Has the Washington Legislature passed a new bill regulating non-competition agreements?
Yes. The bill is now on Governor Jay Inslee’s desk, and it’s very likely he will sign it into law. In fact, let’s just take for granted that the Governor will sign the bill and we’ll call it a law. The new law, which will take effect January 1, 2020, represents the first time the Washington Legislature has codified rules about the use of non-competition agreements.
Are non-competition agreements going to be banned?
No, but the new law does place significant restrictions on which employees and independent contractors can be subject to non-competition agreements and what terms those agreements can contain.
What does the law consider to be a non-competition agreement?
Under the law, a non-competition agreement is any written or oral agreement that prohibits an employee or independent contractor from “engaging in a lawful profession, trade, or business of any kind.”
Which employees and independent contractors can be subject to non-competition agreements?
Under the new law, non-competition agreements are only enforceable against employees making at least $100,000 per year and independent contractors making at least $250,000 per year. These income thresholds are tied to inflation (calculated using CPI-W) with new thresholds taking effect each year on January 1. After January 1, 2020, any non-competition agreement signed by an employee or independent contractor earning less than these thresholds is void and unenforceable.
Are there other requirements for entering into a non-competition agreement with a qualifying employee?
Yes. Employers are required to disclose the terms of the non-competition agreement—in writing—prior to, or contemporaneous with the employee’s acceptance of an offer of employment. If the agreement is entered into after the employee is hired, the employer is required to provide the employee with some form of consideration for entering into the agreement.
Does the law set a limit on the duration of non-compete agreements?
Yes, under the new law non-competition agreements exceeding 18 months are unenforceable unless the employer can show by clear and convincing evidence that a longer agreement is necessary (a very high bar). It’s important to note that this doesn’t mean an agreement with a duration shorter than 18 months is necessarily going to be enforced—agreements are still required to be reasonable in geographic scope and duration and be reasonably necessary in order to protect the needs of the business.
What are the penalties for violating the new law?
If an employer’s non-competition covenant is found by a court or arbitrator to violate the new law, the employer must pay the aggrieved party’s actual damages or a $5,000 penalty (whichever is greater) as well as the aggrieved party’s attorneys’ fees and expenses incurred during any proceedings. Even more ominous for employers, if a court or arbitrator reforms, rewrites, modifies or only partially enforces a non-competition covenant, the same damages above apply. In other words, employers must win a complete and total victory in an enforcement proceeding; otherwise, the departing employee will be considered the prevailing party. To avoid being penalized for non-compliant agreements, employers will need to utilize narrowly-tailored non-competition clauses and carefully consider the risks and benefits of any enforcement action. Interestingly, the law does not provide for attorneys’ fees to a prevailing employer, although presumably a non-competition covenant could include a prevailing party fees provision.
What about non-competition agreements that were signed before the law takes effect?
If no enforcement action is attempted, an agreement entered before January 1, 2020 won’t lead to statutory penalties, but an employer that attempts to enforce an existing non-competition agreement that doesn’t comply with the new law will be subject to penalties. This means that employees subject to noncompliant existing agreements will likely need to be offered fresh consideration to sign a new enforceable agreement.
What if an employee is terminated as the result of a layoff?
Employers can only enforce a non-competition agreement against an employee who has been laid off if the agreement includes compensation equivalent to the employee’s base salary (less compensation from subsequent employment) for the duration of the agreement.
Are non-solicitation agreements still allowed?
Yes, the new law does not restrict confidentiality agreements, agreements restricting the use or disclosure of trade secrets, or non-solicitation agreements. Non-solicitation agreements are defined as agreements that prohibit an employee, after termination of employment, from soliciting other employees of the employer to leave, or soliciting any customer of the employer to stop doing business or reduce its business with the employer.
Does the new law prevent employers from restricting current employees from having other jobs (i.e., “moonlighting”)?
It does. An employer cannot ban moonlighting for employees who earn less than twice the state minimum wage (around $50,000 currently) unless the additional work raises “safety issues” or interferes with reasonable scheduling expectations of the employer.
Does the new law place restrictions on forum selection?
Yes. Agreements can’t contain provisions that require an employee or independent contractor who works in Washington to adjudicate disputes relating to a non-competition agreement out of state.
What about restrictions on franchise employees?
The new law does not allow franchisors to prevent their franchisees from soliciting or hiring employees from one another. Franchisors are also not allowed to prohibit franchisees from soliciting or hiring any employee of the franchisor.
What should I do to get ready for the new law?
Businesses will need to evaluate and likely update the language of existing non-competition agreements to ensure that they are compliant and that employees and independent contractors who have signed non-competition agreements meet the income threshold. Any non-competition agreement signed after January 1, 2020 must comply with the new law or risk the imposition of penalties and fees. Any enforcement action based on a non-competition agreement needs to be carefully considered. Our Seattle office employment attorneys stand ready to assist businesses with preparing for compliance with this new law.