Lawmakers in Montpelier have introduced H. 205 – an act relating to agreements not to compete. The bill, if enacted, would prohibit the use of most non-competition agreements between employers and employees and would nullify most existing non-competes.
What is a non-competition agreement?
A non-competition agreement (also known as a “non-compete”) is a contract most often made between employers and employees. In a non-compete, an employee agrees that during their employment, and for a period of time after leaving their job, they will not do any work that would compete with the business of their employer. Post-employment non-compete restrictions must be limited to a defined job, a specific time period and a geographic area that is not overly broad.
Under existing Vermont law, a non-compete is generally enforceable as long as the agreement is not overly restrictive of an employee’s rights, or unnecessary for the protection of the employer. This decision would be made in a court, and depends on the facts and circumstances of each non-compete. Currently, there is no statute that generally limits the scope of non-competes in Vermont, but the proposed bill would change that.
Why do businesses use non-competition agreements?
In certain circumstances, employers can provide extensive specialized training or disclose confidential strategies or business goals to certain kinds of employees, to assist them in doing their jobs. In order to protect its business strategies, intellectual property, and long term growth goals, those employers might then require those high-level employees to sign non-competes, to prevent them from using that specialized training or confidential information to compete against them with a new employer. In some limited circumstances, companies use non competes as part of larger corporate transactions such as the sale of a business or merger.
What does this bill do?
H. 205 would change the law in two meaningful ways.
First, it prohibits the use of non-competes between franchisors of chain businesses and the franchisees that operate their stores and restaurants. It would require franchisors that are party to an existing non-compete with a franchise to notify the franchisee that the non-compete is null and void.
Secondly, it prohibits the use of most non-competes between employers and employees making less than $100,000 a year in wages. However, the law would not prohibit the use of non competes for high-earning employees or when the agreement is part of a separate, non employment related business transaction. It would also continue to allow businesses to use non-competes as part of post-employment severance agreements as long as it does not restrict the employee’s competitive conduct for longer than they receive severance pay. Further – if enacted, H. 205 would retroactively void all existing non-competes that do not meet the bill’s requirements.
What happens now?
H. 205 is slowly making its way through the legislative process and has not been put forward for a full hearing or vote on passage. The text and impact of the bill may also change throughout this legislative session. Some advocates have called on the bill’s sponsors to include language that would ban all non-competes between employers and healthcare workers.
Businesses who are concerned about the effects of its possible enactment are encouraged to reach out to their representatives in Montpelier.
Please contact Heather Hammond (hhammond@gravelshea.com) or Chris M. Bohórquez (cbohorquez@gravelshea.com) at Gravel & Shea PC if you have questions or would like assistance.
