Don's Discussion

Are you a member with a question? Contact IA&B Legal & Corporate Affairs Director Don Bankus at 717-918-9204 or DonB@IABforME.com.

QUESTION:

Is “restrictive covenant” language, such as a “non-compete” and/or “non-piracy” provision, enforceable in employment agreements?

ANSWER:

As you’re aware, restrictive covenants in an employment agreement are contractual provisions with the purpose to protect 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 exemployee 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 employment with the agency (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.

COURT’S 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 a period of five years. In Pennsylvania, Maryland, and Delaware, 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 6 months to 1 year and a geographic radius of 20 miles.

STATE SPECIFIC LEGISLATION

While both Pennsylvania (Act 74 of 2024) and Delaware (6 Del. Code Section 2706) have enacted laws which restrict the use of “covenants not to compete” applicable expressly to “health care practitioners” (PA) and “physicians” (DE), neither state’s legislature has enacted expansive legislation addressing/limiting “covenants not to compete.”

Maryland, on the other hand, enacted legislation which became effective in October 2019 and provides, in part, that: “A noncompete ... 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.” (See MD Code – Labor & Employment – Section 3-716).

The statute was initially somewhat narrow in scope; however, in 2023 it was modified such that the restriction would apply to any employee who earns equal to or less than 150% of the state minimum wage and regardless of whether the employee entered into the agreement within the State of Maryland. At present, per MD Code – Labor & Employment Section 3-413, Maryland’s minimum wage is $15 per hour, meaning “covenants not to compete” with employees earning less than or equal to $22.50 per hour would be unenforceable.

Stated alternatively, a non-compete agreement with an employee earning more than $46,800 per year would be enforceable. In addition, in 2024 the statute was expanded to include prohibitions applicable to an employee licensed as a veterinary practitioner/technician and certain health care professionals.

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). As of October 2024, four states ban the use of non-competes entirely, and 33 states plus the District of Columbia restrict their use to some degree.

In large part, increased legislation across the nation has been spurred by a perceived need to curb the abusive and excessive use of “covenants not to compete” entered into with regard to low-wage employees, such as those working in the fast food and retail industries, wherein departing employees have often been contractually prohibited from working with another fast food or retail employer within the same geographical area.

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

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.