Non-Compete Agreements Void in Employment Agreements

August 10, 2023

The Minnesota Legislature recently passed a law rendering all covenants not to compete in employment agreements signed on or after July 1, 2023. The new law makes any covenant not to compete contained in an employment (or independent contractor) agreement/contract void and unenforceable if the agreement/contract was executed on or after July 1, 2023. This ban covers agreements between employee (including independent contractors) and employer that restricts the employee/independent contractor, after termination, from performing:

1) work for another employer for a specified period of time;
2) work in a specific geographical area; or
3) work for another employer that is similar to the employee’s work for the previous employer.

The non-compete legislation does not, however, apply retroactively to void covenants not to compete in contracts or agreements executed before July 1, 2023. The new legislation also does not void an entire employment contract or agreement that contains a covenant not to compete, only the covenant itself. Additionally, the new law carves out a few instances when a covenant not to compete would still be valid and enforceable. These instances include:

1) when the covenant not to compete is agreed upon during the sale of a business; or
2) when the covenant not to compete is agreed upon in anticipation of the dissolution of a business.

In enacting this legislation, Minnesota joins Oklahoma, California, and North Dakota as states that have entirely banned covenants not to compete. Other states that have passed legislation restricting the validity or enforceability of non-compete clauses include an exclusion to the law for salary or income thresholds, allowing non-compete clauses for highly compensated employees. Minnesota’s version of the law is more expansive because it does not include any income threshold. This broad application of a non-compete ban creates concerns regarding the new possibility that upper management and “C-suite” employees may easily and quickly become competitors at any time.

While the newly enacted legislation prohibits non-competes, certain restrictions in employment contracts remain applicable. The legislation does not apply to (or excluded) nondisclosure agreements, non-solicitation agreements, confidentiality agreements, agreements restricting the dissemination of trade secrets, or agreements restricting the ability to use client or contact lists, and agreements to protect trade secrets or other confidential information. All of these agreements remain enforceable in employment contracts or agreements executed after July 1, 2023. Nondisclosure, non-solicitation, confidentiality, trade secret, and client contract restrictions, which were once generally seen as accompaniments to a covenant not to compete, are now at the forefront of an employer’s ability to protect sensitive information and customer relationships under Minnesota’s new law. As a result, employers may need to revisit, reevaluate and strength the allowable restrictions in employment contracts–providing the most protection available within the context of the new legal landscape.

In addition to voiding covenants not to compete, the new law also addresses choice of law and choice of venue provisions in employment contracts. Under the new law, an employer is not allowed to require employees who reside and work in Minnesota, as a condition of their employment, to agree to a provision in their employment contract or agreement that would require the employee to: (i) adjudicate (litigate and arbitrate) in another state outside of Minnesota a claim arising in Minnesota; or (ii) deprive the employee of the substantive protection (i.e. prohibition of non-compete) of Minnesota law. As a remedy, an employee may receive injunctive relief and recover reasonable attorney fees.

Minnesota’s new law will require some employers to reassess their employment contracts and agreements in order to ensure both compliance and protection under the newly enacted legislation. Employers may also need to evaluate their current practices regarding information security and employee access to sensitive information. While it is unclear what effect the new law will have on the labor market in Minnesota, employers should be aware that their old employment contract forms may be insufficient to protect their informational security or customers lists and may not comply with the new restrictions on choice of law and venue provisions for employees that are Minnesota residents.

Associated Attorneys