Limitations on Non-Compete Agreements

June 28, 2022

On June 8, 2022, Colorado became one of just a dozen states to enact legislation restricting the use of non-compete clauses that employer’s often include at hiring or other stages of the employment relationship. Set to go into effect on August 10, 2022, Colorado’s HB 22-1317 will substantially limit the use of these clauses.

States Extinguish the Covenant Not to Compete

Though President Biden signed an Executive Order on July 9, 2021 which urged the Federal Trade Commission (FTC) to pursue the reduction of such restrictive covenants, many states are instead taking it upon themselves to limit non-compete agreements in their jurisdiction. In particular, several states, such as Massachusetts and New Hampshire, have enacted laws to prohibit the enforcement of non-compete clauses for employees with less income than a specified threshold amount. While some states have set this threshold as a percentage of the federal poverty level, others have set an hourly or yearly monetary value.

There are only three states with laws that broadly prohibit non-compete agreements, and their laws have been on the books since the nineteenth century. These states – California, North Dakota, and Oklahoma – will not enforce a non-compete agreement unless they fall within very narrow set of statutory exceptions. The District of Columbia most recently enacted similar legislation, expected to go into effect on October 1, 2022, which will also significantly limit an employer’s prohibition on an employee taking on employment with an additional employer.

Though only 13 jurisdictions have enacted legislation restricting non-compete agreements, at least 15 more have proposed comparable bills.

Non-Compete Proposals in the Tri-State Area

New York, New Jersey and Connecticut have each proposed legislation that would curtail the use of covenants not to compete if enacted.

In January 2022, New York Governor Kathy Hochul announced that she favors banning non-compete agreements. Since then, several bills have been introduced in the state senate aimed at limiting the restrictive covenants. Each of the active bills has been referred to the Labor Committee.

New Jersey’s proposed bill would adopt judicial standards for evaluating the reasonableness of non-compete and other restrictive covenants, as well as would put a 12-month limitation on post-employment restrictions.

Connecticut’s bill similarly limits the duration of post-employment restrictions to 12 months. Like Massachusetts and New Hampshire, the Connecticut bill would also set an income threshold for which non-compete agreements would be prohibited for non-exempt employees as well as those taking home less than three times Connecticut’s minimum wage.

We will continue to monitor developments regarding these proposed bills.

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