On July 1, 2024, a new law took effect in Minnesota that bans non-compete, no-hire, and non-solicitation provisions in service contracts with customers. The law is codified at Minn. Stat. § 181.9881. This statute applies when a business either sends or assigns an employee to one of its customers. A similar Minnesota law was previously limited to nurse staffing companies. See Minn. Stat. § 144A.27, subd. 1.
Service Contract Example
Here is an example to help illustrate this situation. Assume that Customer A contracts with Business B to bring one of Business B’s employees, an I.T. specialist, onsite. Under the contract, Business B’s I.T. specialist spends two days per week working directly at Customer A’s office and help troubleshoot computer issues. The I.T. specialist remains an employee of Business B. Pursuant to the new Minn. Stat. § 181.9881, Business B is prohibited from using a provision in its contract with Customer A to prevent Customer A from soliciting and hiring the I.T. specialist directly away from Business B. These provisions have been described as “shadow non-competes.”
Statutory Text
At this time, we have the text of the new statute but no other guidance. The statute states:
MINN. STAT. § 181.9881 – RESTRICTIVE EMPLOYMENT COVENANTS; VOID IN SERVICE CONTRACTS.
Subd. 1. Definitions.
(a) “Customer” means an individual, partnership, association, corporation, business, trust, or group of persons hiring a service provider for services.
(b) “Employee,” as used in this section, means any individual who performs services for a service provider, including independent contractors. “Independent contractor” has the meaning given in section 181.988, subdivision 1, paragraph (d).
(c) “Service provider” means any partnership, association, corporation, business, trust, or group of persons acting directly or indirectly as an employer or manager for work contracted or requested by a customer.
Subd. 2. Restrictive employment covenants; void and unenforceable.
(a) No service provider may restrict, restrain, or prohibit in any way a customer from directly or indirectly soliciting or hiring an employee of a service provider.
(b) Any provision of an existing contract that violates paragraph (a) is void and unenforceable.
(c) When a provision in an existing contract violates this section, the service provider must provide notice to their employees of this section and the restrictive covenant in the existing contract that violates this section.
Subd. 3. Exemptions.
This section does not apply to workers providing professional business consulting for computer software development and related services who are seeking employment through a service provider with the knowledge and intention of being considered for a permanent position of employment with the customer as their employer at a later date.
EFFECTIVE DATE. This section is effective July 1, 2024, and applies to contracts and agreements entered into on or after that date.
Takeaways
The text of the statute raises a couple of key questions:
- Would a payment provision requiring the customer to pay a monetary fee in order to hire the employee constitute a restriction, restraint or prohibition? It appears that the answer is probably yes, but a placement fee is not a restrictive covenant, so this is not entirely clear. The exemption in Subd. 3 suggests that a payment provision might be allowed in the area of software development and “related services,” but it is not clear how broad the scope of definition of “related services” is.
- How does the statute impact prior agreements? On the one hand, the effective date (stated in the Minnesota Session Laws) is clearly July 1, 2024 for contracts signed on or after that date. At the same time, the statute also references “existing contracts” three times, and further states that “[a]ny provision of an existing contract that violates paragraph (a) [of Subdivision 2] is void and unenforceable.” This creates an inconsistency. There is no clear answer on this issue at this time. Because the effective date is slightly more clear and direct, businesses may decide it is reasonable to assume that contracts entered into before the effective date are not impacted, but this is not without some uncertainty or risk.
As with any new law, there are practical questions that remain to be answered. Minn. Stat. § 181.9881 applies to a rather specific employee assignment situation, but this new law is indicative of Minnesota’s overall policy of banning non-compete clauses in as many employment situations as possible.
If your business utilizes the service contract model discussed above, you should be aware of the new law but not panic. Anyone with questions about this or other HR or employment law issues should reach out to V. John Ella, Shannon McDonough, or the rest of our HR & Employment Law Team.
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