A new law went into effect on July 1, 2023. It bans covenants not to compete in the state of Minnesota. The new law under Minn. Stat. §181.988 applies to all non-compete agreements enacted on or after July 1, 2023. Non-compete agreements entered into before July 1 will not be affected. Both employers and employees should be aware of new changes that may affect future employment agreements.
What Counts as a Non-Compete Agreement?
Under the new law, a “covenant not to compete” is defined as “an agreement between an employee and employer that restricts the employee, after termination of the employment from performing: (1) work for another employer for a specified period of time; (2) work in a specified geographical area; or (3) work for another employer in a capacity that is similar to the employee’s work for the employer that is party to the agreement.” This kind of agreement will be rendered void and unenforceable once the statute goes into effect.
However, certain contract provisions that are similar to a covenant not to compete are still allowed under the law. The ban does not include nondisclosure agreements, or agreements designed to protect trade secrets or confidential information. The ban also does not include non-solicitation agreements, or agreements restricting the ability of an employee to use client or contact lists, or solicit customers of the employer.
Who Does the Ban Apply To?
The new law prohibits any non-compete agreement between an employer and an employee or independent contractor regardless of a person’s income.
“Employer” refers to “any individual, partnership, association, corporation, business, trust, or any person or group of persons acting directly or indirectly in the interest of an employer in relation to an employee.”
“Employee” refers to “any individual who performs services for an employer, including independent contractors.”
“Independent Contractor” refers to “any individual whose employment is governed by a contract and whose compensation is not reported to the Internal Revenue Service on a W-2 form.” Under the statute, “independent contractor” also includes “any corporation, limited liability corporation, partnership, or other corporate entity when an employer requires an individual to form such an organization for purposes of entering into a contract for services as a condition of receiving compensation under an independent contractor agreement.”
These very broad definitions evidence the legislature’s intent for the ban to have a broad application. These definitions may be narrowed as courts interpret and apply the statute in lawsuits between employers and employees, but only time will tell as the statute is tested in the courts.
Are There Any Exceptions to the Ban?
Covenants not to compete, as defined in the statute, may be allowed in two instances.
- Non- competes agreed upon during the sale of a business are valid. The person selling the business and the partners, members, or shareholders, and the buyer of the business “may agree on a temporary and geographically restricted covenant not to compete that will prohibit the seller of the business from carrying on a similar business within a reasonable geographic area and for a reasonable length of time.”
- Non-compete agreements are allowed in anticipation of the dissolution of a business. The “partners, members, or shareholders, upon or in anticipation of a dissolution of a partnership, limited liability company, or corporation may agree that all or any number of the parties will not carry on a similar business within a reasonable geographic area where the business has been transacted.”
Can I, an Employer, Change the Law Governing My Agreement to Get Around The Ban?
Short answer, no.
The statute prohibits employers from requiring employees who reside and work in Minnesota to agree, as a condition of employment, to a provision in an agreement that would (1) require the employee[s] to adjudicate outside of Minnesota a claim arising in Minnesota; or (2) deprive the employee[s] of the substantive protection of Minnesota law with respect to a controversy arising in Minnesota. This provision applies to all employment agreements, not just non-compete agreements. Furthermore, a provision of the contract that is in violation of this section is voidable by the employee at any time, and any disputes arising must be litigated or arbitrated in Minnesota law, with Minnesota law governing the dispute.
What Happens if an Employee or Independent Contractor Sues an Employer?
Only the covenant not to compete is rendered void and unenforceable by the new law. The rest of the employment agreement may remain intact. But while the rest of the provisions in an employment agreement may survive, this alone should not tempt employers to test the new ban. In addition to injunctive relief and other remedies available, a court may award an employee enforcing its rights under the law reasonable attorney fees – a costly price to pay for an employer even if the remainder of the employment agreement remains in effect.