Minnesota Becomes Fourth State to Ban Noncompetes
Tucked into a flurry of laws passed by the DFL-led Legislature this session is a provision banning noncompete agreements in Minnesota. While it’s not immediately clear how this will affect Minnesota employers, workplace attorneys say such bans in other states have had clear impacts on hiring decisions.
The ban is part of an omnibus spending bill passed by the Legislature this session. It prohibits any noncompete agreement that restricts an employee or independent contractor from working for another business after termination of employment. The only time a noncompete is deemed valid is during the sale of a business where the agreement would prohibit the seller from carrying on a similar business within a particular geographic area for an amount of time. This type of covenant can also be applied in anticipation of the dissolution of a business.
This law is not retroactive, so if you’re currently under a noncompete, it’s still valid. It applies only to employment contracts enacted after July 1.
While the “covenant not to compete” has been banned for all employees in the state, this ban does not apply to nondisclosure, confidentiality, trade secret, or non-solicitation agreements. A non-solicitation agreement is a different kind of restrictive covenant that prohibits former employees from attempting to recruit employees from their former company. The new law also does not prohibit agreements that restrict an employee or independent contractor from working for another business while performing services for a business.
Traditionally, noncompete clauses were used in contracts for high-paid managers who were more likely to have access to trade secrets and confidential information. But, over the years, there has been a rise in noncompetes imposed on lower-wage workers. Some employment attorneys have argued it’s wrong to prevent many categories of workers—such as fast-food employees—from switching employers through the use of this kind of covenant.
Only California, North Dakota, and Oklahoma have banned post-employment noncompete agreements to the same degree as the new Minnesota law. Other states have passed laws to protect lower-wage employees by restricting prohibitive covenants based on compensation level, workplace attorney for Faegre Drinker Dan Prokott told TCB. For example, Colorado passed a law in 2022 that placed limitations on restrictive covenants so noncompetes could only be applied to workers making over $101,250.
Prokott is licensed in both California and Minnesota, so he has experience working with employers in a state that has had a noncompete ban for decades.
“The fact that an employee living and working in California is not able to be bound by a noncompete agreement … is absolutely one of the considerations that employers will look at regarding candidates,” he said.
Under the new law, an employer must not require an employee who primarily resides and works in Minnesota, as a condition of employment, to agree to a provision in an agreement that specifies it is governed by another state’s law or requires the employee to litigate a claim arising in Minnesota in another state. This provision, which is modeled after a California law that has been in effect since 2017, means residents who work remotely here but are hired by a company out of state won’t be bound by noncompetes prohibited by the new Minnesota law.
But Prokott pointed out that this provision may go further than simply banning outside companies from enforcing noncompetes on Minnesota employees. The vagueness of the wording in this particular section also could apply to any contract agreement.
This made Prokott question: “Does that mean that the limitation provision only applies to a noncompete agreement, which is already prohibited by the new law? Or does it apply more broadly to any agreement or contract?”
Earlier this year, the Federal Trade Commission proposed a plan to ban noncompete clauses across the nation. According to Bloomberg, the FTC is expected to vote next April on the final version of its proposal.