Legislative Session Brings Key Changes to Nevada Non-Compete Law

Fennemore Client Alert

Legislative Session Brings Key Changes to Nevada Non-Compete Law

The 2021 Nevada legislative session has already brought change to Nevada employment law. Among the most noticeable of changes is Assembly Bill 47, which amends the statute governing non-competition agreements (NRS 613.195). AB 47 brings three key changes to Nevada non-compete law, as discussed below.

Change #1: No More Non-Competes For Most Hourly Employees

AB 47 now renders unenforceable any non-competes that are entered into by employees who are paid solely on an hourly wage basis (exclusive of tips or gratuities). As a further protection for hourly employees, if an employer brings an action to enforce, or an employee brings an action to challenge, such a non-compete, the courts are now required to award to the employee reasonable attorney’s fees and costs if the employee is successful in defeating the non-compete.

While, on its face, this change to Nevada non-compete law appears to bring sweeping reform impacting all hourly workers, in reality, some hourly workers may still properly be bound to non-competition agreements. If an employee receives an hourly base wage but also receives commissions, bonuses, or other compensation on top of the hourly wage, AB 47 may not prohibit that employee from being bound by restrictive covenants. Ultimately, Nevada’s courts will need to determine in precisely which “hourly-plus” employment arrangements non-competes can still survive.  Since Nevada courts have a history of bringing equitable considerations into the analysis of non-compete enforceability, it is anticipated that the higher the total compensation paid to the employee, the more likely at least some portion of the non-compete at issue will be deemed to be enforceable.

Change #2: Actions to Enforce Certain Customer Servicing Restrictions Are Now Prohibited

NRS 613.195 already prohibits businesses from restricting a former employee from providing service to a former customer or client if (1) the former employee did not solicit the former customer or client; (2) the customer or client voluntarily chose to seek the former employee’s services instead of the employer’s; and (3) the former employee is otherwise complying with the limitations of the non-compete covenant.

Under AB 47, an employer now may not bring an action to restrict any of these activities, even if the non-compete does not expressly speak to the issue. And that’s not all: if an employer or an employee files a lawsuit regarding a non-compete and the court finds that the employer has restricted or attempted to restrict the former employee from providing customer service in the manner described above, the court is, again, required to award reasonable attorney’s fees and costs in favor of the employee.

Change #3: Judicial Reformation Is Now Required All Non-Compete Disputes, Not Just The Disputes Initiated By Employers

Unlike the first two changes, the final change to Nevada’s non-compete statute helps employers. Under existing law, if – in a case initiated by an employer to enforce a non-compete – the court found that the non-compete was supported by valuable consideration but was unreasonable in time, geography, or the types of activities that were restricted, the court is required to revise (or “blue pencil”) the agreement to enforce it to the maximum extent permitted by law. An open question, however, was whether such blue penciling was required in cases where it was the employee, rather than the employer, who initiated the lawsuit.

Under AB 47, that question is now resolved in the affirmative: the new law applies the judicial reformation process to both employer- and employee-initiated actions. This change should eliminate any prior concern that the blue pencil process created a race to the courthouse.

AB 47 goes into effect on October 1, 2021. Given the mandatory attorneys’ fees that AB 47 imposes, businesses are well advised to use the months leading up to October 2021 to evaluate:

  • Which employees are currently subject to non-competes?
  • What is the business case for requiring those employees to be bound by non-competes? For example, do those employees have access to sensitive customer information or other trade secrets that requires protection? 
  • Does the employee receive some form of compensation that is above and beyond an hourly wage? How much of that employee’s total compensation is reflected in the non-hourly component?
  • Does the employee’s total compensation, combined with any other terms of conditions of employment, confirm that the employee has received valuable consideration that is sufficient to justify not only a non-compete in general, but also the specific non-compete at issue?
  • Is there a solid basis of evidence, preferably in writing, to prove that the former employee is affirmatively soliciting the business’ customers?

Given the ever-changing nature of Nevada non-compete law, and given that each situation requires a careful factual analysis, businesses should confer with employment counsel now to decide which existing non-competes should remain in place, and whether new non-competes should be implemented.

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