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Managing the Risks of Restrictive Covenants with Wage & Hour Compliance

July 28, 2021 - minute read

Due to the competitive nature of hiring and retaining a talented hourly workforce, many employers seek to help their operations excel by adding restrictive covenants within their hiring contracts and service agreements. These pacts, also commonly referred to as “non-competes”, prohibit an ex-employee from working for a business’s competitors for a certain period of time.

It’s clear that the goal of restrictive covenants is to safeguard competitive knowledge and strategies from being given away, something which could harm the overall success of your business. However, these promises between you and your employees can also run the risk of violating critical state employment laws – especially if it is failing to uphold basic wage and hour compliance.

Let’s discuss the overlap between restrictive covenant agreements and wage and hour laws, so you can ensure you’re effectively protecting your operation from competitors without running the risk of a lawsuit.

Restrictive Covenants and State Laws

There are two main things to consider when examining the relationship between wage and hour law and creating legal restrictive covenants. First, you need to look at your state’s stance on non-competes and their specific qualifications for the types of workers that can sign them. Most likely, this will require an understanding of your employees’ exemption status under the Fair Labor Standards Act (FLSA) or some form of compensation threshold.

According to Seyfarth Shaw LLP’s webinar, The Connection Between Wage and Hour & Restrictive Covenant Law, the following states have specific legislation affecting restrictive covenants:

  • States that have non-compete laws tied directly to FLSA exemption status: Georgia, Idaho, Massachusetts, Oregon, Rhode Island, and Virginia.
  • States that have non-compete laws based on compensation thresholds: Illinois, Maine, Maryland, New Hampshire, Oregon, Rhode Island, Virginia, and Washington.
  • States that do not allow for non-competes: California, North Dakota, Montana, Oklahoma, and Washington D.C.
  • To be clear, the other U.S. states may allow for non-competes to be made with certain employees, but they defer to standard law in comparison or have salaried, job-specific limitations.

The second major area to reflect on is the potential for liability risks that come with creating your own restrictive covenants with employees. Seeking to enforce your own non-competes could be a challenge if you aren’t aware of the legal fine print. That’s where wage and hour compliance can come into play.

How Wage and Hour Laws Affect Restrictive Covenants

With those state guidelines in mind, wage and hour compliance is often directly linked to defining which employees can be brought into restrictive covenants for employment.

Let’s say you require an employee to sign a non-compete agreement (whether that includes a non-hiring, non-solicitation, confidentiality, or other clause) because you’ve classified them as a non-exempt employee under the FLSA or because their overall pay places them above the legal threshold… If your wage and hour data is incorrect, you could not only face a lawsuit against the non-compete, but litigation around non-compliance, as well.

That is why adhering to wage and hour compliance and keeping flawless employment records are so vital. If you’re considering requiring restrictive covenants (or have done so already), you must be absolutely certain that you have the workforce documentation verifying your right for doing so!

Managing the Risks of Non-Competes

In order to protect your operation, should restrictive covenants become necessary, here are a few key steps to consider:

  • Know your state laws: Whilst the Biden Administration aims to create a federal policy banning restrictive covenants, there remains no official federal law for employers to adhere to. That means you will need to closely examine your state(s) laws to ensure the legality of any type of non-competes you wish to put in place. If you are a multi-state employer, you must also be cautious of the variations that may exist for each of your worksites.
  • Revisit your classifications: As previously notes, correctly classifying your employees as exempt or non-exempt is key in understanding how state-level restrictive covenant laws can be applied to your workers. If you haven’t evaluated the exemption status of your workers under the FLSA recently, you should consider doing so immediately. The past year has drastically changed the jobs and classifications of many workers.
  • Arbitration Agreements: It comes with its own risks, but having employees sign an arbitration agreement is one pathway to avoiding costly lawsuits and promote one-on-one mitigation. Some employment law specialists suggest limiting arbitration agreements to only wage and hour lawsuits to not run the risk of silencing more sensitive cases (ex. sexual harassment claims). Nevertheless, sorting out dozens of individual arbitrations could prove even more costly.
  • Seek legal counsel: Given the varied nature of state laws and anticipated legislation on the federal level, it is in the best interest of your organization to work with a legal representative in determining the risk-level of potential restrictive covenants. Reach out to a dependable lawyer or wage and hour specialist with your employment data (employees’ job descriptions, states, pay, perceived classification status, etc.), so they can tell you who is worth giving non-competes to and who is not.

Workforce Management: The Secret Ingredient to Safeguarding Non-Competes

You need to know exactly what your workers are doing in order to prove they’re classified correctly as exempt or non-exempt employees under the FLSA. To achieve compliant restrictive covenants, you must be able to demonstrate without a doubt that they honor state-level requirements… and that means having accurate wage and hour data. Luckily, technology can help.

At EPAY Systems, we provide a workforce management solution which tracks the wage and hour data of your hourly workers with ease. Its streamlined capabilities provide live visibility into every aspect of your time tracking and payroll data, all while protecting you against the most common wage and hour pitfalls on multiple fronts.

Want to see how our solution can strengthen your compliance efforts? Take a quick tour, and request your personalized demo today!

Filed Under: Workforce Management Human Resources