Maryland Law Partially Banning Non-Compete Agreements Goes Into Effect Oct. 1

October 1, 2019
Maryland Law Partially Banning Non-Compete Agreements Goes Into Effect Oct. 1

A new statewide law in Maryland banning employers from requiring lower-wage workers to sign non-compete agreements goes into effect October 1, 2019. The new Maryland law forbids making workers earning less than $15 an hour or $31,200 a year from having to agree that they won’t work for a former employer’s competition. Non-compete agreements ban workers from going to work for a competing employer within a certain period of time after leaving a job. One of the most famous examples of a non-compete agreement involved a lawsuit against a nationwide chain of sandwich stores where the court ruled against the employer’s use of the restrictive covenant, holding that the company’s non-compete agreement that prevented employees from working in a similar industry for two years was not valid. The agreements are often used to protect an employer’s trade secrets and other confidential and proprietary information.

Many employers say the agreements are needed to protect them from unfair competition by former employees who go to work for competing businesses or start a rival business, and who would then gain competitive advantage by exploiting customer relationships built through the employer’s time and expense or who would exploit confidential information about their former employer’s customers, operations, business practices, products and marketing plans. But, there’s been pushback, workers have argued that the agreements restrain their ability to support themselves and interfere with their mobility and freedom to contract. Amazon reportedly dropped a non-compete clause in its contracts for warehouse workers, which prevented them from moving to competing companies for 18 months after negative publicity. Courts generally have ruled that such agreements are enforceable as long as they don’t extend too far in the future or cover too wide a geographic area. Nearly one-fifth of U.S. workers, including a significant number of low-wage workers, are covered by the agreements, according to a 2016 blog post from the Obama White House which estimated that about 15% of workers without a college degree were subject to non-compete agreements and that 14% of individuals earning less than $40,000 were covered by the agreements.

So far this year, New Hampshire, Maine, Rhode Island and Washington state have either voted or have seen laws go into effect that outlaw non-compete agreements based on a worker’s wages. Although non-compete agreements are widely used and enforceable in most of the states, there is a growing trend toward limiting the use of non-compete agreements. The Maryland bill became law on May 25 without the governor’s signature. The bill passed both houses of the state legislature and automatically became law when the governor did not use his veto power.

What’s in the New Maryland non-compete law?

Maryland Senate Bill 328 forbids employers from entering into non-compete agreements with employees earning less than $15 an hour or $31,200 a year. While the statute bars non-compete agreements, it expressly reserves the rights of employers to enforce contracts that forbid the “taking or use of a client list or other proprietary client-related information.” However, the statute does not address other types of restrictive covenants such as non-solicitation agreements aimed at customers and co-workers. The law does not mention whether an employer faces penalties for violations nor does it explain or create an enforcement scheme or provide a private right of action for aggrieved workers. Daniel Morgan, writing for law firm Blank Rome, has noted that the law does not grandfather existing non-compete agreements with employees whose earnings bring them within the purview of the new law, which means that those agreements become unenforceable after the law takes effect.

Other state action on non-compete agreements

Employee-friendly non-compete agreement reforms have been a priority for many state legislatures in recent years along with putting into place laws providing sick, safe and family leave and enacting laws that outlaw inquiries about past criminal history on job application forms for many of the nation’s workers.

So far, in 2019 significant movement in the direction of placing restrictions on the agreements for low-income workers has been occurring at the state level, continuing the trend seen in 2018. Laws restricting non-compete agreements for workers based on income have either been approved in recent weeks or will soon go into effect in Maine, New Hampshire, Rhode Island and Washington. Massachusetts, Utah, Idaho, and Colorado passed or amended laws limiting the use of non-competes by employers in their states in 2018. And in the previous years, California, Illinois, Nevada also passed legislation to control the use of non-compete agreements in the workplace. Other states have also reportedly attempted to restrict non-compete agreements, but, so far, none of those proposals have yet to be made law. In addition to action by many state legislatures, attorneys general in many states have also taken a look at no-poach agreements, which are similar to non-compete agreements.

In July 2018, attorney generals in 11 states announced that they were investigating several high-profile fast food chains for their use of no-poaching or non-compete agreements that allegedly restricted the ability of low wage workers to obtain a better-paying job with another franchise. Illinois state attorney general Lisa Madigan said, “No-poach agreements trap workers in low-wage jobs and limit their ability to seek promotion into higher-paying positions within the same chain of restaurants.” The Illinois Attorney General’s office noted in a statement that 58% of major franchisors have no-poach provisions in their franchise agreements while 80% fast food franchisors use the agreements. Attorneys General from New York and Illinois reached a settlement in September 2018 with shared-office space pioneer WeWork, in which the company agreed to eliminate a non-compete agreement for its employees – some making as little as $15 an hour, according to a story in Forbes.

Federal action on non-compete agreements

While regulation of non-compete agreements has seen a significant increase at the state-level, perhaps even accelerating in the last couple of years, similar laws proposed at the federal level have not seen much success. Earlier this year, Republican Senator Marco Rubio (R-FL) proposed the Federal Freedom to Compete Act, which would prohibit an employer from entering into a non-compete agreement with entry-level, low wage workers and would void any non-compete agreements created before the enactment of this bill. The bill hasn’t progressed much beyond its introduction in the U.S. Senate. The federal Workforce Mobility Act was introduced in the U.S. Senate early in 2018 by Connecticut Democratic Senator Christopher Murphy. The legislation would ban all non-compete agreements but Congressional action on the proposed legislation was pretty much kept to its introduction. The Obama Administration weighed in on non-compete agreements. In 2016, the Obama White House published a report on non-compete contracts in employment, concluding that the agreements “can impose substantial costs on workers, consumers and the economy more generally.”

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