Utah Law Governing Non-Competition Agreements – April 2017 Update

20150823_175608The Utah Legislature recently passed and Governor Herbert signed a law in 2016 limiting non-competition agreements. It can be found at Utah Code Ann. 34-51-101, et seq. Please note that I updated this article as of April 2017. When the law initially started through the Legislature, it seriously limited non-competition covenants. The end result was much tamer.

Here are the highlights of the non-competition statute:

  • Post-employment restrictive covenants, i.e., non-competition agreements, are limited to one year from the date of separation;
  • The statute does not apply to clauses concerning non-solicitation, non-disclosure, or confidentiality;
  • Exceptions to the one-year time limitation include the following:
    • Severance agreements that are reasonable and mutually and freely agreed upon in good faith after separation; and
    • Agreements in conjunction with the sale of a business.
  • Attorney fees: The employer will be liable to the employee if the non-competition agreement is found to be unenforceable. Although Utah has typically found attorney fee provisions to be reciprocal (i.e., both sides can be the recipient of fees, depending on who prevails), the statute does not expressly provide for fees to the employer. The prudent employer, therefore, will include an attorney fee provision providing fees to the prevailing party to ensure that the employer can recoup attorney fees if it prevails.

The statute defines non-competition agreements as any agreement in which an employee or former employee agrees they “will not compete with the employer in providing products, processes, or services that are similar to the employer’s products, processes, or services.”

One other note: the law in Utah is unsettled as to confidentiality agreements that act like a non-competition agreement but you should tread carefully. Utah courts are often pragmatic and if it talks like a duck and walks like a duck, the court will likely call it a duck. See Is Your Non-Disclosure Agreement a Non-Compete Agreement in Disguise? This simply means that you should carefully draft your confidentiality and non-competition agreements. You may find yourself with a void agreement if it is poorly drafted.

Effective Date: The law affects any agreement entered on or after May 10, 2016. The statute is not expressly retroactive.

Bad-Actor Employers Warned: Lastly, the statute imposes damages against an employer who seeks to enforce non-competition provisions that are found to violate the statute. The damages available to an employee include any costs of an arbitration, attorney fees and court costs, and actual damages.

Take-Away: Employers should reevaluate their severance agreements and employment agreements to ensure that such agreements are consistent with this new law. For many employers, the non-competition provisions are part of the employment contract signed when the employee is hired. Its effect is not felt until (hopefully) many months or years later when the employee leaves. It is important, then, that employers review their employment contracts now since later is too late.

There are issues and nuances that cannot all be addressed here. If you have questions, you should get specific legal advice. If you would like more information about employment, non-competition, non-solicitation, confidentiality, or non-disclosure agreements, call me, Utah attorney Ken Reich, directly. I have represented both companies and individuals in business matters and disputes involving employment agreements and related matters, including non-competition issues. Using my many years of experience and backed by a firm of legal specialists in nearly every legal field, I can help you or your company evaluate your situation and help you make smart decisions about your business and your life that will best fit your circumstances.

When Your Employee Manual May Hurt More than It Helps- a Fresh Utah Example

IMG_4161You have carefully crafted your employee handbook to expressly and explicitly disclaim any contractual relationship with your employees and keep them at-will and then- BOOM. You got cute with the fine print. You kept your important language buried in the minutia of the handbook while keeping all the employee-friendly terms front and center. This may have been good enough in the past but it is no longer. Let’s look at Reynolds v. Gentry Finance Corporation, 2016 UT App 35, a recent case from the Utah Court of Appeals on this issue.

“[A]n employee handbook distributed to an at-will employee may modify the at-will employment relationship.”

A company’s employee manual is a great opportunity to define its employment relationship with its employees. In fact, employers often expect and hope that employees refer to the employment manual to understand the terms of their employment– not every employee warrants an employment agreement. Here’s where the Gentry company went a bit awry.

Gentry wanted to keep the bundle of at-will employee ‘privileges’ intact while at the same time make the broad statement that “NO EMPLOYEE WILL BE TERMINATED OR HAVE ANY ADVERSE ACTION TAKEN AGAINST THEM FOR BRINGING A COMPLAINT TO THE ATTENTION OF THE HOME OFFICE.” (Capitalization, boldface, and italics in Gentry’s handbook).

“Utah law allows employers to disclaim any contractual relationship that might otherwise arise from employee manuals.” To do this, however, the employer must include in the employee handbook “a clear and conspicuous disclaimer of contractual liability.” This is where it gets sticky and you need to step carefully because 1) “[t]he prominence of the text, [2)]the placement of the disclaimer, and [3)] the language of the disclaimer are all relevant factors in determining whether a disclaimer is clear and conspicuous.”

What does this mean? Well, for example, in a Utah Supreme Court case, a disclaimer that was conspicuously located at the top of a employee handbook and prominently bolded and SET APART by a text box was good enough or “sufficiently prominent” to put employees on notice of its terms. Use your imagination. Look at the ALLCAPS, italicized, and bolded statement from Gentry’s handbook. It stands out. And, if it stands out to you, it is likely to stand out to your employees. If you have questions, talk to a lawyer. I’m getting ahead of myself. Let’s get back to Gentry.

Gentry got sideways with its employee handbook even though it had four separate disclaimers in it. Unlike the disclaimer case example above and Gentry’s statement that an employee would not be terminated or had adverse action taken against them, Gentry’s disclaimer was nearly invisible. The court found that the disclaimer had not been placed at the top of the relevant policy, was “not prominent, not bolded, and not set apart by a text box. It [was], in a word, inconspicuous.”

So what? Well, for Gentry it meant that its employee could avoid having its case dismissed and a jury would get to hear her case. Juries are a mixed bag. If your employee handbook is clean and clear and meets all the right requirements to keep your at-will rights intact, you punch your ticket out of the case early and cheaply. Gentry, however, now gets to pitch its story to a jury who may be sympathetic to an employee that the jury may feel has been wronged.

The takeaway from Reynolds: don’t get cute with your employee manual. Don’t put the important stuff in the fine print or make it inconspicuous. Bold it. Put it in ALLCAPS and italicize it. Make it a black box label that cannot be ignored.

There are issues and nuances for employee handbooks that certainly cannot all be addressed here. If you have questions, you should get specific legal advice. If you would like more information about employee manuals, employment agreements, protecting your rights, or rectifying wrongs committed against you, contact Utah attorney Ken Reich directly. Mr. Reich has represented both companies and individuals in business matters and disputes. Using his many years of experience and backed by a firm of legal specialists in nearly every legal field, Mr. Reich can help you evaluate your situation and help you make smart decisions about your business and your life that will best fit your circumstances.