Update: 2019 Washington Non-Compete Bill Signed Into Law
Changes are coming for non-compete agreements in Washington State. In spring 2019, the Washington Legislature passed a bill that restricts the use of non-competes in Washington and Governor Inslee signed the bill into law. The law will take effect on January 1, 2020.
This is big news for Washington businesses and their employees. While the 2019 law doesn’t purport to ban the use of non-competes altogether, it imposes significant restrictions on their use by Washington employers. A sampling of the key restrictions are addressed below.
The New Law Sets An Income Threshold
A central goal of the law is to prevent non-competes from being used for low level employees. To that end, the law would nullify non-compete agreements for any employee earning $100,000 or less per year.
The law also sets an income threshold for non-competes used with independent contractors. The law would nullify non-competes with independent contractors unless the contractor was being paid more than $250,000 per year.
Note: The law requires that the income threshold for both employees and independent contractors be adjusted annually for inflation.
Imposing an income threshold on the use of non-competes makes good sense. There’s rarely a good reason why a low level worker should be subject to a non-compete clause, as the Senate Bill Report for ESSB 5478 notes:
Where there are unique trade secrets or important proprietary information, some kind of non-competition agreement may make sense…. What is … difficult to believe is that the 14 percent of workers who make under $40,000 a year and are forced to sign these agreements have some special proprietary information. Noncompetes have left the realm of high tech and have been applied to food service workers, security guards, and even delivery people.
Still, setting the salary threshold at $100,000 has already attracted criticism from some who argue that it effectively exempts large Seattle tech companies like Amazon and Microsoft from being subject to the restrictions on non-competes. This criticism is probably not unfounded, particularly given that the original threshold in the bill was around $180,000 but apparently lobbying efforts by Amazon brought the threshold down to $100,000.
The New Law Establishes A Time Limit
One of the features of the law is a presumption that any non-compete exceeding 18 months after employment is unreasonable and unenforceable. This presumption may be rebutted, but only by clear and convincing evidence (a fairly high evidentiary burden) that a longer duration is necessary to protect the party’s business or goodwill.
In effect, this will impose a time limit of 18 months on non-competes. The high burden of proof required to show a need for a longer non-compete, coupled with the uncertainty and cost of litigation, will deter just about every employer from attempting to insert a longer non-compete period into the agreement.
Note: The law also provides a 3-day time limit for non-competes related to performers, like musicians. The ESSB 5478 Senate Bill Report sheds some light into the reasons for this, noting that “In the music industry, noncompetes or blackout dates annually cripples the ability to cobble together a living.”
The New Law Protects Employees Who Are Laid Off By Requiring “Garden Leave” Compensation
The basic rationale for non-competes is to help employers prevent employers from learning confidential information on a Monday and then leaving to take their knowledge to a competitor on a Tuesday. This rationale becomes much less compelling when the employee is hired on a Monday, laid off on a Tuesday, and then told they can’t work for a competitor for the next 18 months.
The new non-compete law has an answer for this problem—mandatory “garden leave” for employers that have been laid off. Generally speaking, a garden leave clause provides that the employer will continue paying a former employee’s salary and benefits during the period of time after employment has ended but while the non-compete remains in effect. Under Washington’s new non-compete law, employers who lay off an employee must provide compensation equivalent to the laid-off employee’s base salary at the time of the termination for the period of enforcement (less compensation earned through other employment during the period of enforcement).
Consider an example. Ted is hired by TreeCutters, LLC but gets laid off six months later. At the time, Ted was being paid a $50,000 annual salary. He’s subject to a 18-month non-compete clause and can’t find any work outside of the tree cutting industry. Unless TreeCutters, LLC continues to pay Ted a $50,000 annual salary for the 18-month period of enforcement, the non-compete will be void.
The New Law Forecloses Forum Shopping & Choice Of Law Provisions
“Forum shopping” is, in a broad sense, an effort to have a certain court hear your case. It might be for geographic convenience or because you think you’re more likely to get the result you want.
It’s not hard to imagine Washington employers inserting forum-selection or choice of law clauses into non-compete agreements in an effort to have another state’s laws govern the contract or require the employee to litigate in another state, thereby avoiding the new restrictions on non-competes in Washington.
But the new non-compete law has answer for this. The new law voids any non-compete that requires an employee or independent the adjudicate a non-compete agreement outside of Washington. It also voids any non-compete that deprives an employee or independent contract of the protections or benefits of this chapter.
The practical effect of this should be to foreclose attempts by employers to evade the restrictions of the new non-compete law by invoking the laws of another state.
The New Law Enables Moonlighting By Low-Earning Employees
Moonlighting is where an employee works more than one job. The non-compete law ensures that certain low-earning employees will be able to moonlight without restriction from their employer.
Employees who earn less than twice the applicable state minimum hourly wage (currently $12 per hour) cannot be prevented from having an additional job, working as an independent contractor, or being self-employed.
There are limits on moonlighting, though. For instance, employers may prevent moonlighting if it raises issues of safety or interferes with reasonable scheduling expectations of the employer.
The New Law Deters Overly Broad Non-Competes
At the moment, Washington employers have little reason to draft narrowly tailored non-compete clauses. This is so because when Washington courts are presented with an overly broad non-compete clause, rather than simply refuse to enforce the clause, they will typically rewrite the clause to be more narrow and then enforce the modified version.
The result of this is moral hazard. The employer has no reason to craft narrow non-compete clauses because there are no consequences for using broad, catch-all clauses; the courts will simply “blue-pencil” the clause and enforce a more “reasonable” version of it.
The law provides a deterrent to this practice. It would do so by imposing a $5,000 minimum in damages (plus attorney fees and costs) if a court or arbitrator reforms, rewrites, modifies, or only partially enforces a non-compete. To avoid exposure to this type of liability, employers would be likely to use minimally restrictive non-compete clauses, unless the circumstances truly called for maximal restrictions.
This provision of the law may be the most significant, as it would force employers to carefully tailor the terms of each non-compete, rather than default to using employer-friendly boilerplate clauses.
The New Law Imposes Disclosure Obligations
The law requires employers to disclose the terms of the non-compete agreement to the employee in writing and no later than the time the employee accepts the offer of employment. Failing to do this will void the agreement. As such, employers should ensure that the exact terms of the non-compete are included in the offer letter to the prospective employee, even if the non-compete language is contained in other employment-related agreements, like a confidentiality and proprietary rights agreement.
Tip: This is akin to the notice requirement for IP assignment provisions in employment contracts, which you can learn more about here.
The disclosure requirement is a positive development. As non-competes have proliferated, they’ve come to be seen in some industries as a standard contract term. This can cause employees to enter a non-compete with little or no awareness of how it will restrict their ability to find work after they leave. By requiring employers to timely disclose the non-compete terms in writing, the law ensures that workers have additional notice of what they’re being asked to agree to.
The New Law Does Not Apply To Other Types Of Restrictive Covenants
The 2019 non-compete law expressly excludes non-solicitation agreements from being subject to the restrictions on non-compete agreements (except as between franchisors and franchisees). This is of note because historically Washington courts have applied the same legal standard to non-compete and non-solicitation agreements. Which is to say, the courts have enforced these types of agreements so long as they’re “reasonable.”
Moving forward, the issue of whether non-solicitation agreements will be enforced will continue to turn on whether they’re determined to be reasonable, a vague standard that’s typically informed by the (1) geographic scope of the restriction, and (2) the length of time of the restriction. While the “reasonableness” standard will continue to have some application for non-competes, it will become less significant in light of the more concrete restrictions imposed by the new non-compete law.
Confidentiality Agreements & Non-Disclosure Of Trade Secrets Or Inventions
Similarly, the 2019 non-compete law expressly excludes confidentiality and non-disclosure agreements from being subject to its restrictions, specifically identifying those covering trade secrets or inventions. While worth noting, this represents less of a departure from the status quo than the exclusion of non-solicitation agreements. That is because the “reasonableness” standard used for non-competes and non-solicitation agreements has not historically been applied to confidentiality agreements.
Covenants Relating To Sale Of A Business
The new law doesn’t apply to a covenant entered into by a person who is purchasing or selling the goodwill of a business or an ownership interest in a business. The idea behind this exemption, presumably, is that the sale of goodwill or an ownership interest in a business is an exchange between owners of capital who are better able to protect themselves through a negotiated agreement than are members of the labor force.
Covenants Entered Into By A Franchisee
The new law doesn’t apply to a covenant entered into by a franchisee when the franchise sales complies with RCW 19.100.020(1).
Timing And Enforcement
The law takes effect starting January 1, 2020. But Washington employers need to start planning for the changes to come prior to the law taking effect.
After the law goes into effect, employers won’t be able to enforce non-competes that violate the law’s restrictions, even if the non-compete was signed before January 1, 2020. Consequently, many employers will need to consider offering less restrictive non-compete terms to key employees to ensure compliance with the coming restrictions.
The new statutory restrictions on non-competes are prudent. Non-competes can be useful tools for protecting trade secrets, proprietary information, and investments in certain employees, but lately they’ve been abused. This law will provide much needed leveling of the playing field between employers and employees.