3640.05 / Can an employer require a remote worker to sign a noncompete or non-solicitation agreement?

Editor’s Note: In April of 2023, the Federal Trade Commission issued a final rule banning nearly all non-compete agreements nationwide. On August 20, 2024, the district court for the Northern District of Texas¹ held that the rule was unconstitutional as it violated the Administrative Procedure Act, and thus issued a nationwide ban on enforcement of the FTC ban.  The FTC has appealed a similar decision issued by the Middle District of Florida, but has yet to file an appeal in the Fifth Circuit.

Non-compete agreements are often included in employment contracts to prevent employees from accepting employment in the same line of work as the employer or from opening their own competing businesses. Whether these agreements are enforceable varies from state to state. Employers with a remote workforce will be required to consider state and local laws governing the enforceability of noncompetition or non-solicitation and other employment agreements. Those laws have been evolving rapidly in recent years, so that a non-compete agreement that is enforceable in one state may not be enforceable in the state where the remote employee is situated. Employers who permit employees to work remotely from other states will be responsible for monitoring these developing laws.

As recently as March of 2022, the California Attorney General issued an alert¹ reminding employers that non-compete agreements are not enforceable in the state of California. Under California law, non-compete agreements are specifically non-enforceable with respect to California residents even if the company operates in another state that does recognize non-compete covenants as enforceable.

In New York state, non-compete agreements are only enforceable if (1) the agreement is necessary to protect the employer’s legitimate interests, (2) it does not impose an undue hardship on the employee, (3) the agreement does not harm the public, (4) the agreement is reasonable in time period and geographic scope.²

Other states have developed new and detailed laws governing the enforceability of non-compete agreements. For example, Colorado³ has revised its laws on noncompetition and non-solicitation covenants effective August 10, 2022. Under the new law, noncompete agreements are enforceable when they are used to protect trade secrets. However, these covenants must be no broader than reasonably necessary to protect a legitimate interest in protecting the trade secrets in question. Even these non-compete covenants are only enforceable if the employee earns enough income to be classified as a highly-compensated employee when the agreement is entered into and when the company attempts to enforce the agreement (in Colorado, the “highly compensated” limit is $101,250 in 2022, $112,500 in 2023 and $123,750 in 2024, to be indexed to inflation in later years).⁴ Non-solicitation covenants are only enforceable against employees earning at least 60% of the highly-compensated employee threshold. Employers will also have to provide the employee with advance notice and give them time to review and agree to the covenant.

In Washington D.C., non-competes are enforceable only against employees who earn at least $150,000 per year ($250,000 for medical specialists). While a new law initially banned most non-competes, effective October 1, 2022, the law on non-competes was amended to provide that employers can ban employees from using and disclosing confidential and proprietary information (i.e., trade secrets) during and after the employee’s employment.⁵

Employers with a remote workforce will be required to conduct a state-by-state analysis to determine the rules for enforcing non-compete and non-solicitation agreements going forward.