Noncompete Agreements: The Current State at the State Level

The U.S. Federal Trade Commission’s (FTC) 2024 proposed rule to ban most American employers from using and enforcing noncompete agreements did not come to pass — at least for now — as the result of two August 2024 court decisions. The appeals process and a shakeup at the FTC has kept the issue at a slow boil at the national level. All that, though, has not stopped individual states from taking aim at employer noncompete agreements.

This article gets you up to speed on recent action on noncompetes at the state level. Total rewards professionals, particularly those in organizations that have employees in multiple states, need to be aware of this trend and any applicable changes that may be forthcoming.

Is Ohio Dotting the ‘I’ (and Crossing the ‘T’) on a Law?

Thirty-nine states and the District of Columbia have active laws that address the use of noncompete agreements in employment relationships.

Four states ban them completely: California, Oklahoma, Minnesota and North Dakota.
Nine states (plus the District of Columbia) have salary/income restrictions on their usage: Colorado, Illinois, Maine, Maryland, New Hampshire, Oregon, Rhode Island, Virginia and Washington.
Twenty-six states have other restrictions: Alabama, Arkansas, Arizona, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Indiana, Iowa, Kentucky, Louisiana, Massachusetts, Missouri, Montana, Nevada, New Jersey, New Mexico, New York, Pennsylvania, South Dakota, Tennessee, Texas, Utah and Vermont.

Ohio could soon join the ranks and bring the total to 40 states. On Feb. 5, two state senators — Republican Bill Blessing and Democrat Bill DeMora — introduced Senate Bill 11, which seeks to bar employers from enforcing agreements that “prohibit or penalize workers for seeking or accepting work or operating a business after the conclusion of the relationship between the employer and worker.” The measure’s two-party cosponsorship likely signals some bipartisan support, giving it decent odds of proceeding.

At present, noncompete agreements in Ohio are governed by the 1975 state Supreme Court case Raimonde v. VanVlerah, which lays out the factors a court can consider as to whether a restrictive covenant is reasonable and based upon a protectable business interest.

As filed, Senate Bill 11 targets employer-employee agreements that:

“[Dictate] the worker will not work for another employer for a specified period of time, not work in a specified geographic area or not work for another employer in a capacity similar to the worker’s work for the employer”;
“[Require] the worker to pay for lost profits, lost goodwill or liquidated damages because the worker terminates the work relationship”;
“[Impose] a fee or cost on a worker for terminating the work relationship”; and/or,
“[Require] a worker who terminates the work relationship to reimburse the employer for an expense incurred by the employer during the relationship for training, orientation, evaluation or other service intended to provide the worker with skills to perform the work or to improve performance.”

If passed:

Applicable contracts would be null in void if they were consummated, modified or extended after the bill’s effective date.
Workers would have the right to bring civil claims against employers for violations and seek damages (i.e., costs, attorneys’ fees, actual damages, punitive damages up to $5,000, and injunctive relief).

Washington Bill Seeks to Ban All Noncompetes

Washington has restricted noncompete agreements since 2020 by prohibiting their use unless:

The worker earns more than the minimum annual salary threshold, which is adjusted annually (in 2025, the figures are $123,394.17 for employees and $308,485.43 for independent contractors).
The noncompete is effective for no more than 18 months, or the business can show “by clear and convincing evidence” a longer duration is necessary to protect the business or goodwill.
The noncompete is disclosed in writing at the time of hire or is supported by additional consideration (e.g., a pay raise or bonus).

The state’s restrictions could get significantly tighter.

On Jan. 3, Democratic state senators Liz Berry and Amy Walen, with backing from 16 other Democratic senators, introduced House Bill 1155 into the Washington State Legislature. Subtitled “prohibiting noncompetition agreements and clarifying nonsolicitation agreements,” the bill, if passed, would broaden the definition of a “noncompetition covenant” and prohibit all employer-employee noncompete agreements.

The bill was referred Jan. 13 to the House Labor & Workplace Standards Committee, where it remains pending.

If passed, the bill would void all noncompetition covenants and make them nonenforceable, regardless of when the parties entered into the agreement. In addition, employers with current or former employees or independent contractors subject to a noncompetition covenant would need to inform them by Oct. 1 that the covenant is no longer active or enforceable.

Toward all that, the bill would amend state codes to further clarify the definition of “noncompetition covenant” and more liberally construe provisions that protect employees and independent contractors. Within the bill’s verbiage, a “noncompetition covenant” includes:

“Every written or oral covenant, agreement or contract that prohibits or restrains an employee or independent contractor from engaging in a lawful profession, trade or business of any kind”;
“A covenant, agreement or contract between a performer and performance space, or any third-party scheduling the performer for a performance space ... that prohibits or restrains the performer from engaging in a lawful performance”;
“An agreement that directly or indirectly prohibits the acceptance or transaction of business with a customer”; and
“Any provision in an agreement that threatens, demands, requires or otherwise effectuates that an individual return, repay or forfeit any right, benefit or compensation as a consequence of the individual engaging in a lawful profession, trade or business of any kind.”

However, the definition does not include things such as nonsolicitation agreements, confidentiality agreements, and covenants prohibiting the disclosure of trade secrets or inventions.

New York Bill Provides Greater Specificity

Under current New York state law, noncompete agreements are enforceable in instances where the contract: 1) is necessary to protect the employer’s legitimate interests, 2) does not impose an undue hardship on the employee, 3) does not harm the public, and 4) is reasonable in time period and geographic scope.

On Jan. 9, Democratic assemblyman Jeffrey Dinowitz introduced NY A01361 to the Labor Committee of the New York State Assembly. The bill, if passed, would establish comprehensive guidelines for employers’ use of restrictive covenants by defining key terms like “employee,” “employer” and “restrictive covenant,” and setting specific requirements for such agreements to be legally enforceable.

Under the bill’s definition:

An employee is “any person employed for hire by an employer in any employment,” including “in a supervisory, managerial or confidential position.”
An employer is “any person, corporation, limited liability company or association” as well as “the state[,] ... political subdivisions, governmental agencies, public corporations and charitable organizations.”
A restrictive covenant is “an agreement between an employee and an employer concerning existing or prospective employment, or an agreement between employee and employer with respect to severance pay.”

The bill stipulates an employer may request or require these covenants as a condition of employment or severance pay, but must meet several strict conditions:

The covenant’s terms are disclosed in writing well in advance.
The agreement is no more restrictive than necessary to protect legitimate business interests.
The scope is limited to only the specific services the employee provided.
The employee may not be penalized for challenging the covenant.
Upon leaving the employer, the employee cannot be restricted from providing services to clients they did not solicit or from working with former colleagues.

The covenant is nullified if an employee is terminated without “good cause.”

The bill also provides the state labor commissioner the power to investigate violations and impose civil fines up to $5,000 per employee affected.

But Wait, There’s More

In addition to the aforementioned bills, the state Supreme Courts in Delaware and Pennsylvania recently provided guidance on the scope and timing of such agreements.

Delaware: The high court in the case Sunder Energy, LLC v. Tyler Jackson et al. refused to enforce a noncompete that was overly broad. The decision takeaway was that noncompete language should be reasonable in geographic scope and duration, and supported by adequate consideration.
Pennsylvania: The high court in the case Rullex Co., LLC v. Tel-Stream, Inc. refused to enforce a noncompete that was signed by a new employee approximately two months after starting employment, even though the employer gave and explained the agreement to the employee prior to the start of employment. The decision underscored that, to be valid, such pacts must be signed at or before the start of employment.

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