The legislatures of Oregon, Nevada and Illinois recently placed additional limitations on restrictive covenants, particularly non-competition covenants.

Changes to Oregon Restrictive Covenants

Effective as to agreements entered into on or after May 21, 2021, Oregon has further restricted non-compete agreements.  Oregon previously limited non-compete agreements to a maximum of 18 months from the date of separation and to only those employees who do the following:

  • Engage in administrative, executive or professional work.
  • Perform predominately intellectual, managerial or creative tasks.
  • Exercise discretion and independent judgment.
  • Are paid a salary (or combination of salary and commissions) that exceeds the median income for a four-person family.

Now, a non-compete agreement may not exceed 12 months beyond the date of separation and the employee must be paid an annual salary of at least $100,533 (adjusted annually for inflation).

Changes to Nevada Restrictive Covenants

As of May 25, 2021, the Nevada Unfair Trade Practice Act (NUTPA) now prohibits non-competition covenants for employees who are paid solely on an hourly wage basis, exclusive of any tips or gratuities.

The NUTPA already provided that a former employee could not be restricted from providing services to a customer of the former employer if the former employee did not solicit the customer, the customer voluntarily chose to leave the former employer and obtain services from the former employee, and the employee is otherwise complying with an enforceable non-compete (supported by consideration, reasonable as to scope as compared with the protection needed by the former employer, does not impose an undue hardship on the employee, and the restrictions are appropriate as compared to the consideration).

The recent amendments to the NUTPA include a provision that an employer must pay reasonable attorney’s fees and costs in the event either the employer seeks to enforce or an employee challenges a non-compete agreement that applies to an hourly employee or prohibits serving a customer of the former employer that the former employee did not solicit.

Changes to Illinois Restrictive Covenants

At the end of May, both houses of the Illinois Legislature passed a bill that, if signed by the governor, will modify the Illinois Freedom to Work Act and further restrict non-compete and non-solicit agreements entered into on or after January 1, 2022.  Employers may not enter into non-compete agreements with employees earning $75,000 or less a year and employees earning $45,000 or less a year may not be bound by a customer or employee non-solicit agreement.  Both of these thresholds will be adjusted for inflation in 2027, 2032 and 2037.

The bill also provides that former employees may recover their attorney’s fees and costs if they prevail in litigation brought by a former employer who seeks to enforce a non-compete or non-solicit agreement.  Additionally, the bill dictates that if continuing employment alone is the consideration for the non-compete, the employee must have been employed for at least two years.

The bill also provides that if the employee was employed less than two years, “professional or financial benefits” either by themselves or when combined with the period of employment may be sufficient consideration.  However, the bill contains several important carve-outs from the definition of a non-compete agreement that will function to protect employers.  For instance, the bill does not apply to any of the following:

  • Restrictive covenants arising out of a transaction involving the purchase or sale of the goodwill of a business or some other ownership interest.
  • “Garden leave” clauses or agreements, which require an employee to give the employer advance notice of his or her separation of employment, but where the employee remains employed and continues to receive compensation for this period of time.
  • Confidentiality, trade secret, or invention assignment agreements.

These type of variations in state law related to the enforcement of restrictive covenants highlight the importance of being thoughtful about strategies to address such potential state specific impediments to the enforcement of restrictive covenants, including the identification of the appropriate segment of employees of whom to require restrictive covenants, the provision of appropriate consideration for such agreements and when the requirement to execute such agreements must be raised with employees, choice of law and venue considerations (including whether such provisions are likely to be honored by state courts), and the use of garden leave provisions, as well as arbitration agreements. We will continue to monitor trends in limitations that states are placing on restrictive covenants.  If you have any questions about restrictive covenants or non-competition covenants, please contact the authors.