Minnesota creates uncertainty among employers with its recent enactment of a near-blanket ban on non-solicitation provisions that restrict customers’ ability to directly hire workers placed on their jobsites. The new law (Minn. Stat. § 181.9881) is set to take effect on July 1, 2024. Various business groups, including association-management companies, are seeking an amendment to narrow the bill.

Here are the key points from the new law:

• Sweeping Prohibition for Service Providers. Service providers may no longer restrict, restrain, or prohibit in any way a customer from directly or indirectly soliciting or hiring one of their employees or independent contractors.
• Also Applies to Current Contracts. Any provision of an existing contract that violates this new restriction is void and unenforceable.
• Notice to Workers Required. If service providers have existing contracts with provisions that now violate this new law, they must provide notice to their workers about the change and that the existing restrictive covenant is now void and unenforceable.
• Exceptions Are Limited. The law 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 with that customer.

A Shift in Service Provider Rights

The new law bans most contract provisions that restrict customers of “service providers” from doing anything to “restrict, restrain, or prohibit” the hiring of a service providers’ employees or independent contractors. A service provider is defined as 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.” Put differently, customers can no longer be prohibited from approaching and directly hiring their in-home health aides, house cleaners, or temporary office staff.

The new law will impact any employer whose business model relies on workers being deployed to interact with customers and provide a service. The only service providers who are narrowly excluded from the new law must provide “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.”

The Rationale Behind the Ban

Last year, Minnesota enacted legislation that prohibited non-compete clauses in most employment contracts. Then, in April 2024, the Federal Trade Commission announced a near-blanket ban on non-compete agreements.

To address a perceived loophole in Minnesota’s non-compete prohibition, state lawmakers recently passed the non-solicitation ban to bar so-called “shadow” non-compete clauses. These clauses exist in contracts not with individual workers, but between businesses. The focus of the debate over the legislation was staffing companies, but the language of the law is much broader.

What Should Service Providers Do?

There are three major things that service providers can do:

• Review any customer service agreement to see if any provisions may be unenforceable under the new law. Specifically, any non-solicitation, conversion fee, or buy-out provisions should be reviewed with an employment attorney.
• Craft non-disclosure language and non-solicitation provisions in employee agreements to be specific about the actual interests of the company.
• Create and distribute notices to workers if any service agreement provisions are void under the new law.
• Reach out to their employment attorneys for assistance in drafting provisions that are expected to protect their interests and stand under any expected changes in the law.

With the evolving employment and labor law landscape, employers with questions or concerns are encouraged to contact the authors (Hellmuth & Johnson attorneys): Mary Ellen Reihsen at [email protected] or 952-460-9275; and Brendan M. Kenny at [email protected] or 952-746-2139.