Updates on Non-Competes | Cleary M&A and Corporate Governance Watch
Minnesota bans new employee non-competes beginning July 1, 2023, and the United Kingdom intends to cap their duration at 3 months
Minnesota Becomes the 4th U.S. State to Ban Employee Non-Competes
Following in the footsteps of California, North Dakota and Oklahoma, Minnesota has banned all employee non-competes beginning July 1, 2023, and bars employers from utilizing choice-of-law or choice-of-venue clauses in an attempt to use a more favorable state’s law as a workaround. Importantly, the new law is not retroactive and does not affect other employee restrictions, such as confidentiality and non-solicitation covenants.
Specifically, the Minnesota law bans all agreements that impose post-termination restrictions on employees from performing work (i) for another employer for a specified period; (ii) in a specified geographical area; or (iii) for another employer in a capacity that is similar to the employee’s work for the employer that is a party to the agreement.
The new law also includes the typical exception for non-competes that are executed in connection with the sale of a business. However, there is no minimum ownership percentage that is required for an employer to avail itself of this exception. This means that it may be possible for a buyer to enter into a non-compete agreement with employees who hold actual incentive equity (e.g., restricted stock or profits interests, but not stock options or phantom equity) at the time of a sale of their employer.
In addition, the new law provides that if an employee prevails on a claim to enforce a non-compete, the employee has the right to recover his or her reasonable legal fees, as well as injunctive relief and other damages as deemed appropriate.
The United Kingdom Intends to Cap Non-Competes at 3 Months
Significant developments are similarly afoot in the U.K. following the U.K. government’s response to a consultation on measures to reform non-competes in light of concerns that they act as barriers to growth, innovation and entrepreneurialism.
Although it will not seek a wholesale ban on non-competes (as the U.S. Federal Trade Commission (the “FTC”) has proposed), the U.K. government, in its equally controversial shake-up, has publicly stated following a consultation on the matter, that it intends to introduce a three month statutory cap on post-termination non-competes. This will, according to U.K. government research, halve the national average duration.
The U.K. government believes, unlike the FTC, that there is insufficient evidence to justify an outright ban, and that an outright ban could lead to unintended consequences, including employers strengthening other restrictive covenants (such as non-solicits), employers showing reduced willingness to train and upskill their workforce, increased litigation risks related to confidentiality breaches and intellectual property ownership, and diminished incentives for innovation and investment.
The cap, when enacted, will apply to two types of agreements: (i) contracts of employment, and (ii) contracts with “limb (b)” or personal services workers (“Limb B Worker”). The latter refers to individuals who have a contract to (personally) perform work for another party, where that other party is not a client or customer of the individual. This stipulation is significant for three reasons:
- It will place greater importance on correctly classifying an individual as an employee or Limb B Worker, rather than an independent contractor, which is often a problematic area for employers. If an employer is found to have misclassified a worker as an independent contractor, and the contract includes a longer than enforceable non-compete, the non-compete risks becoming entirely unenforceable.
- It will enable longer non-competes to be included in “wider workplace contracts” where the bargaining power between parties is considered to be more equal. These will include partnership agreements, limited liability partnership agreements and shareholder agreements. However, it remains to be seen whether non-competes included in other employment-related documentation (such as incentive plans and award agreements) will be subject to the cap.
- Relatedly, the application of the cap to non-competes given by selling shareholders in favor of a buyer on a share sale, where those shareholders are employees or Limb B Workers, remains unclear. The current position under English common law is complex, and involves a nuanced determination in light of the facts and circumstances of the individual case (including, as the FTC has proposed, the relative size of the stake being sold). The introduction of the statutory cap will place even more weight on this determination.
Draft legislation to implement the cap will be published when parliamentary time allows, which is unlikely to be before October 2023. Once drafted, the legislation will need to pass through the U.K. parliamentary process, where revisions could be made, before it is enacted.
