Employers do not need to be reminded that inflation reared its ugly head in 2022. Whether it was the price of gas at the pump, food, vehicles, or computers, the cost of doing business certainly went up last year. But increased prices are not the only impacts of inflation. There are hidden costs, too. One less well-known cost is that many multi-state employers may suddenly be at risk of having some of their non-compete agreements run afoul of applicable state law.
As Locke Lord previously wrote, in recent years, there has been a growing trend nationwide towards limiting the enforceability of certain non-compete agreements between employers and their employees. Among other strategies, some state legislatures prohibited the enforcement of non-competes against lower wage earners. Nevada, for example, no longer allows non-compete agreements for hourly workers, while Rhode Island and Massachusetts ban non-competes for employees who are classified as nonexempt under the Fair Labor Standards Act. Other states, such as Illinois, set a salary floor (currently $75,000 per year; $80,000 per year in 2027), which limits non-compete agreements to only those employees who earn more than these amounts.
Taking a different approach, a few states have specifically tied their minimum earning thresholds for employees to the Consumer Price Index (“CPI”). Generally speaking, the CPI measures the overall change in consumer prices on a subset of goods and services over time. Thus, when inflation hits, the CPI number rises, thereby relieving some categories of workers from their existing non-compete agreements. Here are some state laws to keep an eye on:
In light of this growing trend, for example, an employee in Portland, Oregon making $115,000 per year in 2022 is of particular interest. As a result of the 2022 increase to the CPI, unless the employer provides the employee a raise in 2023, the employer will risk losing the ability to enforce an already existing non-compete agreement that was enforceable just weeks ago, even if the employee resigns and joins a direct competitor.
The landscape of restrictive covenants continues to change with each passing legislative session. Being aware of these changes gives employers the best chance of protecting their intellectual property, their workforce, and their valuable customer relationships. Failure to do so, however, risks the enforceability of both existing and future non-compete agreements with key employees and other members of an employer’s workforce.
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