Nevada Legislature Enacts New Law Regarding Noncompetition Agreements

By Kamer Zucker Abbott

June 20, 2017

Assembly Bill 276, recently passed by the Legislature and signed by the Governor, addresses the important issues of validity and enforceability of noncompetition agreements with former employees. In particular, this new law instructs the courts to reform agreements that are found to be overbroad, rather than rejecting them in their entirety. The new law's requirements became effective on June 3, 2017.

First, the new law establishes the acceptable parameters for a noncompetition agreement, which is commonly referred to as a "noncompete" agreement.  It provides that a noncompete agreement is "void and unenforceable" unless it: 

• is supported by valuable consideration;
• does not impose any restraint that is greater than is required for the protection of the employer for whose benefit the restraint is imposed;
• does not impose any undue hardship on the employee; and
• imposes restrictions that are appropriate in relation to the valuable consideration supporting the noncompetition covenant.

Second, the law addresses the issue of a customer or client voluntarily choosing to leave the employer and utilize the former employee's services.  It provides that the employer may not restrict a former employee from providing service to a former customer or client if:  

• the former employee did not solicit the former customer or client;
• the customer or client voluntarily chose to leave and seek services from the former employee; and
• the former employee is otherwise complying with the limitations in the covenant as to time, geographical area and scope of activity to be restrained, other than any limitation on providing services to a former customer or client who seeks the services of the former employee without any contact instigated by the former employee.

Third, this law imposes a new limit upon the length of the noncompete term if an employee is discharged because of "a reduction in force, reorganization or similar restructuring." In this situation, the employee can only be restricted from competing with the employer for the amount of time in which the employer is continuing to pay the employee's "salary, benefits or equivalent compensation, including, without limitation, severance pay."  As such, if you wish to impose a noncompete agreement in connection with a reduction in force (layoff) or reorganization, you will need to limit the noncompete term to the severance payout period.

Fourth, and most beneficially for employers, the law addresses what happens if a noncompete agreement is found to be too onerous. As long as the agreement is supported by sufficient consideration, the courts will revise the agreement and enforce it as revised. Thus, if the geographical area or scope of activity to be restrained is too broad or the agreement imposes an undue hardship upon the employee, a court will not void the entire agreement and leave the employer without a remedy.  Instead, a court will "blue pencil" the agreement - revise it - and then enforce the revision. This is welcome news for employers and directly overrules the Nevada Supreme Court's refusal last year to blue pencil these types of agreements in the case of Golden Road Inn, Inc. v. Islam, which we discussed in our August 4, 2016 issue of the KZA Employer Report.

Finally, this new law amends Nevada Revised Statute 613.330's list of unlawful employment practices to expressly prohibit an employer from discriminating against an employee "because the employee has inquired about, discussed or voluntarily disclosed his or her wages or the wages of another employee."  This restriction does not apply to "any person who has access to information about the wages of other persons as part of his or her essential job functions and discloses that information to a person who does not have access to that information unless the disclosure is ordered by the Labor Commissioner or a court of competent jurisdiction."  As many employers already know, rules prohibiting employee discussion and disclosure of wages, benefits and other terms and conditions of employment violate employees' rights to discuss their employment with others "for mutual aid and protection."  This new law codifies that protection, specifically as to wages.

This new law will require some adjustment to your employment practices, particularly if you utilize noncompete agreements.  If you have questions or need assistance, please contact a KZA attorney.