Utah Legislative Changes to Non-Compete Covenants in Employment Agreements
Friday, 27 May 2016
by Staff, Spaulding Law
The Post Employment Restrictions Act defines a “Post-employment restrictive covenant,” a “covenant not to compete” or a “non-compete agreement” as “an agreement, written or oral, between an employer and employee under which the employee agrees that the employee, either alone or as an employee of another person, will not compete with the employer in providing products, processes, or services that are similar to the employer’s products, processes, or services.”
Significantly, the law states that a post-employment restrictive covenant (non-compete agreement), does not include (a) non-solicitation agreements (agreements that are designed to keep a terminating employee from contacting or “soliciting” fellow employees or other parties in contact or association with the employer to follow the terminating employee); or (b) nondisclosure or confidentiality agreements. This means that the new law does not have any impact on a non-solicitation or confidentiality agreement.
The Post Employment Restrictions Act is fairly brief and direct. It states that in addition to any requirements (limitations) imposed by the common law (judicial rulings), for a non-compete agreement entered into on or after May 10, 2016, an employer and an employee may not enter into a non-compete agreement for a period of more than one year from the day the employee is no longer employed by the employer, otherwise the restrictive covenant (non-compete covenant) is void (unenforceable).
The new law has exceptions. In addition to not applying to non-compete agreements entered into prior to May 10, 2016, in Utah Code Annotated 34-51-202, the law states that it does not apply in two other circumstances. First, it does not apply when a non-compete covenant is made a part of a “reasonable severance agreement mutually and freely agreed upon in good faith at or after the time of termination.” Second, it does not apply when the non-compete is agreed to in connection with the sale of a business if the “individual subject to the non-compete receives value related to the sale of the business.” Thus, if you enter into a severance contract at the time of termination, or if you sell your business, you can still be bound.
Perhaps the most significant part of the new law is a provision that awards attorneys’ fees against an employer if the non-compete covenant subject to the new law is challenged and the former employee prevails. What this provision will do is encourage former employees who are subject to a non-compete to engage legal counsel and challenge an illegal restrictive covenant and have the ability to offer statutory legal fees. The inability of a victim of an onerous non-compete covenant to engage and pay for an attorney has been a barrier in the past, however, the new law will act to balance the scales between an overly-aggressive employer and an employee without the resources to hire counsel.
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