On April 9, 2020, Governor Ralph Northam signed House Bill (HB) 330, Virginia’s first law banning covenants not to compete against “low-wage employees.” Effective July 1, 2020, Virginia employers may not enter into, enforce, or threaten to enforce a covenant not to compete with any employee who earns less than the annual average weekly wage in the Commonwealth, which will be $1,137 per week ($59,124 per year) as of the same day HB 330 takes effect. Given that the average annual salary for all occupations in Virginia was calculated as $57,304 in Fiscal Year 2020 (July 1, 2019 – June 30, 2020), the new law will apply to a significant number of Virginia’s workers.
What types of agreements are affected?
The law broadly defines the term “covenant not to compete” to include a “covenant or agreement, including a provision of a contract of employment, between an employer and employee that restrains, prohibits, or otherwise restricts an individual’s ability, following the termination of the individual’s employment, to compete with his former employer.” Accordingly, the law has the potential to affect noncompete provisions contained in employment agreements, standalone restrictive covenants, and separation agreements presented at the end of employment.
What is less clear is the extent to which the new law might also impose restrictions on customer nonsolicitation provisions. If a customer nonsolicitation provision qualifies as a “covenant not to compete” it may be prohibited in its entirety against low-wage employees. However, within the definition of “covenant not to compete,” the law provides that employers may not “restrict an employee from providing a service to a customer or client of the employer if the employee does not initiate contact with or solicit the customer or client.” This ambiguity leaves open the possibility that narrowly-tailored customer nonsolicitation provisions may still be enforceable against low-wage employees if they are written in a manner that does not prohibit an employee from accepting unsolicited business from former customers. Ultimately, this issue will be determined by the courts.
The new law allows for the continued use of nondisclosure agreements if they are designed to “prohibit the taking, misappropriating, threatening to misappropriate, or sharing of certain information, including trade secrets” and confidential or proprietary information.
Who qualifies as a “low-wage employee?”
Beginning July 1, 2020, a “low-wage employee” is any employee who earns less than the average weekly wage of the Commonwealth, as determined by the Virginia Workers’ Compensation Commission, which will be $1,137 per week (or $59,124 per year) when the law takes effect. However, this amount is adjusted annually, which means to ensure compliance with the law, employers will need to continually reassess whether workers who are subject to noncompete agreements qualify as “low-wage employees.”
The term “low-wage employees” also includes “interns, students, apprentices, or trainees employed . . . at a trade or occupation in order to gain work or educational experience.” In addition, independent contractors are considered “low-wage employees” if they are compensated at a rate that is less than the annual median hourly wage in the Commonwealth, currently $20.30 per hour. This amount is also subject to change annually, which means to stay in compliance with the law employers will need to monitor the wages of independent contractors who might be subject to noncompete provisions.
“Low-wage employees” do not include “any employee whose earnings are derived, in whole or in predominant part, from sales commissions, incentives, or bonuses.”
What is prohibited by the new law?
Beginning July 1, 2020, Virginia employers cannot “enter into, enforce, or threaten to enforce” a covenant not to compete with any “low-wage employee.”
What about noncompetes entered into before July 1, 2020?
The new law contains a grandfather clause, according to which the new restrictions apply only to noncompete agreements that are entered into on or after July 1, 2020. As Virginia begins to ease its stay-at-home restrictions due to COVID-19, employers may wish to have returning employees who have not previously signed a noncompete agreement do so upon returning to work. Agreements that are signed before July 1, 2020, are exempt from the new law.
What are the penalties for violating the new law?
Employees may sue “any former employer or other person” (suggesting the potential for individual liability against managers and supervisors) for injunctive relief, liquidated damages (which is not defined by the new law), lost compensation, damages, and reasonable attorneys’ fees and costs. In addition, employers may be subject to a civil penalty of $10,000 for each violation.
Are there any posting requirements?
Yes. Virginia employers must post a copy of the new law (or a summary approved by the Virginia Department of Labor and Industry) in the same location where other employee notices required by state or federal law are posted. Employers that fail to post a copy of the new law after repeated notices of a violation could face a fine of up to $1,000 for each subsequent violation.