Restrictive Covenant Scorecard for All 50 States + D.C.

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50 Ways to Leave Your Employer

(With apologies to Paul Simon.)

Non-competes and other restrictive covenants are regulated by state law, and the rules differ (often significantly) from state to state. Consider the variety of mechanisms that have gone into recent restrictive covenant legislation:

• Minimum compensation thresholds (ranging from $150,000 annually in the newly revised D.C. law to $14.50 per hour in New Hampshire);

• Prohibitions on using non-competes with employees who are paid an hourly rate or who are nonexempt under the Fair Labor Standards Act;

• Requirements to advise employees of the right to consult with counsel before signing the agreement;

• Advance notice periods where the employer must give the employee time to consider the agreement before signing it;

• Statutory restrictions or presumptions as to temporal, geographic, and behavioral scope;

• Restrictions on choice of law and forum-selection provisions.

Some laws contain one, some, or several of these features, but no two laws are the same.

Even in states without legislation, the common law has evolved differently over the years. Two of the most important lines of demarcation relate to the consideration needed to impose restrictive covenants on current employees and the power judges have to rewrite unreasonable covenants.

Why It’s Important to Compare

Comparing restrictive covenant laws from state to state is not just an academic exercise.

Employers usually have several options when considering choice of law or forum-selection provisions in a contract or when choosing a forum in which to bring an enforcement action. Picking the wrong state in either scenario could relinquish an advantage or have serious negative consequences, particularly in light of the increasing frequency with which states are imposing civil penalties to deter unlawful covenants.

Methodology

I created a weighted list of categories to quantify how tolerant each state is towards restrictive covenants. It would be impractical to include every nuanced issue, so I focused on those that have the highest impact to most employers. I also weighed the most severe rules more heavily, so an outright ban on non-competes affects the overall score more than a minimum compensation threshold of less than $100,000.

I allowed for some flexibility in the scoring within each category, bumping states up or down from the default depending on the circumstances. For example, Oklahoma does not have an outright ban on customer non-solicitation provisions, but its statute only allows narrow prohibitions on “directly soliciting established customers.” I gave Oklahoma -10 for that category, whereas I gave California (which generally bans all customer non-solicitation provisions) the full -25.

Here’s a list of the categories and their weighted values.

• Bans

  • Ban on non-compete provisions (-25)

  • Ban on customer non-solicitation provisions (-25)

  • Ban on employee non-solicitation provisions (-20)

    [This scorecard does not take into account customer non-servicing provisions or employee no-hire provisions, where active solicitation by the employee is not required for there to be a breach.]

• Penalties

  • Established penalties or liability for violating the state’s restrictive covenant laws (-20)

• “Blue Pencil” or Reformation Authority

  • “All or nothing” states with no “blue pencil” or reformation power (-15)

  • Limited “blue pencil” states where judges can strike severable, overbroad provisions but not rewrite the covenants to make them reasonable (0)

  • Discretionary reformation states, where judges can, but are not required to, revise overbroad covenants to be reasonable (+10)

  • Mandatory reformation states, where judges must revise overbroad covenants to be reasonable (+20)

• Compensation Requirements

  • Minimum compensation requirement of at least $100,000 annually (-15)

  • Other compensation rules, such as minimum thresholds below $100,000 annually, requirements as to exemption status under the FLSA, etc. (-10)

• Administrative Requirements

  • Advanced notice required (-10)

  • Additional consideration beyond continued at-will employment required for current employees (-10)

• Miscellaneous

  • Presumption or rule against enforcing a choice of law provision designating another state’s law to apply to the contract (-10)

  • Positive statutory presumption that restrictions within specified ranges are reasonable and enforceable (+15)

  • Other unique barriers to enforcement (variable between -5 to -20)

    • This includes factors like statutory caps on temporal scope, the requirement to advise the employee to consult with counsel, signature requirements, or other special rules.

The Scorecard

Here’s how every state + D.C. scored using these weighted categories. (Note: This takes into account recent changes to Colorado law that took effect August 10, 2022 and changes to D.C. law that are expected to become “applicable” on October 1, 2022, but which our legislation tracker projects to take effect on November 10, 2022. We are keeping a close eye on the D.C. law to see when the new rules will actually start applying to contracts, but for now, we take the changes into account.)

The Takeaways

1. No surprise here—California takes the prize for being the most employee-friendly. It is the only state that bans all three primary restrictive covenants: non-competes, customer non-solicitation provisions, and employee non-solicitation provisions. (There is some debate about employee non-solicitation provisions, but the weight of authority holds they are unenforceable as restraints of trade.) California also has a robust body of case law supporting potential claims against employers who try to impose unlawful restrictive covenants on employees.

2. Three of the top five states for employers (Arkansas, Florida, and Idaho) all have mandatory reformation—a rare, very employer-friendly feature. The other two states with mandatory reformation, Nevada and Texas, are weighed down by other regulations that Arkansas, Florida, and Idaho lack.

3. Massachusetts, despite its quirks, is not as oppressive as its reputation may suggest. Massachusetts gets a big bump because it is one of the few states that has a statutory presumption of reasonableness if a non-compete fits into defined geographic and behavioral parameters.

4. Some states, like Virginia, Utah, and Maine, got lower scores not because their laws are particularly onerous, but because the employer could be on the hook for civil penalties, damages, or attorneys’ fees if it fails to comply.

5. It’s important to remember that the type of restriction you’re analyzing matters when comparing states. If you don’t have a true non-compete, then Massachusetts becomes much more enforcement-friendly, because the statutory requirements would no longer apply. The same thing would happen if you had non-solicitation provisions that fit within the carve-outs from the Oregon and Washington statutes. The scorecard does not have a provision-by-provision breakdown; it’s designed to be a top-down look at the state as a whole.

Staying within the lines of this national patchwork of restrictive covenant laws is a significant challenge that gets more difficult as the law continues to evolve. Blue Pencil Box helps employers and attorneys by providing updated and automated 50-state surveys, custom checklists, as well as daily updates on what’s happening in the case law, legislation, and regulatory actions.