Washington State Imposes Limits on Non-Compete Agreements

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Washington is the latest state to shake up the non-competition landscape. Last month, Gov. Jay Inslee signed into law a bill that significantly limits post-employment/post-service non-compete agreements. Washington now joins a handful of states that have enacted legislation to curb the use and reach of such restrictive covenants.

Highlights of the New Law

Employee Non-Competes: Effective January 1, 2020, a non-compete with a Washington employee is only enforceable if the employee:

  • Makes more than $100,000 per year (subject to yearly adjustment for inflation)
  • Is notified of the non-compete terms no later than when the offer of employment is accepted
  • Receives independent consideration (e.g. a cash bonus or promotion) if the non-compete is entered after hire/during employment
  • Receives severance pay equating to the employee’s final base salary during the period of enforcement, less actual earnings—if the employee is terminated as part of a layoff

Contractors: A non-compete with an independent contractor is only enforceable if the contractor makes more than $250,000 per year (subject to yearly adjustment for inflation).

Duration: An employee non-compete exceeding 18 months post-termination is presumed unreasonable and unenforceable unless the employer establishes that a longer duration is necessary to protect its business or goodwill.

Venue: A non-compete will be rendered void and unenforceable if it requires a Washington-based employee or contractor to adjudicate a dispute concerning the non-compete outside of Washington.

Remedies/Penalties: If a non-compete is (1) determined to violate the new law; (2) modified by a judge or arbitrator because of non-compliance; or (3) otherwise only partially enforced, the employer is liable for the employee or contractor’s actual damages or a $5,000 penalty, whichever is greater, plus attorneys’ fees and costs.

Effective Date: Although the law does not go into effect until January 1, 2020, non-competes that pre-date this effective date will be scrutinized under the new law if they are the subject of lawsuits filed after the effective date.

Moonlighting: Lastly, the new law prohibits enforcement of no moonlighting policies against employees who earn less than twice the state minimum wage, unless safety concerns or scheduling conflicts exist.

What Should Employers Do?

To prepare for the new law, we recommend that Washington employers, with the assistance of legal counsel, do all of the following:

First, they should scrutinize their existing non-competes for compliance with the above requirements and limits.

Second, they should ensure that workers earn more than the minimum salary/pay. But employers should not uncritically increase employee salaries to meet the minimum salary requirement, as this could lead to pay discrimination risk and other unintended consequences if such increases are not carried out in a systematic way.

Third, with newly implemented agreements, employers should explicitly call out the non-compete in the offer letter. If the non-compete agreement is contained in a separate document, such as a confidentiality and invention assignment agreement, the title should specifically reference “non-competition,” and it should clearly indicate that the employee received the non-compete at the same time as the offer.

Fourth, employers should be careful, especially for separations after December 31, not to loosely characterize an employee’s separation as a “layoff” if it is, in fact, simply an involuntary termination—doing so would trigger the severance pay obligation of the new law.

The new law is ambiguous in a few important respects. It does not define what type of consideration is sufficient to enforce a non-compete agreement entered into after hire. It is also unclear under what circumstances a non-compete agreement’s restrictive period can exceed 18 months. These and other ambiguities may be clarified by the Washington legislature in the future.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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