of non-compete clauses in employment contracts in Minnesota and nationwide.
Decades ago, non-compete covenants were mostly used to stop scientists, inventors, or top executives from usurping confidential information or inventions of a company. The employment contracts were generally between highly-paid professionals, who were compensated for agreeing not to compete.
In recent years, this changed. As of a few years ago, an estimated 30 million Americans—or 1 in 5 employees—were bound by noncompete clauses. Dog sitters, tree trimmers, trash haulers, laborers, hair stylists, day care workers, doctors, sales people, mid-level financial professionals, and even sandwich shop makers and warehouse workers have all been required to sign noncompete clauses that limit their ability to work for competing businesses.
In 2023 the state of Minnesota and in 2024 the Federal Trade Commission (“FTC”) took action to sharply limit employment non-competes. The federal and state rules are similar but not identical. Generally speaking, the laws prohibit most employers from entering into non-compete clauses with most employees.
Effective Date. The Minnesota state-level restrictions took effect in 2023. The FTC restrictions are set to take effect on September 4, 2024 but are being challenged in the courts.
Legal Challenges. In Minnesota, the state legislature enacted the non-compete ban. At the federal level, the FTC promulgated federal rules to adopt the non-compete ban. After the FTC’s final rule was published, lawsuits were filed challenging the FTC’s legal authority to promulgate the rule. Initial legal rulings are expected this summer. If these lawsuits succeed, the FTC rule could be enjoined or stayed from becoming effective in September.
Contracts Impacted. The Minnesota statute applies to employment non-competes adopted after July 1, 2023. The FTC rule ban new non-competes after the rule becomes effective and also invalidates most existing non-competes at the time the rule becomes effective, but it does not prohibit employers from enforcing non-competes if the legal claim arose before the rule becomes effective.
Independent Contractors. The Minnesota statute and the FTC rule apply to independent contractors.
Senior Executives. The FTC rule does not apply to “senior executives,” meaning employees who earn more than $151,164 per year and who serve in a “policy-making” position. A “policy making” position is generally one that controls a significant aspect of a business without needing the approval of a higher-level executive.
Non-profits. The FTC generally does not apply to non-profit organizations, although the FTC retained discretion to determine if the organization is truly acting as a non-profit corporation so as to warrant an exemption.
Sale of Business. Neither the state nor federal law prohibits non-competes that are negotiated during the sale of a business.
Notice to Employees. The federal rule requires employers to provide clear and conspicuous notice to employees who have a non-compete clause that falls within the rule’s prohibitions that it will not be enforced.
Service Contract Providers. In addition to the employment non-compete laws, in the spring of 2024, the Minnesota Legislature enacted a new provision prohibiting service contract providers from prohibiting most customers from soliciting or hiring its employees. This provision applies to agreements made on or after July 1, 2024.
Provisions Still Allowed. While the change in law at both the federal and state level represents significant change, employers may still use carefully-crafted contractual provisions to protect the confidentiality of their proprietary information and the solicitation of their customers by former employees:
- Confidentiality agreements protect an employee from using propriety information of the employer, both during employment and afterward. A well-written confidentiality agreement can help to protect an employer’s bona fide confidential information and trade secrets.
- Non-solicitation agreements prohibit an ex-employee from soliciting the employer’s customers after employment ends.
That said, an employer may not have a confidentiality or non-solicitation agreement that is so broad that it effectively functions as a non-compete agreement.Lori Swanson can be reached at lswanson@swansonhatch.com, or at 612-315-3037. Mike Hatch can be reached at mhatch@swansonhatch.com, or at 612-315-3037. The firm’s website is www.swansonhatch.com .
www.swansonhatch.com
431 S Seventh Street, Suite 2545
Minneapolis, MN 55415
612-315-3037
The materials in this article are for informational purposes and do not constitute legal advice, nor does your unsolicited transmission of information to us create a lawyer-client relationship. Sending us an email will not make you a client of our firm. Until we have agreed to represent you, nothing you send us will be confidential or privileged. Readers should not act on information contained in this article without seeking professional counsel. The best way for you to inquire about possible representation is to contact an attorney of the firm. Actual results depend on the specific factual and legal circumstances of each client’s case. Past results do not guarantee future results in any matter.
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Swanson | Hatch, P.A.
431 S. 7th Street, Suite #2545
Minneapolis, MN 55415
612-315-3037
www.swansonhatch.com