State laws governing noncompete clauses in employment agreements have been in place for years. But the Federal Trade Commission’s (FTC) new rule that effectively bans those clauses will certainly have an impact on existing state-level legislation and enforcement. The Final Rule, which was published in the Federal Register on May 7, 2024, and goes into effect on September 4, 2024, explicitly preempts state law that conflicts with the Final Rule. Below is our analysis of how employers and state law in D.C., Maryland, and Virginia will be affected.

Washington, D.C.

Washington, D.C., has banned noncompetes in place for “covered employees” since October 1, 2022.^[1] The D.C. definition of “covered employee” is expansive. This is an employee who spends more than 50% of their time working in D.C. or whose employment is based in D.C. and who regularly spends substantial time working in D.C. and less than 50% of their time working in a different jurisdiction.^[2] Covered employees can also be workers whose employment has not actually begun, but who reasonably anticipate the same factors as present employees.

Similar to the Final Rule, D.C. has a carve-out for “highly compensated employees,” which it defines as an employee who is reasonably expected to earn at least the minimum qualifying annual compensation of $150,000 in a consecutive 12-month span, or whose compensation was at least the minimum qualifying compensation in the consecutive 12-month span immediately preceding the noncompete term.^[3] If the employee is a “medical specialist,” such as a licensed physician or surgeon, the minimum compensation is increased to $250,000.^[4]

If, after October 1, 2022, a D.C. employer seeks to have a highly compensated employee sign a valid and enforceable noncompete agreement, the agreement shall:

• contain specifics regarding the functional scope of the restriction, including the services, roles, industry, or competing entities the employee would be restricted from working in or on behalf of;
• state the geographical limitations of the restriction;
• establish a time limit of 365 calendar days from the date of separation for non-medical specialists or 730 calendar days from the date of separation for medical specialists; and
• be provided to the employee at least 14 days prior to the beginning of employment or at least 14 days prior to the execution of the agreement.^[5]

The Final Rule does not materially change or conflict with the D.C. law banning noncompetes for covered employees, but it does have a significant impact on prospective noncompetes with highly compensated employees. The D.C. law for highly compensated employees contained no date after which such agreements were banned. Under the Final Rule, should a D.C. employer seek to enter into a valid and enforceable noncompete with a highly compensated employee, they will be unable to do so after September 4, 2024, regardless of whether they abide by the current D.C. Code.

Maryland

Until recently, the Maryland Code had a more simplistic approach to noncompete agreements than D.C. or Virginia. In Maryland, a “noncompete . . . provision in an employment contract . . . that restricts the ability of the 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 against the public policy of the State.”^[6]

The restriction on noncompetes applies to any employee who earns equal to or less than 150% of the State minimum wage rate, and applies regardless of whether the employee entered into the agreement within the State of Maryland.^[7] As of the date of this publication, Maryland’s minimum wage rate is $15.00 per hour,^[8] meaning that employees earning less than or equal to $22.50 per hour cannot enter into noncompete agreements. Stated alternatively, any employee earning more than $43,200 per year could enter into a noncompete agreement.

The statute explicitly provides that it does not apply to agreements that restrict or preclude departing employees from taking proprietary client-related information with them at the end of their employment. Thus, an employer’s ability to enter into nondisclosure agreements, confidentiality agreements, or nonsolicitation agreements remains intact.

Most recently, on April 25, 2024, Governor Wes Moore signed HB 1388 into law, which added additional restrictions to Maryland’s noncompete statute. The new statutory language, which does not go into effect until July 1, 2025, adds specific bans on noncompetes for:

• employees whose jobs providing direct patient care require licensure under the Health Occupations Article of the Maryland Code and who earn equal to or less than $350,000 in annual compensation; and
• veterinarians and veterinary technicians under the Agricultural Article of the Maryland Code.^[9]

The amended statutory language does include a carveout for employees who require licensure under the Health Occupations Article, provide direct patient care, and earn more than $350,000 in annual compensation. For such an employee to be subjected to a valid and enforceable noncompete, the agreement must not exceed one year from the last day of employment and cannot prevent an employee from working anywhere outside of a 10 mile radius from the employer’s place of business.^[10] In other words, if an employer is located in Baltimore’s Inner Harbor, a noncompete cannot prevent an employee from working in Annapolis, MD immediately upon leaving their employment.

The amended statutory language does not require employers to notify any employees that a current noncompete will be unenforceable. Employers are also not required to affirmatively provide information about a former employee covered by a noncompete to the employee’s former patient; however, if a patient requests information about the employee, the employer is required to provide it.

Assuming the Final Rule takes effect on September 4, 2024, Maryland’s noncompete laws—both current and amended—will be drastically changed due to the Final Rule’s preemption of conflicting state law. This means that all current noncompetes under Maryland law will now be unenforceable except for those for senior executives, and no new noncompetes whatsoever may be entered into after September 4, 2024.

Virginia

The Virginia Code refers to a noncompete agreement more formally as a “covenant not to compete,” which it defines as “a covenant or agreement, including a provision of a contract of employment . . . that restrains, prohibits, or otherwise restricts an individual’s ability . . . to compete with his former employer.”^[11]

Virginia bans all noncompetes with “low-wage employees,” who, as in Maryland, are employees with average 52-week earnings less than the Commonwealth’s minimum average weekly wage.^[12] As of the date of this publication, a low-wage employee in Virginia is anyone who earns less than $1,410 per week.^[13] The definition specifically includes students, interns, apprentices, and trainees. The definition also explicitly excludes any employee whose earnings are predominantly or entirely comprised of sales commissions, incentives, or bonuses.

The Virginia statute further specifies that a covenant not to compete “shall not restrict an employee from providing a service to a customer or client of the employer if the employee does not initiate contact with or solicit the customer or client.”^[14] In other words, employers are free to keep existing or execute new nonsolicitation agreements, but cannot try to enforce them if the customer or client sought out the former employee of its own volition.

Again, because the Final Rule preempts conflicting state-level governance of noncompete agreements, if the Final Rule does become effective, noncompete agreements in Virginia will be assessed based on the Final Rule’s standard employee vs. senior executive factors, and all new noncompetes regardless of employee status or pay will be banned beginning September 4, 2024.

Regardless of the state and whether the state law provides specific permissions for nonsolicitation or other restrictive agreements, such agreements should be reviewed to ensure they do not qualify as a “functional noncompete,” as discussed in our article, “3 Steps to Prepare for the FTC Noncompete Clause Rule.”

NOTES

^[1] D.C. Code § 32-581.02

^[2] D.C. Code § 32-581.01(6)

^[3] D.C. Code § 32-581.01(10)

^[4] D.C. Code § 32-581.01(12)-(13)

^[5] D.C. Code § 32-581.03(a)

^[6] Md. Code Ann., Lab. & Empl. § 3-716(b)

^[7] Md. Code Ann., Lab. & Empl. § 3-716(a)(1)

^[8] Md. Code Ann., Lab. & Empl. § 3-413(c)

^[9] https://mgaleg.maryland.gov/2024RS/Chapters_noln/CH_378_hb1388e.pdf

^[10] Id.

^[11] Va. Code Ann. § 40.1-28.7:8(A)

^[12] Id.

^[13] https://doli.virginia.gov/notice-of-the-average-weekly-wage-for-2024/

^[14] Va. Code Ann. § 40.1-28.7:8(A)