Virginia Court Ruling Clarifies State’s Ban on Noncompete Agreements Against Low-Wage Workers

Quick Hits

• In Sentry Force Security, LLC v. Barrera, a private security firm sued a former employee for breaching a restrictive covenant that contained customer and employee nonsolicitation provisions after he started his own private security company.
• The Court of Appeals of Virginia concluded that employers can lawfully prohibit low-wage employees from directly soliciting customers (i.e., initiating contact with a customer). However, employers cannot prohibit low-wage employees from accepting unsolicited business from a customer (i.e., when a customer initiates contact with a former employee).
• The court held that employers cannot enter into or enforce employee nonsolicitation provisions with low-wage employees.

Virginia law prohibits “covenants not to compete” against “low-wage employees,” meaning those who earn less than the average weekly wage in Virginia or are entitled to overtime under the Fair Labor Standards Act (FLSA). After Virginia passed that law in 2020, employers have questioned whether customer and employee nonsolicitation clauses fell within the scope of prohibited covenants.

In this case, Sentry Force claimed James Barrera breached his customer and employee nonsolicitation agreements when he established a new private security company, diverted customers to the new company, and hired several Sentry Force employees to join the new company. Barrera filed a counterclaim against Sentry Force for violating Virginia’s law banning “covenants not to compete” against low-wage employees, which carries a $10,000 penalty per violation.

Under Virginia law, a “covenant not to compete” is broadly defined as:

“[A] covenant or agreement, including a provision in a contract of employment, between an employer and an employee that restrains, prohibits, or otherwise restricts an individual’s ability, following termination of the individual’s employment, to compete with his former employer. A ‘covenant not to compete’ shall not restrict an employee from providing a service to a customer or client of the employer if the employee does not initiate contact with or solicit the customer or client.”

Customer Nonsolicitation Provisions

The Court of Appeals of Virginia concluded that the law prohibits employers from entering into a customer nonsolicitation provision with a low-wage employee, but only if that provision has the effect of barring the employee from accepting unsolicited business from a former customer. 

The law permits employers to restrict a low-wage employee’s ability to actively solicit former customers. The Court of Appeals noted that the “plain language” of the law “actually does allow” an employer to protect its customers from direct solicitation by its current or former employees. In other words, an agreement that bars an employee from actively soliciting a former employer’s customers is not a “covenant not to compete” under the law, but if the customer approaches the former employee with its business, the former employee can accept that customer’s business.

Employee Nonsolicitation Provisions

The Court of Appeals of Virginia further concluded that employee nonsolicitation provisions fall within the broad definition of “covenants not to compete” and, therefore, cannot be entered into or enforced against low-wage employees.

Unlike customer nonsolicitation provisions, the law does not contain an exception for employees who seek out new employment in an unsolicited manner. Thus, the court held that “an agreement (1) between an employer and employee that (2) bars that employee from soliciting the employer’s other employees (3) after the employee no longer works for the employer clearly falls within the scope of the statute.” The court reasoned that such an agreement would be a covenant between an employer and employee that restrains that employee’s ability to compete with the former employer after termination of the individual’s employment.

Next Steps

Employers in Viriginia may want to identify their low-wage employees, defined as those who earn less than $78,364.52 per year or are nonexempt under the FLSA. The earnings threshold changes each year.

Employers in Virginia also may want to review their restrictive covenants to ensure they are in compliance with the current state of the law. Obviously, employers in Virginia will want to ensure any employee nonsolicitation clauses comply with the holding in Sentry Force Security. Similarly, if a customer nonsolicitation clause prohibited former employees from accepting unsolicited business from former customers, Sentry Force Security holds that such provisions do not comply with state law.

This case shows that employers may be successful in taking legal action against low-wage employees who directly solicit clients or customers in violation of a nonsolicitation clause.

Along with Virginia, Colorado, Illinois, Maine, Maryland, New Hampshire, Oregon, Rhode Island, Washington, and Washington, D.C., have banned noncompete agreements with low-wage workers. The income thresholds vary by state.

Ogletree Deakins’ Richmond office and Unfair Competition and Trade Secrets Practice Group will continue to monitor developments and will provide updates on the Unfair Competition and Trade Secrets and Virginia blogs as new information becomes available.

Tevis Marshall is a shareholder in Ogletree Deakins’ Richmond office.

This article was co-authored by Leah J. Shepherd, who is a writer in Ogletree Deakins’ Washington, D.C., office.

Follow and Subscribe
LinkedIn | Instagram | Webinars | Podcasts