In light of these significant, recent changes, companies with Washington- and/or Oregon-based employees or independent contractors should engage counsel to reevaluate their current and prospective noncompete agreements and exit procedures.
New legislation enacted in May 2019 will make noncompetes harder to enforce in Washington state and Oregon.
Washington State Enacts Sweeping Noncompete Legislation
On May 8, 2019, Washington became the latest state to enact comprehensive noncompete legislation. Under the Act Relating to Restraints, Including Noncompetition Covenants, on Persons Engaging in Lawful Professions, Trades or Businesses, noncompetition covenants will be void and unenforceable unless they meet a number of specific requirements. Although the act does not take effect until January 1, 2020, it impacts certain agreements signed and certain claims that arise before the effective date, as explained further below.
The act provides that noncompetition covenants are only enforceable against employees and independent contractors whose annual earnings exceed $100,000 and $250,000, respectively. These amounts will be adjusted annually, on September 30 of each year, to account for inflation.
In addition to the newly imposed earnings thresholds, for employees, the duration of a noncompetition covenant cannot exceed 18 months after termination unless the party seeking enforcement can prove by clear and convincing evidence that a longer period is necessary to protect its business or goodwill. Moreover, noncompetition covenants are void and unenforceable against laid off employees unless they provide for compensation equal to an employee’s base salary from the time of termination through the end of the enforcement period, minus any compensation earned through other employment during that period. To be enforceable, a noncompetition covenant must also meet the following requirements, which apply depending on when an employee enters the agreement:
- If entered at the start of employment, the terms of the agreement must be disclosed to the employee in writing at the time the employment offer is made or earlier;
- If entered at the start of employment and effective only at a later date due to a foreseeable change in the employee’s compensation, the employer must specifically disclose that the agreement may be enforceable in the future; and
- If entered after the start of employment, the employer must provide independent consideration.
The act empowers Washington state’s attorney general to pursue “any and all relief” on behalf of an aggrieved worker. In addition, an employee or independent contractor is entitled to bring his or her own claim to pursue actual damages or a statutory penalty of $5,000—whichever is greater—plus mandatory attorneys’ fees, expenses and costs. An employee or independent contractor will still be entitled to these damages even if a court attempts to “blue pencil” a noncompliant agreement.
The act applies to all “Washington-based” employees and independent contractors. It renders any noncompetition covenant void and unenforceable if it requires a Washington-based employee or independent contractor to adjudicate the agreement outside of Washington or deprives the employee or independent contractor of the protections or benefits of the Washington law.
The act specifically excludes nonsolicitation agreements (defined as agreements between employers and employees prohibiting solicitation upon termination of employment of any employee of the employer to leave the employer, or of any customer of the employer to cease or reduce the extent to which it is doing business with the employer), confidentiality agreements and covenants prohibiting the use or disclosure of trade secrets from the definition of a “noncompetition covenant.” The act, however, addresses certain employment restrictions outside of the noncompetition covenant context. It prohibits employers from barring employees who earn less than twice the state’s minimum wage from having another job while they are employed by the employer, unless there are legitimate safety, scheduling or conflict of interest concerns. In addition, the act bars franchisors from restricting a franchisee’s ability to solicit or hire employees of the franchisor or another franchisee.
The act applies to all proceedings commenced on or after the January 1, 2020, effective date, regardless of when the cause of action arose. The act also prohibits bringing a cause of action regarding a covenant signed prior to the January 1, 2020, effective date “if the noncompetition covenant is not being enforced.”
Oregon Legislation Imposes Additional Notice Requirements on Employers
Modifications to Oregon’s existing Noncompetition Law, ORS 653.295, were signed into law on May 14, 2019, introducing additional restrictions on employers’ already curtailed ability to enforce noncompetition covenants, except with respect to certain “excluded employees” described in ORS 653.010(3). Under the newly amended legislation, employers will not only be required to meet preemployment notice requirements under the Noncompetition Law, they must now give employees postemployment notice of their noncompete obligations.
Under Oregon’s current law, employers must inform new hires in writing at least two weeks before their first day of employment that a noncompetition covenant is a condition of their employment, unless the noncompetition agreement is entered into upon a subsequent bona fide advancement of the employee by the employer. Now, for any noncompetition covenant entered on or after the January 1, 2020, effective date, employers must also provide employees with a signed, written copy of the terms of their noncompetition agreement within 30 days after the date of termination.
Oregon’s existing law, last amended in 2017, imposes other limits on noncompetition agreements. For instance, the existing law limits the period of noncompetition enforcement to 18 months from the date of termination. With limited exceptions, it also renders a noncompetition covenant voidable where the employer does not have a protectable interest (i.e., trade secret or proprietary information) and the employee’s annual salary and commissions does not exceed the median income of a family of four at the time of termination, unless the employer makes certain payments to the employee during the restricted period.
In light of these significant, recent changes in Washington and Oregon’s noncompete laws, companies with Washington- and/or Oregon-based employees or independent contractors should engage counsel to reevaluate their current and prospective noncompete agreements and exit procedures.