Update: 2019 Non-Compete Bill Passes Both Houses Of Washington Legislature, Governor Inslee Expected To Sign
*This post has been updated and lightly edited to reflect recent legislative activity.
In early March 2019, the Washington Senate passed a bill, ESSB 5478, that would restrict the use of non-compete agreements in Washington.
Just last week, on April 17th, a substantively identical companion bill, ESHB 1450, passed both houses of the Washington state legislature. Governor Inslee is expected to sign the 2019 non-compete bill into law in the coming weeks, Geekwire is reporting.
This is big news for Washington businesses and their employees. While the 2019 bill 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 Bill Sets An Income Threshold
A central goal of the bill is to prevent non-competes from being used for low level employees. To that end, the bill would nullify non-compete agreements for any employee earning $100,000 or less per year.
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.
Note: The bill also sets an income threshold for non-competes used with independent contractors. The bill would nullify non-competes with independent contractors unless the contractor was being paid more than $250,000 per year.
The Bill Establishes A Time Limit
One of the features of the bill is a presumption that any non-compete exceeding 18 months 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 would impose a time limit on non-competes. While I agree that non-competes should be limited in time, I’m not sure that setting a (more or less) rigid cap is the best solution, as certain circumstances may legitimately call for longer non-compete periods. It seems to me that Washington courts are reasonably well equipped to police the length of non-competes on a case-by-case basis (and have in fact done so).
In any event, I think the income threshold is more important to have than a time limit, given that the income threshold protects more vulnerable employees from abusive uses of non-competes. A prospective employee who will make six-figures has more leverage and likely a better chance to negotiate down an overly lengthy non-compete.
Note: The bill also provides a 3-day time limit for non-competes related to performers. 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 Bill 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 bill 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.
In my view, this provision of the bill 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 Bill Imposes Disclosure Obligations
The bill would force 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.
Tip: This is akin to the notice requirement for IP assignment provisions in employment contracts, which you can learn more about here.
This 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 bill ensures that workers have additional notice of what they’re being asked to agree to.
Timing And Enforcement
The bill would take effect starting January 1, 2020. But Washington employers need to start planning for the changes to come as soon as Governor Inslee signs the bill.
After the bill goes into effect, employers won’t be able to enforce non-competes that violate the bill’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.
Overall, I think the bill is a good one. Non-competes can be useful tools for protecting trade secrets, proprietary information, and investments in certain employees, but lately they’ve been abused. Assuming Governor Inslee signs the bill into law, it would provide much needed leveling of the playing field between employers and employees.
Check back in for updates on the progress of the bill.