Employee & Contractor Non-Solicitation Agreements Banned
As of July 1, 2024, Minnesota employers face a significant change in how they engage with clients and protect their workforce. The newly enacted Minn. Stat. § 181.9881 prohibits service providers from restricting customers from soliciting or hiring their employees, including independent contractors. This law follows another law that banned noncompete agreements in Minnesota.
Understanding the New Law
1. Key Definitions
- Service Provider: Any entity acting directly or indirectly as an employer or manager for work contracted or requested by a customer. This includes partnerships, associations, corporations, businesses, trusts, or groups of persons.
- Employee: Broadly defined to include anyone performing services for a service provider, encompassing both traditional employees and independent contractors.
- Customer: Any individual or entity hiring a service provider for services, including partnerships, associations, corporations, businesses, trusts, or groups of persons.
2. Prohibited Actions
Under Subdivision 2, the statute explicitly states:
- No Restrictive Covenants: Service providers cannot restrict, restrain, or prohibit customers from directly or indirectly soliciting or hiring an employee of the service provider.
- Void Provisions: Any existing contract clauses that violate this prohibition are considered void and unenforceable.
- Notice Requirement: If a service provider has a contract with a provision that violates this law, they must notify their employees about the invalid restrictive covenant and the new statute.
Implications for Employers
1. Contractual Adjustments
- Review Existing Contracts: Employers must scrutinize current agreements with customers to identify and remove any non-solicitation clauses that prevent customers from hiring their employees.
- Update Contract Templates: Future contracts should omit any language that could be interpreted as restricting a customer’s ability to solicit or hire employees.
2. Employee Communication
- Mandatory Notifications: Service providers with existing contracts containing prohibited clauses must inform their employees about both the voided provisions and the new legal landscape.
3. Protection of Business Interests
- Reassessing Strategies: With non-solicitation agreements off the table, employers need to explore alternative methods to protect their workforce and business interests, such as:
- Employee Retention Programs: Enhance job satisfaction and loyalty through competitive compensation, benefits, and a positive work environment.
- Confidentiality Agreements: Ensure sensitive business information remains protected through enforceable confidentiality clauses.
Exceptions to the Rule
There is an exception for technology service companies. Subdivision 3 outlines specific exemptions for workers providing professional business consulting for computer software development and related services, who seek employment through a service provider with the intention of potentially securing a permanent position with the customer, are exempt from this statute.
Notably, there is no exception for the sale of a business, selling a book of business, a business owner being bought out, or similar exceptions that are typically found in similar statutes. For example, even Minnesota’s noncompete ban has an exception for selling or dissolving a business.
Steps Toward Compliance
1. Legal Consultation: Engage with legal counsel to interpret how this law specifically impacts your business and to develop compliant contractual practices.
2. Employee Engagement: Proactively inform employees about the changes and how the company plans to navigate the new legal requirements.
3. Policy Development: Develop internal policies that align with the statute while fostering employee retention and protecting proprietary information.
Employer Action Items
- Audit Contracts: Identify and amend or remove prohibited clauses.
- Employee Notices: Prepare and distribute required notifications to employees.
- Legal Strategy: Work with attorneys to develop compliant and effective approaches to employee retention and business protection.
By proactively addressing these changes, Minnesota employers can minimize legal risks and adapt to the evolving regulatory environment.
Language of Minn. Stat. § 181.9881
For reference, here is the language of Minn. Stat. § 181.9881:
Section 181.9881 – RESTRICTIVE EMPLOYMENT COVENANTS; VOID IN SERVICE CONTRACTS
Subdivision 1. Definitions.
(a) “Customer” means an individual, partnership, association, corporation, business, trust, or group of persons hiring a service provider for services.
(b) “Employee,” as used in this section, means any individual who performs services for a service provider, including independent contractors. “Independent contractor” has the meaning given in section 181.988, subdivision 1, paragraph (d).
(c) “Service provider” means any partnership, association, corporation, business, trust, or group of persons acting directly or indirectly as an employer or manager for work contracted or requested by a customer.
Subd. 2. Restrictive employment covenants; void and unenforceable.
(a) No service provider may restrict, restrain, or prohibit in any way a customer from directly or indirectly soliciting or hiring an employee of a service provider.
(b) Any provision of an existing contract that violates paragraph (a) is void and unenforceable.
(c) When a provision in an existing contract violates this section, the service provider must provide notice to their employees of this section and the restrictive covenant in the existing contract that violates this section.
Subd. 3. Exemptions. This section does not apply to workers providing professional business consulting for computer software development and related services who are seeking employment through a service provider with the knowledge and intention of being considered for a permanent position of employment with the customer as their employer at a later date.
EFFECTIVE DATE. This section is effective July 1, 2024, and applies to contracts and agreements entered into on or after that date.