DON'S DISCUSSION

By IA&B Legal & Corporate Affairs Director Don Bankus

Are you a member with a question? Contact Don to find the answer at 800-998-9644, ext. 603 or DonB@IABforME.com.

QUESTION:

Is restrictive covenant language (such as non-compete and non-piracy provisions) enforceable in employment agreements?

ANSWER:

As you’re aware, restrictive covenants in an employment agreement are contractual provisions with the purpose of protecting the agency’s primary asset – its book of business. Restrictive covenants most commonly found in an employment agreement are:

1. a “covenant not to compete,” which prohibits an ex-employee from competing with a former employer for a certain period of time, and usually within a defined geographical area, after the former employee has left the business (competing either by way of joining forces with a competitor, or by way of establishing his or her own agency), and

2. a “non-piracy” provision, which generally prohibits an ex-employee from soliciting or accepting business from customers and prospects of the former employer for a specified period of time.

COURTS’ PERSPECTIVES

In most jurisdictions, covenants not to compete remain legal and enforceable, so long as the specific restrictions are not egregious or deemed to be against public policy. Examples of egregious restrictions would be attempting to contractually prohibit a former employee from working anywhere within 200 miles of your agency for five years. In Pennsylvania, Maryland, and Delaware, in order to be enforceable, a covenant not to compete should be limited in time and geographic scope. Courts generally will not disturb a covenant not to compete if it is limited to an enforcement period of between six months and one year and a geographic radius of 20 miles.

RECENT LEGISLATIVE ACTION

Legislatures in Pennsylvania and Delaware have not enacted legislation addressing “covenants not to compete.” However, Maryland enacted Senate Bill 328, effective Oct. 1, 2019, which is very narrow in scope and would primarily be applicable to employment agreements “concerning an employee who earns equal to or less than … $15.00 per hour; or … $31,200 annually.” With regard to such classification of employees, the legislation further provides that:

A noncompete or conflict of interest provision in an employment contract or a similar document or agreement that restricts the ability of an employee to enter into employment with a new employer or to become self-employed in the same or similar business or trade shall be null and void as being against the public policy of the state.

Notably, Maryland’s statute does not infringe upon or limit an employer’s right to use “non-piracy” language in an employment agreement (no matter the income or salary level) and is not retroactive. Other states which have enacted legislation limiting the scope of covenants not to compete include Maine, New Hampshire, Illinois, Oregon, Virginia, and Washington, as well as most recently the District of Columbia.

In large part, the recent increase in legislation has been spurred by the use of covenants not to compete with regard to low-wage employees (e.g. fast food and retail industries), wherein departing employees are contractually prohibited from working with another employer in the same geographical area.

Learn more about employment agreements by accessing IA&B’s Producer Agreement Toolkit at IABforME.com.

This document is not a legal opinion and should not be relied upon as such. The intent of this document is to provide a general background regarding the topic or topics discussed, not to provide legal advice. Producers and agencies should consult an attorney regarding specific situations and specific questions with respect to the topic or topics covered in this document. Neither the Insurance Agents & Brokers nor any of its employees shall be responsible for any errors or omissions regarding any statements made in this document, nor any errors or omissions regarding any statutes, regulations, court rules, and/or any other government documents cited in this document.