Washington State has enacted a new law that means big changes for employers. The new law, in effect on January 1, 2020, will dramatically limit the enforcement of non-compete agreements in our state and imposes tough penalties on employers found to be in violation.
While the new law does not take effect for many months, businesses should nonetheless act quickly and before year’s end to evaluate practices and, if necessary, revise existing and future non-compete agreements to ensure compliance. Under the new law, if an employee successfully proves a company’s non-compete agreement is unenforceable, then the employer will be required to pay the greater of $5,000 or an employee’s actual damages, plus the employee’s attorneys’ fees (and its own, in defending the non-compete), expenses and costs incurred in challenging the agreement.
Brief Summary of Changes
Washington Courts have typically disfavored restrictive covenants but usually enforced a non-competition agreement that protected an employer’s legitimate business interests and was reasonable in scope, geographic reach, and duration. The Legislature halted this trend through passage of Engrossed Substitute House Bill 1450.
The primary changes imposed by the new law mean that non-compete agreements will only be enforceable if:
- They cover a period less than 18 months;
- The employee earns more than $100,000 a year (or an independent contractor earns more than $250,000 a year);
- The employer discloses terms of the non-compete when making an offer of employment (or earlier); and
- The employer compensates employees that are laid off but still subject to non-compete agreements.
The new law applies only to “non-compete” agreements, defined 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.” Explicitly excluded are non-solicitation agreements, confidentiality agreements, covenants prohibiting the use of trade secrets or inventions, and/or covenants entered into by a person purchasing or selling the goodwill of a business or otherwise acquiring or disposing of an ownership interest.
- Unenforceable if Longer than 18-months
The law creates a rebuttable presumption (i.e., an assumption made by a court that is taken to be true unless someone comes forward to contest it), that a non-compete lasting longer than 18 months is unreasonable and unenforceable against an employee. This is also a significant change, as Washington courts had typically upheld non-compete agreements for two or more years.
A party seeking to rebut that presumption must prove by clear and convincing evidence that a duration longer than 18 months is necessary to protect the employer’s business or goodwill—a significant burden to overcome.
- Unenforceable for Employees Earning Less than $100,000/year
The new law limits which employees and independent contractors with whom an employer can enter into non-compete agreements. Under the new law, non-compete agreements with employees earning less than $100,000 a year, annualized and adjusted for inflation, are “void and unenforceable”. Non-compete agreements with independent contractors earning less than $250,000 year are also “void and enforceable.”
This bright line rule is a significant departure from the previous (common law) rule, under which non-compete agreements were enforced if “reasonable.” Reasonableness was evaluated on a case-by-case basis and depended on three factors—(1) whether the restraint was necessary for the protection of the business or goodwill of the employer; (2) if it imposed on the employee no greater restraint than was reasonably necessary to secure the employer’s business or goodwill; and (3) evaluation of the degree of injury to the public. With the enactment of the new law, the Legislature drew a line in the sand, deeming any non-compete with an employee “earning” less than $100,000 unenforceable, without exception or evaluation of the three reasonableness factors. Previously, the level of earnings was not a part of the reasonableness evaluation.
“Earnings” are defined as “the compensation reflected on box one of the employee’s United States internal revenue service 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.” For independent contractors, “earnings” means payments reported on Internal Revenue Service form 1099-MISC.
- Unenforceable if Not Disclosed
The new law requires employers to disclose the terms of a non-compete covenant in writing to prospective employees at the acceptance of a job offer. If the terms of the non-compete become enforceable only at a future date (for example, because of changes in the employee’s compensation), the employer must disclose that the agreement may be enforceable against the employee in the future. This new provision means that an employer cannot present a non-compete to a new employee on their first day of work, with other standard new hire paperwork. It must be disclosed earlier, upon acceptance of the offer.
- Unenforceable Against Terminated Employees, Unless Compensated
The new law renders non-compete covenants void and unenforceable against employees who have been terminated, unless the employer continues to compensate the employee “for the period of enforcement minus compensation earned through subsequent employment during the period of enforcement.” This rule is problematic because it imposes an obligation on employers to compensate the terminated employee, depending on future earnings. It is not clear how an employer would know, at termination, whether a former employee has found subsequent employment or how much that former employee is being compensated.
Comment: Washington’s new law imposes many new obligations on employers. In addition to those discussed above, it also imposes requirements related to restrictions on dispute provisions, moonlighting, and franchisor-franchisee agreements that employers should note.
Although it does not become effective until January 1, 2020, the new law is retroactive, meaning that non-competes entered into before January 1, 2020 are still subject to the law’s provisions, if those non-compete covenants are being enforced after the effective date.
As established in Washington common law, the new law codifies the rule that non-compete agreements that are entered into after the commencement of employment must be supported by independent consideration, such as a raise, promotion, or bonus compensation. If employers have non-competes that may be in violation, they should review the agreements and related policies prior to 2019 year-end so that any raises, promotions, or bonus compensation can serve as consideration for revised non-competes.