Virginia already precludes covenants not to compete with “low-wage employees” who earn less than the average weekly wage in Virginia or who are not exempt from overtime under the federal Fair Labor Standards Act. Effective July 1, 2026, Virginia’s prohibition on covenants not to compete will extend to employees who are terminated by their employer without cause unless the employer provides severance or other monetary payment to the terminated employee.
The new statute provides that:
No covenant not to compete between an employer and an employee is enforceable if such employer discharges such employee from employment without providing severance benefits or other monetary payment to such employee, unless such employer discharges such employee for cause. Such severance benefits or other monetary payment shall be disclosed upon execution of the covenant not to compete.
The statute does not apply to covenants not to compete when an employee (who is not a “low-wage employee”) resigns or when the employer terminates the employee for cause. If, however, the employer terminates an employee who is not a “low-wage employee” without cause, then a covenant not to compete cannot be enforced against the employee unless the employer provides severance or another monetary payment to the employee.
While the statute seems straightforward on its face, it leaves many open questions. For example, the statute does not contain a definition of “cause.” Thus, it is not clear what standard courts will use in determining whether an employer had cause to terminate an employee or whether courts will incorporate or defer to definitions of cause in individual employment contracts.
Similarly, the statute does not specify what type of severance benefits or amount of monetary payment is sufficient to meet the statutory requirement to allow enforcement of a non-compete. It will be left to the courts to determine whether there is a minimum threshold that must be cleared before a covenant not to compete will be enforceable or whether severance benefits that are not direct monetary payments to an employee (such as continued payment of health care coverage or retention of otherwise forfeitable equity awards) will qualify under the statute.
The statute also provides that the severance benefits or other monetary payment must be “disclosed” at the time the agreement containing the covenant not to compete is executed. If the covenant not to compete is contained in an agreement entered into at the commencement of employment, then the statute seems to require that the severance or other payment must be set out in that initial agreement. Conversely, the statute seems to preclude enforcement of a covenant not to compete if the employer and employee agree on a severance amount or other monetary payment at the conclusion of employment unless the covenant not to compete is included in the severance agreement itself.
Notably, the statute does not apply to covenants not to compete entered into, amended or renewed prior to July 1, 2026, so its application is limited to agreements entered into, amended or renewed after July 1, 2026. Given the many open issues regarding Virginia’s new statute, employers should proceed cautiously when including covenants not to compete in agreements with employees in Virginia, particularly if those covenants are included in agreements that are entered into at the commencement of employment and that do not provide for severance or other monetary payment at the conclusion of employment.
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Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion.