Update on state legislation following the demise of FTC rule banning non-compete agreements

In the wake of last year’s nationwide injunction of the FTC's Non-Compete Rule, state legislatures across the country have moved swiftly to advance their own agendas regarding the enforceability of non-compete agreements. From Ohio and Michigan to Florida, Texas and beyond, a broad range of states are actively introducing, debating or enacting legislation that could significantly alter the legal landscape for restrictive covenants. This update provides a summary of recent and pending state law changes that employers should be aware of as the legal landscape continues to shift rapidly.

As McDonald Hopkins previously addressed, Ohio has taken a bold step with the introduction of Senate Bill 11, which, if enacted, would make Ohio only the fifth state (in addition to California, Minnesota, Oklahoma, and North Dakota) to institute a comprehensive ban on post-employment non-compete agreements. The bill would render all such agreements void, regardless of their duration or geographic scope, and would apply to a broad definition of "worker" — including employees, independent contractors, interns, volunteers, and more. Notably, the bill provides for a private right of action for aggrieved workers, with remedies including actual and punitive damages, injunctive relief, and attorneys' fees. The bill also restricts certain types of agreements that require workers to pay for lost profits, goodwill, or training costs upon termination, but does not expressly prohibit non-solicitation or non-disclosure clauses.

Elsewhere, states like Michigan, Washington, and Tennessee are considering or have already introduced bills that would broadly prohibit non-compete agreements, with some proposals applying retroactively and others prospectively. For example, Michigan's HB4040 would retroactively ban non-competes for all workers except in limited circumstances involving the sale of a business. Washington's HB1155 (retroactively) and Tennessee's SB0995/HB1034 (prospectively) similarly seek to void most non-compete covenants, with varying exceptions and notice requirements. North Carolina has introduced the Workforce Freedom and Protection Act, which would ban non-competes for employees earning less than $75,000 per year, joining a growing list of states with minimum salary thresholds for enforceability (Colorado, District of Columbia, Illinois, Maine, Maryland, New Hampshire, Oregon, Rhode Island, Virginia, and Washington, as well as Idaho and Nevada which have wage requirements instead of salary thresholds).

In addition to these states, several others are actively considering or enacting legislation that would significantly impact the enforceability of non-compete agreements. Arkansas, Louisiana, Maryland, Vermont, Hawaii, Arizona, Kentucky, Virginia, and Wyoming have all introduced or are debating bills that would either restrict or clarify the use of non-compete clauses. For example, Maryland and Vermont are considering measures that would limit non-competes for lower-wage workers, while Hawaii (which seeks to retroactively limit non-competes for workers in the restaurant and retail store industries and already limits non-competes in the technology industry) and Arizona are evaluating broader prohibitions or new requirements for enforceability. Vermont, however, would not prohibit non-compete agreements entered into in relation to the sale of a business, dissolution of a partnership, dissolution of an LLC, or a severance agreement, if the agreement is reasonable. Kentucky and Wyoming have also introduced bills that would impose new standards or limitations on non-compete agreements, reflecting a nationwide trend toward increased scrutiny and regulation of restrictive covenants. Additionally, Arkansas, New York, and Texas have introduced legislation aimed at limiting the enforceability of non-compete agreements, signaling a continued push for reform in these states.

Meanwhile, other states are moving in different directions. Florida, for example, is on the verge of enacting the "Florida Contracts Honoring Opportunity, Investment, Confidentiality, and Economic Growth (CHOICE) Act" through House Bill 1219. This legislation would provide a clear framework for enforceable non-compete and garden leave agreements, setting out specific requirements for notice, confidentiality, and the rights of covered employees. The bill aims to strengthen the enforceability of such agreements, provided they meet the statutory criteria, and would not consider them a restraint of trade or contrary to public policy. Similarly, Kansas has enacted employer-friendly restrictive covenant legislation, further illustrating the divergent approaches states are taking in this area.

Given this patchwork of state laws and the uncertainty at the federal level, it is more important than ever for employers—especially those operating in multiple states—to stay informed and consult with their McDonald Hopkins attorney regarding their restrictive covenant programs. Our labor and employment team will continue to monitor these developments and provide updates as new laws are enacted and pending legislation progresses. For now, employers should review their current agreements and practices to ensure compliance with the evolving state-by-state requirements.