On July 1, 2023, a Minnesota law came into effect that bans non-compete agreements between employers and employees. This new law also covers independent contractors. The new law is not retroactive, and therefore will only be applied to those employment agreements that are entered on or after the date July 1.
A non-compete agreement, also known as a non-competition agreement or covenant not to compete (CNC), is a legal contract between an employer and an employee (or, in some cases, between business partners) that restricts the employee’s ability to work for or start a competing business for a specified period of time and within a specific geographic area after their employment or business relationship ends. These can be standalone agreements or appear as a single paragraph within a larger employment contract. Non-compete agreements are common in various industries, especially those where employees have access to sensitive information or trade secrets. In recent years, new legislation has pushed back against a quick and rapid expansion of covenants not to compete.
Non-compete agreements typically contain provisions that may:
Limit Employment: They can prevent employees from working for competitors or in similar industries for a specified duration after leaving their current employer.
Geographical Restriction: They often define a specific geographic region (e.g., a certain radius around the employer’s location) within which the employee cannot compete.
Time Restriction: These agreements have a finite duration during which the employee is bound by the restrictions, usually ranging from a few months to a few years.
Scope of Activity: They outline the types of activities or services that the former employee is prohibited from engaging in.
Courts hesitate to enforce non-compete agreements as they are anti-free market agreements that can stifle competition, innovation, and individual economic freedom in several ways:
Reduced Labor Mobility: Non-competes can limit an employee’s ability to switch jobs, potentially trapping them in an undesirable or unfulfilling position. This limits the free market’s ability to efficiently allocate labor resources.
Innovation Constraints: These agreements can hinder the flow of knowledge and innovation because employees may be deterred from leaving their current employer to start new businesses or join innovative startups. This can slow down technological progress and economic growth.
Market Entry Barriers: Non-competes can make it difficult for new businesses to attract experienced talent, as employees may be reluctant to join a startup or small business that cannot afford to enforce or buy out non-compete agreements.
Reduced Consumer Choice: By limiting competition among businesses, non-competes can reduce consumer choice and lead to higher prices for goods and services.
Impact on Wages: Some argue that non-compete agreements can depress wages since employees may have limited bargaining power if they cannot easily switch employers. Often a non-compete will continue to apply even if the company terminates the employee for no reason, thus limiting the employee’s ability to provide for themselves and their family.
In recent years, there has been a growing push for reform to make non-compete agreements more limited in scope and duration to strike a better balance between protecting legitimate business interests and promoting a competitive and free labor market. Minnesota now joins California, North Dakota, and Oklahoma as the only states to take this step.
The new Minnesota non-compete law is applied to agreements that would restrict the ability of the employee, after terminating their employment, from working for another employer within a specified period, working in a specific geographical area, or working in the same field as you did with your former employer with another employer. It will not, however, apply to non-disclosure agreements, confidentiality agreements, non-solicitation agreements, or the ability to use an employer’s contact list to solicit customers.
There are two notable exceptions to the law. The first is during the sale of a business. This involves a situation where the seller of the business agrees not to compete against the purchaser for a specified period of time and/or compete within a specific geographic location. Both the time period and region have to be reasonable in nature.
The second exception is in a situation where a partnership, limited liability company, or corporation and expected to dissolve. Shareholders, partners, or other interested parties may enter into an agreement where one or all will not pursue starting another business within a reasonable area of where the original was located or competing.
There are also provisions preventing employers from circumventing the law. Any attempt in an employment contract to require an employee, who primarily works and resides in Minnesota, to agree to adjudicate claims in Minnesota involving the non-compete law in another state or deny the employee the protections under the non-compete law will be voided.
Minnesota’s new non-compete law is a significant step for workers’ rights. However, if your employer required you to sign a non-compete agreement before July 1, 2023, you still may have grounds to challenge that agreement. Many covenants not to compete are overbroad and unenforceable. Contact the Minnesota employment lawyers at Heimerl & Lammers at (612) 294-2200. We can review your agreement and discuss your best options moving forward.
