Update Applicable to:	Effective date
All covered service providers	Immediately

What happened?

On May 17, 2024, Governor Walz signed SF 3852 / HF 3947 into law, which bans restrictive covenants entered on or after July 1, 2024, except for workers providing professional business consulting for computer software development and related services.

Quick Summary:

• The law (Senate File (SF) 3852 / HF 3947), Section 181.9881 voids restrictive employment covenants in service contracts and eliminates “shadow covenants”.

What are the details?

Background:

• In 2023, Minnesota banned employment noncompete agreements signed on or after July 1, 2023 (SF 3035).

• That law, Minn. Stat. 181.988, is specific to “an agreement between an employee and employer that restricts the employee, after termination of the employment.”

• However, this left without addressing what is considered a “Shadow Covenant”, which is defined as contracts between two entities “above the employee,” restricting the employee’s employment without their knowledge.

Key Points:

• Now, in Senate File (SF) 3852 / HF 3947, Section 181.9881 voids restrictive employment covenants in service contracts and eliminates “shadow covenants”.

• The law provides that effective July 1, 2024, service providers cannot restrict customers from soliciting or hiring employees of the service provider, except for certain computer software development workers.

• According to Ogletree Deakins, the law leaves many important questions unanswered, including the validity of conversion fees. Conversion fees will be “allowed” but the state may interpret the law to disallow them if they are so high that they deter customers from hiring the employee directly.
  • What constitutes “high” or “too large” is open to challenge and may vary depending on the customer.

• Notice: employers must provide notice to contracts and agreements entered on or after July 1, 2024.
  • It is unclear whether the notice provision applies to contracts entered before July 1, 2024, because the law specifically states it only applies

For our previous update: Minnesota Amends Several Laws: Brace for Impact (VensureHR)

Business Considerations

• Employers should consider whether any conversion fees in existing and future contracts with customers are so high as to deter the customer from offering employment to the placed employee.
• Employers should review their existing contracts and determine whether notice is required to be provided to employees.
• Employers should provide workers in the tech industry with clarity on whether they fall under the computer exemption and “related services” by reviewing existing contracts and ensuring the employee has signed off on future contracts acknowledging the restrictions related to the receipt of certain training benefits.

Source References

• New Minnesota Law Voids Restrictive Employment Covenants in Service Contracts, Except for Computer Professionals (Ogletree Deakins)
• Section 181.9881
• Another Minnesota Noncompete Ban: Restrictive Covenants in Service Contracts (Faegre Drinker Biddle & Reath LLP)
• MN SF 3035
• Minnesota Legislature Bans Restrictive Covenants in Service Contracts (So-Called “Shadow Non-Competes”) (Fafinski Mark & Johnson, P.A.)

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