SPOTLIGHT: CHANGES REGARDING NON-COMPETE AGREEMENTS
On June 3, 2017, Governor Sandoval signed Assembly Bill 276, which amends NRS 613 to set new standards for non-compete agreements. These new standards became effective upon the Governor’s signature.
A non-compete agreement is an agreement between an employer and employee, which states that upon termination of employment the employee is prohibited from pursuing employment in competition with the employer.
Non-compete agreements are popular where proprietary information, like customer lists, unique technology, and the like, are involved.
New Standards for Non-Compete Agreements
Under Nevada law, a non-compete agreement is void and unenforceable unless (1) it is supported by valuable consideration; (2) it does not impose any restraint that is greater than is required for the protection of the employer; (3) it does not impose any undue hardship on the employee; and (4) it imposes restrictions that are appropriate in relation to the consideration supporting the restriction.
Consideration is a fancy legal term meaning something of value. Therefore, in order for something to have valuable consideration there must be an exchange of something of value for the promise not to compete. In the past, the promise of continued at-will employment was sufficient. It is unclear what might be sufficient consideration under these new standards.
The new standards do not prohibit agreements regarding confidentiality and trade secrets. So long as any confidentiality or trade secrets agreement is supported by valuable consideration and is otherwise reasonable in scope and duration, it will be enforceable.
Dealings with Former Customers Not Prohibited Under Certain Circumstances
A non-compete agreement, under the new law, may not restrict a former employee from providing services to a former customer in three specific instances:
- When the former employee did not solicit the former customer
- When the customer voluntarily chose to leave and seek services from the former employee
- When the former employee is otherwise complying with the limitations in the agreement as to time, geographical area and scope, other than any limitation on providing services to a former customer who seeks services without any contact instigated by the former employee
Enforcing the Non-Compete Agreement When Termination is Due to Reduction in Force, Reorganization, Etc.
Employment is terminated for many reasons. Sometimes it is initiated by the employee when they find a new position with a different employer. Sometimes it is initiated by the employer due to employee misconduct or when the business needs to downsize. How do these new standards apply when a company needs to restructure and let some employees subject to non-compete agreements go?
If termination of employment is due to reduction is force, reorganization, or similar restructuring of the employer, a non-compete agreement is only enforceable during the period in which the employer is paying the employee’s salary, benefits, or other compensation.
Revisions to Non-Compete Agreements
If an employer brings an action in court to enforce a non-compete agreement and the court finds that the non-compete contains unenforceable restraints, what happens? Does it just get thrown out? Not quite.
If the court finds that the non-compete agreement is supported by valuable consideration, but otherwise imposes a greater restraint than necessary or imposes an undue burden on the employee, the court will revise the non-compete agreement to the extent necessary to make it enforceable. This is what is called ‘blue penciling’.
If your company utilizes non-compete agreements, you should review the requirements of this law very closely as it may require you to make some revisions.
The Nevada Association of Employers (NAE) is uniquely situated to keep our members appraised for what is happening at the state and federal level. We monitor legislative process, administrative policies, and proposed agency rules to ensure our members receive accurate and up-to-date information regarding their obligations as employers in Nevada. For more information about NAE and what we do for Nevada employers, visit our website. If you are a Nevada employer interested in membership, please contact firstname.lastname@example.org or join today!