There has been an emerging trend of laws and rules attempting to limit or prohibit employers’ ability to enter into non-compete agreements with employees on both the federal and state level.

The landscape of non-compete restrictions has been everchanging with proposed, enacted, and failed attempts to limit or prohibit employer use of non-compete agreements, which has brought with it immense confusion on the current state of the law.

Accordingly, below is the current status of the legality of employee non-compete agreements at the federal level and on the state level in Maryland, Virginia, and the District of Columbia.

Federal Law

FTC Rule

On April 23, 2024, the Federal Trade Commission issued a non-compete rule that banned virtually all non-compete agreements in the United States between employers and workers, only allowing employers to maintain existing non-compete agreements with employees that met the definition of a “senior executive” under the rule.

The rule also required employers to notify current and former workers subject to non-competes that the provisions were void. This was the first attempt at the federal level to ban non-compete agreements.

While the rule was set to go into effect on September 4, 2024, on August 20, 2024, the U.S. District Court for the Northern District of Texas struck down the rule nationwide in Ryan LLC v. Federal Trade Commission.

The FTC has appealed the ruling to the 5^th Circuit. While employers will have to wait to see the outcome of the appeal, there is no current federal rule prohibiting employers from entering into non-compete agreements with employees.

However, the National Labor Relations Board is also scrutinizing non-compete agreements.

National Labor Relations Board ALJ Decision on Non-Competes and Employee Non-Solicitation Agreements

On June 13, 2024, in the J.O. Mory, Inc. case, Case No. 25-CA-309577, an Administrative Law Judge (ALJ) for the National Labor Relations Board (NLRB) held that a non-compete and a non-solicitation of other employees in an employment agreement was unlawful as it interfered with employees’ section 7 rights.

Section 7 of the National Labor Relations Act (NLRA) guarantees non-supervisory employees (which include employees that do not have the ability to hire, fire, or effectively recommend such actions) the right to engage in concerted activities for collective bargaining, forming or joining a union, or for each others’ mutual aid or protection. Employees have this right regardless of whether they are members of a union or not.

In the J.O. Mory, Inc. case, the employer required all employees to sign an employment agreement upon hire that included, among other things, a non-compete provision prohibiting the employee from competing with their employer for one year after the termination of their employment. It also included an employee non-solicitation provision prohibiting an employee from soliciting another employee to leave their employment with the employer for two years after the termination of their employment.

In this case, the NLRB ALJ analyzed these provisions using the framework set out in Stericycle, Inc., 372 NLRB No. 113 (2023) for assessing whether a facially neutral work policy interferes with an employee’s section 7 rights. Accordingly, the ALJ assessed whether the provisions had a reasonable tendency to chill employees from exercising their section 7 rights.

If yes, under Stericycle, the provisions were presumed unlawful, even if a different interpretation was reasonable. The employer then had an opportunity to rebut the presumption by showing that the provisions advanced a legitimate and substantial business interest that it could not do with a more narrowly tailored provision.

In this case, the ALJ held that both the non-compete and employee non-solicitation provisions violated employees’ section 7 rights, because:

• The non-solicitation of employees provision would dissuade employees from asking their coworkers to make a joint threat to quit unless their working conditions improve, or informing their coworkers about better benefits and wages offered by another party out of fear they would be accused of soliciting them in violation of the agreement.
• The non-compete was too broad in scope, and would prevent an employee from engaging in protected concerted activity out of fear that if they were terminated their employment opportunities would be limited.

The ALJ also held that the employer had not proven that these provisions advanced a legitimate and substantial business interest that could not be addressed with a more narrow provision because other provisions in the agreement, including a non-disclosure and a non-solicitation of customers provision, addressed the employer’s business interests of protecting their confidential information and access to customers.

State Law

Maryland, Virginia, and the District of Columbia each have restrictions on an employer’s ability to enter into non-compete agreements with employees as outlined below:

Maryland

Maryland law prohibits employers from entering into a non-compete agreement or a conflict of interest provision that restricts the ability of an employee to enter into employment or to become self-employed with the following classes of employees:

• Employees earning equal to or less than 150% of the state minimum wage. Currently, the Maryland state minimum wage is $15.00 per hour. Accordingly, employers are currently not able to enter into a non-compete agreement or conflict of interest provision with an employee working in Maryland that earns equal to or less than $22.50 per hour.

• Employees employed in a position that:
  • Requires them to be licensed under the Health Occupations Article (for example, individuals employed as nurses, physicians, physician assistants, optometrists, dentists, chiropractors, pharmacists, psychologists, physical therapists, etc.);
  • Provides direct patient care; and
  • Earns equal to or less than $350,000 in total annual compensation.

• Employees that are licensed as a veterinary practitioner or veterinary technician.

However, under the Maryland law, employees that work in a position that requires them to be licensed under the Health Occupations Article, and provide direct patient care can be subject to a non-compete or conflict of interest position if they earn more than $350,000 in total annual compensation. To be lawful, the non-compete or conflict of interest provision must comply with the following restrictions:

• The duration of the non-compete or conflict of interest provision may not exceed one year from the last day of the employee’s employment;
• The geographic restriction cannot exceed 10 miles from the employee’s primary place of employment.

Additionally, even if a healthcare employee can be subject to a non-compete under the law, on the request of a patient, an employer must provide the patient information on the new location where a former employee subject to a non-compete will be practicing.

Virginia

Virginia has a non-compete law that prohibits employers from entering into a non-compete covenant with a low-wage employee.

A low-wage employee is an employee whose average weekly earnings are less than the average weekly wage of the Commonwealth of Virginia. Currently, the average weekly wage is $1,410 per week (or, $73,320 per year). A “low-wage employee” does not include any employee whose earnings are derived, in whole or in predominant part, from sales commissions, incentives, or bonuses paid to the employee by the employer.

Under the law, a non-compete covenant means an agreement between an employer and employee that restricts an employee’s ability to compete with their employer post-termination. A non-compete covenant does not include non-disclosure agreements that prohibit the disclosure of proprietary or confidential information.

A non-compete covenant also does not include an agreement that restricts an employee from providing a service to a customer or client of the employer if the employee solicits or initiates contact with the client.

District of Columbia

Finally, the District of Columbia also has a non-compete law that prohibits employers from entering into non-competes with covered employees who are not “highly compensated.”

Under the law, a non-compete agreement is an agreement that prohibits an employee from performing work for another for pay or from operating the employee’s own business. It does not include non-competes in the sale of a business context, employee non-disclosure agreements, or agreements prohibiting employees from working for another person during their employment with an employer if the employees’ outside employment will result in the disclosure or use of employer-confidential information, conflict with any conflict of interest rules, or impair the employer’s ability to comply with law or contract. The law is silent on whether it applies to non-solicitation of customer provisions.

A covered employee that cannot be subject to a non-compete under the law is an employee who is not highly-compensated and spends more than 50% of their work time in the District, or whose employment is based in the District and regularly spends a substantial amount of their worktime in the District and does not spend more the 50% of their worktime outside of the District.

A highly compensated employee is an employee who earns at least the minimum annual compensation, which is:

• In 2023, $150,000 for non-medical employees (and $250,000 for medical employees); or
• Beginning in 2024 and for each subsequent calendar year, an amount equal to the prior calendar year’s minimum qualifying annual compensation, increased in proportion to the annual average increase, if any, in the Consumer Price Index for All Urban Consumers in the Washington Metropolitan Statistical Area published by the Bureau of Labor Statistics of the United States Department of Labor for the previous calendar year adjusted to the nearest whole dollar.

According to the District’s Department of Employment Services, for 2024, to qualify as a highly compensated employee, a non-medical employee has to earn more than $154, 200 per year in total compensation (or more than $257,000 per year for medical employees). The highly-compensated employee thresholds for 2025 has not been released yet.

Under the law, employers can enter into a non-compete agreement with an employee who qualifies as a highly compensated employee, provided that the agreement:

• Specifies the functional scope of the competitive restriction;
• Specifies the geographic limitation; and
• The duration of the non-compete does not exceed a year for non-medical employees, and two years for medical employees.

Employers subjecting a highly compensated employee to a non-compete agreement must provide the agreement to the employee in writing at least 14 days before they begin their employment, or, if an existing employee, at least 14 days before the employee must sign the agreement. Employers must also send a specific notice to employees when proposing a non-compete.

Importantly, an employee must meet the highly compensated employee threshold when they sign the non-compete agreement, and also when the proposed term of the non-compete is set to begin.

Takeaways

While we will have to wait to see the outcome of the FTC’s appeal of its non-compete ban, there is no current federal rule prohibiting employers from entering into non-compete agreements with employees. However, the NLRB continues to scrutinize non-compete agreements under the NLRA.

Time will tell if and how the NLRB’s scrutiny of non-compete agreements will change after the new presidential administration begins, but for now non-competes for non-supervisory employees could create problems under the NLRA. Setting aside federal law, the state non-compete landscape continues to evolve requiring cautious drafting of any non-compete agreement.  

For more information on non-competes, you can reach Nicole at nmbehrman@lerchearly.com.