Washington Gov. Jay Inslee recently signed House Bill 1450, which limits the enforceability of noncompete clauses in written and oral employment contracts between employers on one hand and employees and independent contractors on the other. The new law also imposes penalties upon employers who seek to enforce an unenforceable noncompete clause after Jan. 1, 2020.

Noncompete Agreements with Employees

Pursuant to HB 1450, a noncompetition clause may be enforced against an employee only if:

• the employer disclosed the terms of the noncompetition clause in writing before the employee accepted the employer's offer of employment or, if the agreement is entered after the commencement of employment, the employer provided independent consideration for the agreement
• the employee's annual earnings exceed $100,000 per year
• when an employee is laid off, enforcement of the noncompetition clause must provide for compensation to the employee equivalent to the employee's base salary at the time of the layoff minus compensation earned through subsequent employment during the duration of the noncompete period
• the duration of the noncompete period does not exceed 18 months (unless the employer can prove by clear and convincing evidence that a longer duration is necessary)
• any dispute relating to the noncompete clause with a Washington-based employee is adjudicated within the state of Washington
• enforcement of the agreement would not deprive the employee of any protections or benefits provided by Washington's labor and employment laws

The new law also prohibits employers from restricting or prohibiting employees from working a second job or otherwise supplementing their income unless the employee earns more than twice the applicable state minimum wage. Washington's minimum wage in 2019 is $12 per hour.

Noncompete Agreements with Independent Contractors

Likewise, under the new law, a noncompetition clause may only be enforced against an independent contractor if:

• the independent contractor's annual earnings exceed $250,000 per year
• any dispute relating to the noncompete clause with a Washington-based independent contractor is adjudicated within the state of Washington
• enforcement of the agreement would not deprive the employee of any protections or benefits provided by Washington's labor and employment laws

Section 4(2) of HB 1450 also prohibits a noncompete agreement between a performer and performance space from lasting longer than three calendar days.

Penalties Imposed for Violations and Blue Penciling

While HB 1450 permits courts to "blue pencil" (modify, rewrite or partially enforce) a noncompete clause in order to make it enforceable, it still imposes the same penalties upon the employer that it would if the clause was unenforceable: the greater of actual damages or a $5,000 penalty. The law applies in all litigation commenced after the law's effective date of Jan. 1, 2020, regardless of when the agreement was entered into by the parties or when the cause of action arose.

Employer Next Steps

In the wake of HB 1450, Washington employers should think critically about which employees or independent contractors it asks to sign noncompete clauses and ensure that such clauses comply with the new law. Employers should also review their existing employment contracts and determine which, if any, contain noncompete clauses and evaluate whether the existing clauses are enforceable as written.