How Inflation in 2022 Could Affect Non-Compete Agreements in 2023

Employers do not need to be reminded that inflation reared its ugly head in 2022. Whether it was ‎the price of gas at the pump, food, vehicles, or computers, the cost of ‎doing business certainly went up last year. But increased prices are not the only impacts of ‎inflation. There are hidden costs, too. One less well-known cost is that many multi-state ‎employers may suddenly be at risk of having some of their non-compete agreements run afoul of applicable ‎state law.‎

As Locke Lord previously wrote, in recent years, there has been a growing trend nationwide ‎towards limiting the enforceability of certain non-compete agreements ‎between employers and their employees. Among other strategies, some state legislatures ‎prohibited the enforcement of non-competes against lower wage earners. Nevada‎, for example, ‎no longer allows non-compete agreements for hourly workers, while Rhode Island‎ and ‎Massachusetts‎ ban non-competes for employees who are classified as nonexempt under the ‎Fair Labor Standards Act. Other states, such as Illinois‎, set a salary floor (currently $75,000 ‎per year; $80,000 per year in 2027), which limits non-compete agreements to only those employees ‎who earn more than these amounts. ‎

Taking a different approach, a few states have specifically tied their minimum earning thresholds for employees to the ‎Consumer Price Index (“CPI”). Generally speaking, the CPI measures the overall change in ‎consumer prices on a subset of goods and services over time. Thus, when inflation hits, the CPI ‎number rises, thereby relieving some categories of workers from their existing non-compete ‎agreements. Here are some state laws to keep an eye on:‎

• Oregon – Effective January 1, 2022, Oregon’s non-compete statute reduced the ‎maximum ‎length of a non-compete agreement to twelve months. The legislation also specified a ‎minimum annual gross salary and commission threshold of ‎‎$100,533, which is adjusted ‎annually for inflation. For purposes of non-compete enforcement, the statute specifically ‎provides that the employee’s salary is to be viewed “at the time of the employee’s ‎termination of employment.” Any noncompliant agreements ‎will be void and ‎unenforceable.
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• Washington State – Effective January 1, 2020, Washington state implemented an initial ‎annual compensation threshold of $100,000 for employees and $250,000 for independent ‎contractors. This amount is also tied to the CPI, with the compensation figures (according ‎to the Washington State Department of Labor & Industries) rising to $116,593.18 for ‎employees and $291,482.95 for independent contractors in 2023.‎
   
• Washington, D.C. – Although the District of Columbia initially proposed a total ban on non-‎compete agreements in 2020, the final version of its legislation instead set a minimum ‎qualifying annual compensation limit of $150,000 beginning in 2022. Starting in 2024, ‎this amount will increase in proportion to the CPI.‎
   

In light of this growing trend, for example, an employee in Portland, Oregon making ‎‎$115,000 per year in 2022 is of particular interest. As a result of the 2022 increase to the CPI, ‎unless the employer provides the employee a raise in 2023, the employer will risk losing the ability to enforce an already ‎existing non-compete agreement that was enforceable just weeks ago, even if the employee ‎resigns and joins a direct competitor. ‎

The landscape of restrictive covenants continues to ‎change with each passing legislative ‎session. Being aware of these changes gives employers the ‎best chance of protecting their ‎intellectual property, their workforce, and their valuable customer ‎relationships. Failure to do so, ‎however, risks the enforceability of both existing and future non-compete agreements with ‎key employees and other members of an employer’s workforce.‎