Rhode Island is the latest state to jump on the bandwagon of limiting the application of non-compete agreements, with its Rhode Island Noncompetition Agreement Act (the “Act”). See these links for our prior posts explaining the previous six non-compete statues enacted in 2019: Maine; Maryland; New Hampshire; Oregon; Utah; and Washington. Rhode Island’s Act becomes effective on January 15, 2020.
Ban on Non-Competes For “Low-Wage Earners”; “Nonexempt” Employees; Minors; and “Undergraduate or Graduate” Student Workers
The Act follows the trend of banning the use of non-compete restrictions for categories of workers who generally do not pose a competitive threat. Non-compete restrictions “shall not be enforceable against the following types of workers”:
- “Employees age eighteen (18) or younger”
- “Undergraduate or graduate students” who participate in an internship or otherwise work—“whether paid or unpaid”—while enrolled in an “educational institution”
- “An employee who is classified as nonexempt under the Fair Labor Standards Act”; and
- “A low-wage employee.”
The Act defines a low-wage employee as an employee whose annual “earnings” are not more than 250% of the federal poverty level for individuals as established by the United States Department of Health and Human Services federal poverty guidelines.” The Act defines “earnings” to mean “wages or compensation paid to an employee during the first forty (40) hours of work in a given week, not inclusive of hours paid at an overtime, Sunday, or holiday rate.” The 2019 HHS Poverty Guideline for a household of one person is $12,490. Accordingly, for purposes of the Act a “low-wage worker” is currently an employee earning up to $600.48 per week ($31,225 / 52), excluding overtime.
The prohibition of non-competes for “nonexempt” employees may have the unintended consequence of prohibiting non-compete restrictions for key sales employees who are nonexempt but nevertheless possess a particular ability to inflict competitive harm. However, the Act expressly carves out “covenants not to solicit or transact business with customers, clients, or vendors of the employer” as well as “nondisclosure or confidentiality agreements.”
Application to All Non-Compete Restrictions as of January 15, 20120 Regardless Of Date Signed
The Act does not grandfather in non-compete restrictions entered into before a certain date. The Act simply provides non-competition agreements as defined “shall not be enforceable.” However, the Act specifically provides that it “does not render void” other permissible restrictions, such as client solicitation restrictions. The Act also specifically provides that it does not preclude a judicially imposed noncompetition restriction “whether through preliminary or permanent injunctive relief or otherwise, as a remedy for a breach of another agreement or of a statutory or common law duty.” Accordingly, for example, the Act would not prohibit a court from imposing an injunction for violating Rhode Island’s trade secrets statute prohibiting a former employee from working for a competitor for a period of time.
Carve-Outs for Various Types of Competition Restrictions
The Act does not govern client and vendor solicitation restrictions or confidentiality or non-disclosure agreements, as explained above. The Act similarly excludes numerous other types of agreements and restrictions from the definition of “non-competition agreement”:
- Covenants not to solicit or hire employees;
- Noncompetition agreements made in connection with the sale of a business entity, “or all or substantially all of the operating assets of a business entity, or partnership,” or “otherwise disposing of an ownership interest … when the party restricted by the noncompetition agreement is a significant owner of, or member or partner in, the business entity who will receive significant consideration or benefit from the sale or disposal” (emphasis added);
- Noncompetition agreements originating outside of an employment relationship;
- “Forfeiture agreements,” which the Act defines as “an agreement that imposes adverse financial consequences on a former employee as a result of the termination of an employment relationship, regardless of whether the employee engaged in competitive activities, following cessation of the employment relationship”;
- Invention assignment agreements; and, interestingly,
- “Noncompetition agreements made in connection with the cessation of or separation from employment if the employee is expressly granted seven (7) business days to rescind acceptance” and “Agreements by which an employee agrees not to reapply for employment to the same employer after termination of the employee.”
Under the latter exception, noncompetition agreements are permissible in severance agreements so long as, just like the Older Workers Benefit Protection Act requires for terminated employees 40 years of age or older, the employee is provided seven days to revoke acceptance. The “no reapplication” exception appears targeted to settlements of discrimination charges or claims, which generally impose that requirement on the former employee. And the terms “substantially” and “significant” in the sale-of-business exception seem fertile ground for litigation over the precise meanings of those terms.
“Forfeiture Agreements” Distinguished From “Forfeiture for Competition Agreements”
The Act’s definition of “forfeiture agreement” appears to refer to agreements under which employees promise to return advance payments, such as moving expenses, which employers commonly pay for under the condition that the employee must repay the amount if they terminate employment within a certain time period. The Act excludes such agreements from coverage. However, the Act expressly defines “forfeiture for competition agreements” as an agreement that imposes adverse financial consequences on an employee if the employee engages in competitive activities. “Forfeiture for competition agreements” are expressly included in the definition of “noncompetition agreements” that the Act now prohibits.
For a small and relatively sparsely populated state, Rhode Island’s Noncompetition Agreement Act has adopted many different aspects of the state laws governing noncompetition that have preceded it, particularly those enacted in 2019. We expect states that are considering similar statutes to look to Rhode Island for guidance.