INSIGHTS & NEWS
NEW LIMITATIONS ON THE SCOPE AND ENFORCEMENT OF NON-COMPETE COVENANTS IN WASHINGTON STATE
JANUARY 1, 2020
The recent legislative session resulted in the passage of a new statute that significantly limits the enforceability of non-compete agreements in Washington. The new statutory provisions are effective January 1, 2020. However, they will apply to retroactively to agreements that were entered into prior to the effective date. The following is an overview of the key provisions of the new statute and recommendations for employers who utilize non-compete agreements.
Scope of Restrictions: Employees. Under the new statute, non-compete covenants with employees are void and will not be enforced unless the following conditions are met:
The non-compete covenant must be disclosed in writing prior to acceptance of the offer of employment. If the agreement becomes enforceable at a later date due to changes in the employee’s compensation, the employer must specifically disclose prior to acceptance of the offer of employment that the employee is subject to future enforcement of the non-compete covenant.
If the non-compete covenant is entered into after employment has commenced, it must be accompanied by independent consideration (e.g., a bonus). This provision is consistent with existing requirements.
The employee subject to the non-compete covenant must earn annualized compensation in excess of $100,000 from the employer seeking the non-compete covenant. If an employee earns less than the statutory minimum, the non-compete covenant is void and unenforceable.
In the event an employee is terminated as a result of a layoff, the employee must receive compensation equal to their base salary less any compensation earned through subsequent employment during the period of enforcement.
The statute instructs the courts and arbitrators to presume that non-compete covenants in excess of 18 months (the “restricted period”) are presumptively unreasonable and unenforceable. An employer may rebut the presumption by proving by “clear and convincing evidence” that a longer duration is necessary to protect the business or its goodwill.
Scope of Restrictions: Independent Contractors. Under the new statute, non-compete covenants with independent contractors are void unless the independent contractor earns more than $250,000 from the party seeking enforcement of the covenant. For both employees and independent contractors, the compensation threshold will be adjusted annually for inflation. The adjustment will be calculated each September 1 and will become effective the following January.
Additional Restrictions on Employees and Independent Contractors. Under the new statute, a non-compete covenant that requires an employee to adjudicate the covenant outside of Washington State or that deprives the party subject to the covenant of the protections or benefits of the new statute is void and unenforceable as a matter of law.
Scope of Restrictions: Franchisors. No franchisor can restrict, restrain, or prohibit a franchisee from soliciting or hiring: 1) an employee of the franchisor, or 2) an employee of another franchisee of the same franchisor. These terms are often referred to as anti-poaching agreements.
Enforcement and Penalties. The new law imposes substantial penalties on an employer if a non-compete covenant is found by a court or an arbitrator to violate the statute. The provisions of the new statute can be enforced by the person subject to the non-compete covenant or by the attorney general. If a court or arbitrator finds that a non-compete covenant violates the new statute, the violator must pay the party subject to the covenant the greater of the party’s actual damages or a statutory penalty of $5,000, plus reasonable attorney’s fees, expenses, and costs incurred in the proceeding. Significantly, the same penalties apply if the court or arbitrator reforms, rewrites, modifies or partially enforces the non-compete covenant.
The statute applies to all proceedings commenced on or after the effective date of the statute (January 1, 2020), regardless of when the cause of action arose. After the effective date of the statute, an employer will be required to pay the employee’s attorneys’ fees and damages if it seeks to enforce a non-compete covenant that does not conform to the new law. If the non-compete covenant was signed before the statute’s effective date, an aggrieved party may commence a proceeding under the new statute only if the covenant is being enforced.
Exclusions from the Statute. The statute does not apply to non-solicitation agreements, confidentiality agreements, agreements restricting the disclosure of trade secrets or inventions, agreements between a buyer/seller of the goodwill of a business, or agreements that otherwise acquire or dispose of an ownership interest in a business. The statute narrowly defines non-solicitation agreements to include only agreements between an employer and employee that prohibit the employee from soliciting: 1) any employee from leaving the employer, or 2) any customer to cease or reduce the extent to which it is doing business with the employer.
Steps to Take Now. Although the statute does not become effective until January 1, 2020, it will apply to all noncompete covenants currently in place if they are enforced after the effective date. Businesses need to review their current forms to ensure that the non-compete covenants are compliant with the new statute. Additionally, businesses need to review all non-competes that have previously been executed to determine whether they comply with the new statute. Be aware that non-solicitation covenants that restrict activities beyond the narrow scope of the statute may be deemed to be non-competition agreements and therefore subject to the requirements of the statute. If new non-compete covenants are necessary, businesses need to remember that additional consideration will be necessary in order for the new non-compete covenants to be enforceable. For both employees and independent contractors, businesses need to review compensation to determine if compensation renders a non-compete covenant unenforceable.
Going forward, businesses must be vigilant in documenting the reason for termination. The new statute requires compensation during the restricted period for employees that are laid off if the non-compete is going to be enforced.
The new statute includes many provisions that will require additional guidance from the courts or the legislature. During this period of change, businesses are advised to proceed with caution and to consult with legal counsel prior to taking any action. The employment lawyers at Socius Law Group are here to help you navigate through this period of change. If you would like to schedule a call to discuss these changes or our recommendations for your business, please contact Jeannette Adams Gorman (firstname.lastname@example.org) or Jason Bergevin (email@example.com).
This is intended to be a source of general information, not an opinion or legal advice on any specific situation, and does not create an attorney-client relationship with our readers. If you would like more information regarding whether we may assist you in any particular matter, please contact one of our lawyers, using care not to provide us with any confidential information until we have notified you in writing that there are no conflicts of interest and that we have agreed to represent you on the specific matter that is the subject of your inquiry.