On October 1, 2021, new provisions took effect within NRS 613.195, Nevada’s primary statute governing the enforceability of employee covenants not to compete. The new provisions—that result from the passage of Assembly Bill 47—have changed the legal landscape with respect to non-compete agreements, and have left many employers wondering whether they can continue to use and enforce these agreements with their Nevada employees.
Background on Nevada’s Laws Regarding Non-Compete Agreements
Nevada historically has been favorable to employers when it comes to enforcing non-compete agreements against former employees. Under NRS 613.195, a non-compete agreement generally is enforceable if it meets four broad requirements:
- First, the agreement must be supported by “valuable consideration.” The Nevada Supreme Court has recognized that employment or continued employment are sufficient consideration to support the employee’s promise not to compete.
- Second, it must not impose a restraint “greater than is required to protect the employer.”
- Third, it must not impose an “undue hardship on the employee.”
- Lastly, it must only impose restrictions that are “appropriate in relation to the valuable consideration supporting the noncompetition covenant.”
Over the years, these four requirements have been interpreted and further defined by Nevada Supreme Court case law. In 2016, the Court issued an important opinion regarding the enforceability of non-compete agreements, in the case of Golden Road Motor Inn, Inc. v. Islam. There, the Court considered the overall “reasonableness” of the non-compete agreement, and stated there exists no “inflexible standard” for judging whether a covenant not to compete is enforceable. However, the Court focused on two primary characteristics of the agreement—time and territory. In other words, during what period of time and within what geographic boundaries will the employee be restricted from competing with their former employer? If the restrictions are too broad or too long-lasting, a Nevada court will likely find them unreasonable and unenforceable. See Jones v. Deeter, 112 Nev. 291 (1996) (invalidating a non-compete because it had a geographic scope of one hundred miles and a duration of five years); Camco, Inc. v. Baker, 113 Nev. 512 (1997) (invalidating a non-compete because it was too geographically broad); Golden Road Motor Inn, Inc. v. Islam, 132 Nev. Adv. Op. 49, 376 P.3d 151 (invalidating a non-compete because it prohibited a casino employee from taking any position, even that of a janitor, with any casino within a 150-mile radius).
Following Golden Road, in 2017, the Nevada Legislature passed Assembly Bill 276. Among other important things, AB 276 provided that if a court finds a non-compete agreement unreasonable, or that it imposes a “greater restraint than is necessary for the protection of the employer for whose benefit the restraint is imposed,” the court must “revise the covenant to the extent necessary and enforce the covenant as revised.” This legislation was in direct response to Golden Road, in which the Supreme Court found a non-compete agreement unreasonably overbroad, and on that basis invalidated and refused to enforce the agreement in its entirety. As a result of AB 276, if a Nevada court determines that a non-compete agreement is overbroad or too restrictive, the court may no longer simply discard the entire agreement. Rather, to the extent possible, the court must revise the agreement in order to make its terms reasonable, and then enforce the revised agreement.
New Limitations on Nevada Non-Competes
As of October 1, 2021, Assembly Bill 47 has added three significant new provisions to NRS 613.195:
- First, covenants not to compete may not be applied to any employee who is paid solely on an hourly wage basis, exclusive of any tips or gratuities. This change signals the Legislature’s intent to prohibit non-compete agreements that restrict traditionally lower-wage employees from finding work.
- Second, employers are now prohibited from bringing legal action to restrict a former employee from providing services to the employer’s customer if the former employee did not “solicit” the customer and the customer voluntarily chose to seek services from the former employee.
- And third, a former employee may now recover attorneys’ fees and costs in any legal action regarding the enforceability of a non-compete agreement—whether initiated by the employer or employee—if the court finds the employee was paid solely on an hourly wage basis, or finds that the agreement restricted the employee from providing services to a customer of the employer that was not solicited and voluntarily chose to seek services from the employee.
These new provisions raise several questions about how Nevada courts will now approach non-compete agreements in the employment context. How will the law apply to hourly employees who may also receive productivity bonuses and/or commissions? In addition, what exactly does it mean for a former employee to “solicit” your customers? By way of example, many employees may send a “tombstone” announcement to their clients and contacts when exiting a company, to provide notice of their new professional affiliation, but which contains no express attempt to solicit the clients’ business. How would Nevada courts view this type of announcement under these new provisions?
To work through these complex issues, we strongly encourage employers to consult with qualified Nevada employment law counsel regarding their use and enforcement of non-compete agreements for all applicants and employees. If employers are using non-compete agreements for employees paid solely on an hourly basis (exclusive of tips or gratuities), this practice should be discontinued; however, these agreements for hourly workers may be revised to exclude any impermissible covenant not to compete, while retaining other important terms, such as confidentiality and/or trade secret protections for the employer. Also, employers are generally encouraged to review any non-compete agreements they are currently using for all other categories of employees, including salaried workers, to ensure the agreements satisfy the requirements of NRS 613.195 and are in accordance with the most up-to-date judicial interpretations of applicable law.