On May 11, 2023, the Minnesota Legislature agreed to a new law rendering void and unenforceable all future covenants not to compete, with limited exceptions for agreements entered into in connection with the sale or dissolution of a business. Following a final vote in the House and Senate, the law will be sent by Gov. Tim Walz for his signature. The law is written to take effect July 1, 2023, and to apply to contracts and agreements entered into on or after that date. With enactment, Minnesota will become the fourth state to impose a complete ban on employment-related noncompetes (joining California, Oklahoma and North Dakota).
The law prohibits any noncompete agreement with an employee or independent contractor that restricts the person from working for another business after termination of employment or independent contractor engagement regardless of a person’s income, with only two very limited carveouts for noncompetes agreed upon (1) during the sale of a business where the agreement prohibits the seller from carrying on a similar business within a reasonable geographical area for a reasonable period of time, or (2) in anticipation of the dissolution of a business where the dissolving partnership or entity agrees that all or any number of the partners, members, or shareholders will not carry on a similar business in a reasonable geographical area for a reasonable period of time. Subject to those limited exceptions, the law provides that any “covenant not to compete” contained in a contract is void and unenforceable. Importantly, a “covenant not to compete” does not include nondisclosure, confidentiality, trade secret, or non-solicitation agreements (including specifically those restricting the ability to use client or contact lists or restricting the solicitation of customers). Also, because “covenant not to compete” is defined in terms of prohibiting conduct “after termination of the employment,” the new law will not prohibit agreements that restrict an employee or independent contractor from working for another business while performing services for a business.
In addition to the noncompete ban, the law also prohibits employers from requiring employees who reside and work in Minnesota to agree, as a condition of employment, to a provision in “an agreement or contract” that would (1) require the employee[s] to adjudicate outside of Minnesota a claim arising in Minnesota; or (2) deprive the employee[s] of the substantive protection of Minnesota law with respect to a controversy arising in Minnesota. While this prohibition on foreign choice of law and forum provisions certainly applies to any “covenant not to compete,” and the reference to an “agreement or contract” in this subdivision of the new law appears to be broader in scope than just any “covenant not to compete,” the inclusion of the following language at the end of the relevant subdivision creates some ambiguity regarding the scope of any “agreement or contract” covered by the non-Minnesota choice of law/venue restriction: “This subdivision applies only to claims arising under this section.”
Of note, the law does not render an entire agreement unenforceable if it otherwise contains a void or unenforceable covenant not to compete — only the impermissible covenant is rendered void. In addition, a court may award an employee enforcing rights under this law reasonable attorney fees.
What does this mean for employers? Because the law is scheduled to take effect July 1, 2023, Minnesota employers should immediately review their template employee agreements to ensure their agreements are compliant in light of the new law. Going forward, Minnesota employers should consider other means of protecting their trade secrets, customer relationships, and investments in training, such as permissible nondisclosure agreements, non-solicitation agreements and confidentiality policies.
The new law leaves unanswered a number of questions. For example, are otherwise prohibited noncompete agreements enforceable if they are designed to protect trade secrets and confidential information? May an employer prohibit a former employee from performing unsolicited work for a former client? And does the sale of business exception allow a buyer to prohibit an individual seller from accepting employment with a competitor? These and other questions will have to be resolved by litigation or future clarifying amendments.
Multi-state employers with employees in and outside of Minnesota should be aware that state law restrictions on noncompete agreements vary widely in their scope and enforceability. As noted above, Minnesota will become the fourth state to ban noncompete agreements altogether. In addition to outright noncompete bans, many states are otherwise taking action to restrict noncompetes — including through bans for low-wage workers or workers below a certain income threshold. Last year, Colorado placed substantial limits on noncompete and non-solicitation agreements for employees below certain income thresholds. More recently, earlier this month Maryland increased the pay rate where employers can institute noncompete or conflict of interest clauses for jobs to $22.50 per hour.
Multi-state employers should therefore take this opportunity to review template agreements, including to account for these Minnesota changes and to ensure compliance in the jurisdictions where their employees work and reside. In doing so, employers should also be mindful of the National Labor Relations Board’s (NLRB) recent decision in McLaren Macomb, 372 NLRB No. 58 (Feb. 21, 2023) and subsequent guidance issued by the General Counsel of the NLRB. Although the decision and guidance focus on confidentiality and non-disparagement provisions contained in severance agreements, the guidance may also apply to standard employee agreements containing noncompete or confidentiality provisions that are entered into at the start of or during employment.
Employers should also note that the noncompete ban was agreed to alongside many other bills in the Senate Jobs and Economic Development and Labor Omnibus Budget Bill (S.F. 3035). The omnibus bill also included amendments to Minnesota’s earned sick and safe time law (Minn. Stat. §§181.9445 to 181.9448), the nursing mothers, lactating employees, and pregnancy accommodations law (Minn. Stat. § 181.939), and other Minnesota employment laws. As currently written, the effective dates for these amendments vary from enactment to July 2024. We will continue to monitor developments and will publish another alert summarizing other new laws affecting Minnesota employers following enactment.