As readers of this blog well know, there is a growing trend of state legislatures seeking to limit or outright ban non-competes. (See here, here, and here as just a few examples of state efforts to curb non-competes—not to mention the proposed federal legislation and international efforts—in the last six months.) Last week, the Washington Senate jumped on the bandwagon by passing a bill with a 30–18 vote that would severely limit the enforceability non-competes. (Similar efforts failed last year, as we reported here.) Some of the key features of this year’s bill are as follows:
- The bill defines “noncompetition covenant” as “every written or oral covenant, agreement, or contract by which an employee or independent contractor is prohibited or restrained from engaging in a lawful profession, trade, or business of any kind” and does not include, among others, non-competes arising out of the sale of a business, non-solicitation agreements, confidentiality agreements, and covenants prohibiting the use or disclosure of trade secrets. The bill’s express exclusion of non-solicitation agreements distinguishes the bill from more restrictive states like California.
- Non-competes would be unenforceable against employees earning $100,000 a year or less and independent contractors earning $250,000 a year or less from the company seeking enforcement. Moreover, this threshold is adjusted annually for inflation, resulting in a moving target for employers and employees alike. For example, an employee making $100,001 when the bill becomes law (if it indeed does) may be subject to a binding, enforceable non-compete—but if his or her compensation does not keep pace with the cost of inflation, it would be unenforceable. Then, if the employee got a raise that brought his or her compensation equal to or greater than the cost of inflation increase, the non-compete would again be enforceable.
- Adding to the confusion, the bill defines earnings as “the compensation reflected on box one of the employee’s . . . form W-2 that is paid to an employee over the prior year, or portion thereof for which the employee was employed, annualized and calculated as of the earlier of the date enforcement of the noncompetition covenant is sought or the date of separation from employment” or, for independent contractors, payments reported on internal revenue service form 1099-MISC. The reference to box 1 of the employee’s W-2 reveals that employers will need to determine an employee’s wages after adjusting gross pay based on deductions for 401k, medical flexible spending accounts, and other relevant deductions. This could result in a bizarre scenario where an employee who maxes out his or her retirement account could be under the $100,000 threshold, resulting in unenforceability of the non-compete, whereas an employee with the same exact job and who makes the same exact base salary—but does not fully fund a retirement account—earns more than the threshold, and thus his or her agreement is enforceable.
- The bill contains a notice provision, whereby the employer must disclose the terms of the non-compete in writing to new employees “no later than the time of the acceptance of the offer of employments.” It further provides that “if the agreement only becomes enforceable only at a later date due to changes in the employee’s compensation,” (say, if an employee was hired at a salary of $100,000 or less but later got a raise that increased his or her salary over the $100,000 benchmark), the employer must “specifically disclose that the agreement may be enforceable against the employee in the future.” This provision appears to allow employers to require their employees making $100,000 or less to sign non-competes, provided that the agreements specify that the non-compete provision will not be enforceable unless and until the employee’s compensation meets the threshold earnings. Needless to say, this is likely to result in confusion, especially with employees who don’t believe their agreements will be enforced but who ultimately meet the $100,000 threshold at a later date. The bill does not appear to require any advance notice to existing employees asked to sign a non-compete, nor does it include a notice provision for independent contractors.
- For existing employees who are asked to sign a non-compete, the employer must provide consideration above and beyond continued employment.
- Non-competes will not be enforceable against laid off employees, unless enforcement includes compensation for the entirety of the non-compete period; this compensation must be equivalent to the employee’s base salary at the time of termination, less any compensation that the employee earns through subsequent employment during the period when the non-compete is in effect.
- The bill would also create a rebuttable presumption that non-compete clauses binding employees for more than 18 months post-termination are “unreasonable and unenforceable.” Employers seeking to rebut the presumption will need to provide “clear and convincing evidence” that a restriction exceeding 18 months is necessary to protect its “business or goodwill.” This presumption does not appear to apply to independent contractors. (Oddly specific, but notable for those in the performing arts: the maximum permissible duration for a non-compete between “a performer and a performance space, or a third party scheduling the performer for a performance space,” is three calendar days.)
- Under the bill, Washington-based employees or independent contractors could not be required to litigate the non-compete provision outside of Washington, nor is it permissible for a clause to “deprive the employee or independent contractor of the protections or benefits of” the bill—including, presumably, if the agreement includes a choice of law that is less friendly to employees or independent contractors than the proposed Washington law. It is unclear whether an agreement that includes a choice of law provision designating a more employee-friendly law (such as California law) would be enforceable under this bill. In any event, if the bill passes, employers with a workforce in Washington would have to keep the limitations of the bill in mind when rolling out non-competes to their Washington-based employees and contractors, even if there would otherwise be a good reason to use another state’s law.
- The bill also provides that no franchisor may restrict, restrain, or prohibit a franchisee from soliciting or hiring any employee of a franchisee of the same franchisor, or any employee of the franchisor itself.
- Separate and apart from the provisions regarding non-competes, the bill prohibits employers from preventing employees who make less than twice minimum wage from having other employment unless the “specific [additional] services to be offered by the employee raise issues of safety for the employee, coworkers, or the public, or interfere with the reasonable and normal scheduling expectations of the employer.”
- The bill provides a private right of action (in addition to enforcement by the attorney general), and permits recovery of the greater of actual damages or a $5,000 penalty, plus reasonable attorneys’ fees and costs. Notably, these remedies are also available against a company attempting to enforce a non-compete where the court or arbitrator “reforms, rewrites, modifies, or only partially enforces any noncompetition covenant.” Accordingly, if this bill passes, employers will need to prudently draft their non-compete agreements and carefully consider litigation strategy if they intend to enforce a non-compete that a court may deem overly broad, as they may wind up facing counterclaims subjecting them to damages, attorneys’ fees, and costs, even for good faith efforts to enforce agreements they believed to be reasonable and enforceable.
- The bill “displaces conflicting tort, restitutionary, contract, and other laws of this state pertaining to liability for competition by employees or independent contractors with their employers or principals, as appropriate” but does not displace or modify the Uniform Trade Secrets Act.
If passed, the bill would take effect on January 1, 2020.
The bill’s sponsor, Marko Liias, was quoted saying: “While non-compete clauses are useful in protecting proprietary information, they have become far too commonplace—a tool to stifle innovation rather than one to protect it.” Recognizing the value of protecting trade secrets and intellectual property, the bill takes aim at those non-competes being used in low-paying industries like fast food and grocery, which have generated significant media criticism: “When 14 percent of workers who make $40,000 a year or less are forced to sign non-compete agreements, it is clear that these arrangements are being used for purposes other than protecting trade secrets,” said Liias. “There are clearly instances in which these provisions make sense, but they should not be used simply to limit workers’ employment options.”
It’s unclear whether the bill will gather enough votes in the Washington House of Representatives, but we’ll be sure to report back with updates.