Are Non-Compete Agreements Illegal?

In most states, non-compete agreements are not illegal. Only four states prohibit non-compete agreements entirely: California, Oklahoma, North Dakota and Washington D.C.* The rest of the states actually enforce employment non-compete agreements as long as they meet those states’ legal requirements.

Is it a crime to enforce a void non-compete agreement?

Yes, it is a crime in certain states.

Colorado Penalizes Illegal Non-Compete Agreements

Colorado recently passed the law that makes it illegal to enter into non-compete agreements unless they fit within narrow exceptions provided under the statute. C.R.S. § 8-2-113. An employer who tries to enforce an agreement in violation of the law, can be convicted of class 1 misdemeanor and required to pay a fine of n $10–$250. C.R.S. § 8-2-115. A guilty employer may also go to jail for up to 60 days. On March 1, 2022, the penalty will increase to a class 2 misdemeanor punishable by up to 120 days in jail and a fine of up to $750.

Nevada Can Fine Employers Who Try to Enforce Illegal Non-Compete Agreements

On October 1, 2021, Nevada abolished non-compete agreements with hourly employees. Employers who try to enforce hourly employees’ non-compete agreements may be on the hook for employees’ attorney’s fees.

Additionally, any company that willfully does anything intended to prevent any employee who left for cause or was discharged from obtaining employment in Nevada is guilty of a gross misdemeanor and shall be punished by a fine of up to $5,000. N.R.S. § 613.200.

Moreover, the Labor Commissioner may impose an administrative penalty of up to $5,000 for each violation against any employer that tries to enforce an illegal non-compete agreement.

Illinois’s Attorney General Can Assess Civil Penalties

As of January 1, 2022, the state’s Attorney General can investigate any employer it believes is violating the state’s non-compete legislation. 820 ILCS 90/30 The Attorney General can then impose a civil penalty on any employer that tries to enforce an illegal non-compete agreement. Such penalties range from $5,000 to $10,000.

Washington D.C. Can Also Fine Employers

In January of 2021, the Mayor of Washington, D.C. signed the Ban on Non-Compete Agreements Amendment Act of 2020 which places a near-total ban on non-compete agreements. D.C. Law 23-209.

Under this law, any non-compete provision prohibited by the Act is void and unenforceable. Additionally, under this new law, employers cannot retaliate against employees for refusing to agree to a non-compete provision.

An employer who violates this law, can face fines ranging from $500 to $3000 per violation. In addition to such fines, the mayor of Washington D.C. may also assess a range of administrative penalties ranging from $350 to $1,000 for each violation of the Act (other than retaliation), and $1,000 or more for each instance of retaliation in violation of the Act.

Have States Actually Fined Employers with Illegal Non-Compete Agreements?

Yes, Attorneys General in several states have pursued formal actions against certain employers whom they viewed as abusing non-compete agreements.

In 2019, Illinois’s Attorney General announced a settlement with a national payday lender, Check Into Cash, related to its use of noncompete agreements. Under the agreement, the company could not longer require its store-level employees earning less than $13 per hour to sign non-competes. The company was also required to pay $75,000 for the AG’s office to use toward public outreach on noncompete agreements.

The same year, Washington’s Attorney General required a coffee company, Mercurys Coffee, to void all of its existing non-compete agreements with baristas and pay $50,000 to reimburse AG’s office for its attorney’s fees and costs. The Attorney General issued a statement declaring these overbroad non-compete agreements illegal under the Washington Consumer Protection Act.

Recommendations

Non-compete agreements have been facing closer scrutiny in the last six years. Several states have criminalized the use of illegal non-compete agreements – a trend that is likely to continue. Employers should carefully review their non-compete agreements and make sure they are not overbroad and are reasonable. Failure to do so, may result in civil and criminal penalties in thousands of dollars.

**Washington D.C. does allow non-compete agreements with licensed physicians, who have completed their medical residency, and who receive annual compensation of at least $250,000.

Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice.  Her practice includes commercial, intellectual property and employment litigation.  You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 531-2403 or fill out the form below. 

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