In a move that was surprising to many, the Utah legislature passed, and the Governor signed, H.B. 251, the "Post-Employment Restrictions Act" in March of 2016. You can review the new law here, which sets a one year-limit on employment non-compete agreements starting May 10, 2016.
While the Act that ended up being passed was altered significantly from the original bill that was introduced, the Act prohibits employee non-compete agreements from being longer than one year following termination, and, significantly, requires a non-prevailing employer who seeks to enforce an agreement in violation of the Act to pay attorneys' fees and costs to an employee who successfully challenges the enforceability of the post-employment non-compete agreement.
What Non-Compete Agreements are Subject to the Act?
Utah Code Section 34-51-201 provides that "in addition to the requirements under the common law, for a post-employment restrictive covenant entered into on or after May 10, 2016, an employer and employee may not enter into a post-employment restrictive covenant for a period of more than one year from the day on which the employee is no longer employed by the employer. A post-employment restrictive covenant that violates this section is void."
The Act defines a "post-employment restrictive covenant" as a "covenant not to compete or non-compete agreement between an employee and employer where the employee agrees that the employee, either alone or as an employee of another person, will not compete with the employer in providing products, processes or services that are similar to the employer's products, processes, or services." U.C.A. 34-51-101(1)(a). Importantly, non-solicitation agreements and nondisclosure and confidentiality agreements are not "post-employment restrictive covenants under the Act." In addition, the Act expressly does not apply to severance agreements signed upon or after termination, and the Act does not apply to restrictive covenants included with the sale of a business so long as the individual(s) subject to the restrictive covenant receives value from the sale (e.g., an employee of the business being sold receives compensation as part of the transaction in order to be precluded from competing).
The Act does not apply to independent contractors, only employer/employee relationships. Hence, independent contractors (or those who are improperly classified as independent contractors) must still show that a non-compete is unenforceable under the common law of Utah, and in many situations a non-compete agreement may extend beyond one year if an employer can establish that the agreement is narrowly tailored to protect its legitimate business interests. Employers are also free to use non-compete, non-circumvention and non-disclosure agreements to restrict certain actions by departing employees, without regard to the one year limitation in the Act. In many ways, these types of agreement are much more efficient and effective in preventing employees from damaging an employer's business post-termination than non-compete agreements.
Employers who ask employees to sign non-compete agreements starting on May 10, 2016 and moving forward should still tailor a non-compete agreement to comply with Utah's common law requirements, but should limit the duration of the non-compete agreement to one year. Under Utah common law, for a non-compete agreement or other restrictive covenant to be enforceable it must be supported by consideration, negotiated in good faith, necessary to protect the employer's legitimate business interests (i.e., goodwill, trade secrets) and reasonable in duration and scope (although the duration now must be no longer than a year for non-compete provisions).
What Happens if an Employer Violates the Act?
An employer can no longer force an employee to sign an overly broad non-compete agreement and avoid economic harm for doing so. Under the Act, if an employer seeks to enforce a post-employment restrictive covenant, either by filing a civil action or commencing an arbitration, and the court (or arbitrator) determines that the covenant is unenforceable, the employer is liable and must pay the employee's costs, attorneys' fees and actual damages. U.C.A. 34-51-301. This means that employers should take significant care to craft agreements that are tailored to the specific duties of an employee, and not bind employees engaged in a common calling to non-compete agreements that are overly broad. Employees are much more likely to contest overly broad agreements given the new provisions in the Act, and employers who ask an employee to sign a non-compete longer than one year in duration do so at their own peril.
What Should Employees Do?
The Act is a major victory for employees, but employees always must be vigilant about protecting their interests before signing a non-compete or other restrictive covenant. In most circumstances, employees who are presented with an agreement that includes a non-compete or other restrictive covenant when they start working should have an experienced Utah non-compete lawyer review the agreement before signing. While the Act limits the duration of non-competes to one year, and provides for the award of attorneys' fees and costs if an employee prevails, non-compete agreements are still enforceable and can significantly limit employees ability to earn a living following termination. Moreover, employers may still have employees sign restrictive non-solicitation provisions that fall outside of the Act's protections.
Many issues that should have been addressed in the Act were not addressed but may come up in future legislation. For example, Utah law still provides that an employee's continued employment is significant consideration to support a non-compete. Also, whether or not you are terminated, quit, or resign for good cause, Utah law still allows a post-employment restrictive covenant to be enforced. It's not enough that your employer thought you were a terrible employee or incompetent or simply didn't need your services anymore, or that you had a justification for leaving. In each of those situations, under settled Utah law an employer may still enforce the restrictive covenant that you signed with limited exceptions. Even worse, although the Supreme Court has not addressed this issue, Court's often "blue pencil" overly broad agreements, which means that a Court may still be able to modify an overly broad non-compete so that it is enforceable, even though the agreement your employer asked you to sign was unenforceable.
There are numerous other issues that both employers and employees need to consider under the Act and Utah common law. If you have questions about the Act, non-compete agreements or other forms of restrictive covenants, including non-disclosure, non-solicitation and non-circumvention agreements, please call our office at (801) 758-7604 and speak to one of our Utah attorneys experienced with non-compete issues and restrictive covenants, or contact us online at www.utahtriallawyers.net to get additional information.
At Stavros Law, our employment lawyers represent individuals and businesses on all aspects of Utah employment law, including non-compete agreements, non-solicitation agreements and other restrictive covenants.
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