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Minnesota Again Considers Banning Non-Competes

The FTC’s proposed rule banning non-competes nationally has received much attention, but the far likelier change to non-compete law for Minnesotans is from the all-DFL state government. Barely into session, the Minnesota legislature is considering two companion bills, HF295 and SF405. Like last year’s HF999, the law, if enacted, would ban all non-compete agreements with Minnesota employees who make less than a certain salary threshold and would require “garden leave” payments for employees making higher incomes.

These bills would prohibit all non-competes except when the employee earns an annual salary at least equal to the median income for a four-person family in Minnesota for the most recent year before the employee’s termination, provided the employer pays the employee during the non-compete period at least half the employee’s highest annualized base salary in the last two years of employment.

The bills raise several unanswered questions, most importantly their scope. The subject of the legislation is “covenant not to compete,” which the bills define as including “an agreement between an employee and employer that restricts the employee, after termination of the employment, from performing . . . work for another employer for a specified period of time.” Construed broadly, that definition applies not only to non-competes but also to customer non-solicits and possibly even confidential information non-disclosure agreements.

The bills are also unclear on what forms of compensation are included in the threshold “salary” and how that salary is measured. For example, if an employee earns $100,000 annually but takes a three-month unpaid medical leave, it is unclear whether the salary threshold is met. It is also unclear whether a non-compete would be enforceable for an employee who has been employed less than two years since that employee would not have a previous two years of annualized salary from which to measure the garden leave payment.

Critically, employers would not be able to contract around these prohibitions by including a non-Minnesota choice-of-law provision, at least for employees who do not have legal counsel. The bills would make those provisions voidable at the employee’s discretion. The bills also allow an award of attorney’s fees to an employee who seeks to void the provision.

We will continue monitoring the bills and how they could impact employers. To discuss further, contact Joel Andersen or Katie Connolly.

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