As of July 1, 2023, non-competition provisions are no longer enforceable against Minnesota employees or independent contractors in most situations.
Minnesota’s new law prohibits any covenant not to compete that is contained in a contract or agreement with an employee or independent contractor. The bill defines a covenant not to compete as an agreement “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 geographic 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.” Importantly, the new law will only apply to agreements signed on or after July 1, 2023, and it will not apply retroactively.
Unlike similar laws other states have passed, Minnesota’s law does not provide a wage threshold or any other exceptions based on the status or classification of the worker. However, non-competition provisions based on the sale of a business are still valid. Specifically, non-competition provisions will still be valid if agreed upon during the sale of a business or in anticipation of the dissolution of a business. In particular, when there is a sale of a business, the law says that the purchaser and “the person selling the business and the partners, members, or shareholders” may agree on a non-competition provision that prohibits the seller from engaging in a similar business in a reasonable geographic area for a reasonable length of time. The law, however, does not explicitly specify what level and type of interest one must hold in the business to officially be considered a “seller.” For example, the law is not specific about whether a “seller” may include an individual who only is selling a very small interest in the business. With respect to the second exception, if a dissolution of a business is anticipated, the partners, members, or shareholders may agree that they will not participate in a similar business in a reasonable geographic area where the dissolving business was located. It’s important to note that for both of these exceptions, the law does not provide guidance as to what constitutes a “reasonable” geographic territory or length of time for a non-competition provision to be permissible.
Another exception is that the law expressly allows for non-disclosure and non-solicitation provisions, which will provide employers with some remaining protections. In particular, these exceptions will enable employers to protect against a former employee soliciting their customers and/or employees, or from taking and using confidential information and trade secrets, as long as those provisions are drafted in accordance with applicable Minnesota guidelines and supported by a legitimate business purpose.
In addition to the restrictions on non-competition provisions, Minnesota’s new law prohibits employers from requiring that employees who primarily reside and work in Minnesota agree to a provision requiring a claim or controversy to be adjudicated outside of Minnesota. This limitation applies to all contracts and agreements between an employer and an employee, not just those that contain a non-compete agreement.
For all employers with employees in Minnesota, it is essential to examine their employee and independent contractor covenants agreements to (1) remove any non-competition provisions and (2) add or strengthen provisions prohibiting solicitation of customers and employees, as well as provisions prohibiting the disclosure of confidential information. In addition, this statute is yet another reminder to multi-state employers that covenants agreements should be specifically tailored to the law of the state where each worker lives and/or works.
If you have any questions, please do not hesitate to reach out to a member of the Morris, Manning & Martin, LLP Employment Team.