This is the third post in a series examining Washington law on noncompete agreements.
In the first, we provided an overview of the major changes to Washington law regarding noncompete agreements under new legislation that Governor Inslee signed into law on May 8, 2019.
In the second, we discussed how Washington courts evaluate the reasonableness of a noncompete agreement to determine its enforceability.
In this post, we take a closer look at the key elements of the new statutory scheme governing noncompete agreements, so that employers and employees can be attuned to how recent changes may impact their rights and risks.
Applicability. The new law broadly applies to all noncompete agreements. But it does not apply to confidentiality agreements or to non-solicitation agreements (except in the franchise context, as discussed below)—agreements that are closely related to and sometimes included within agreements not to compete. To the extent that an agreement prohibits current or former employees from disclosing an employer’s confidential information or soliciting an employer’s customers, the agreement is unaffected by the new law.
Effective Date. The law goes into effect on January 1, 2020. It also applies retroactively to all noncompete agreements entered into before the effective date, but only if the legal action to enforce the agreement is initiated after the January 1, 2020 effective date. Thus, an employer that has concerns regarding a former employee breaching an existing noncompete should consider initiating proceedings before January 1, 2020 if the agreement would be impacted by the new law.
An Employer Must Make Certain Disclosures for a Noncompete to Be Enforceable. Disclosure is an important aspect of the new statute. To be enforceable, a noncompete agreement must be disclosed to a prospective employee in writing at or before the time the employee accepts employment. If the noncompete agreement will be triggered at a later date due to changes in the employee’s compensation, the employer must disclose that the agreement may be enforceable against the employee in the future.
A Noncompete for Existing Employees Requires the Employer to Provide New Value. If an employer wants to have an existing employee enter into a noncompete agreement, the employer must provide independent consideration for that agreement, such as a raise or a promotion. This was true under prior case law, but it is now codified.
A Noncompete May Only be Enforceable Against Higher-Earning Employees and Independent Contractors. The new law more explicitly attempts to protect an employee’s right to earn a living—a policy that is expressed in existing Washington law on noncompete agreements. Under the new law, noncompete agreements are only enforceable against employees who make at least $100,000 per year and independent contractors who make at least $250,000 per year. These minimum thresholds will be adjusted annually for inflation, to be calculated as set forth in the statute.
If an employee makes less than twice the state minimum hourly wage, an employer cannot restrict, restrain, or prohibit that employee from working elsewhere to supplement their income unless the employee’s outside work causes safety issues or interferes with the employer’s reasonable and normal scheduling expectations.
There May Be Financial Consequences if an Employer Lays off an Employee with a Noncompete. The noncompete agreement must provide for the employee to receive compensation at their base salary for the restricted period, minus any compensation they earn from subsequent employment, if the employee is laid off. In other words, if an employer terminates an employee who is subject to a non-competition agreement, the employer may be obligated to pay the employee his or her salary for the length of the period he or she is subject to the noncompete.
The Statute Creates a Presumption Regarding the Maximum Length of a Non-Competition Period. The legislature decided that a noncompete period of a year and a half is likely sufficient to protect the former employer’s business. Thus, the statute creates a presumption that a noncompete period extending beyond 18 months after the employee’s termination is unreasonable and thus unenforceable. An employer may still request and, potentially, enforce such a noncompete if the employer proves that the extended time period is necessary to protect its business or goodwill—but the presumption means that the burden is on the employer to demonstrate why 18 months is insufficient to protect goodwill, confidential information or the other narrow interests that may be protected by a non-compete agreement[1].
There are Specific Rules for Franchisors. There are certain provisions that apply solely to franchisors and franchisees. While the new law does not apply to non-solicitation agreements generally, it expressly prohibits franchisors from restricting, restraining, or prohibiting a franchisee from soliciting or hiring any employee of a franchisee of the same franchisor or of the franchisor itself. If you are, or might be, in a franchise situation, you will want to dig deeper into these provisions.
The Remedies are Structured to Incentivize Compliance. Finally, the new law contains provisions that are designed to prevent contracting around it and to facilitate actions to enforce the law. A noncompete agreement cannot include a forum-selection clause that requires adjudication of the agreement outside of Washington State. And a noncompete agreement that deprives an employee or independent contractor of the protections or benefits of the statute will is generally void and unenforceable.
Regarding enforcement, the statute allows the Washington State Attorney General or any “person aggrieved by a noncompetition covenant” to bring an action against an employer whose noncompete agreement violates the new law and for the recovery of attorneys’ fees and actual damages (or a $5,000 statutory penalty, whichever is more) if a court or arbitrator determines that a noncompete agreement violates the statute, must be reformed, or is only partially enforceable.
Understanding these elements of the new law is just the beginning. How employers and employees adapt to protect their respective interests will be where the rubber meets the road.
[1] A special provision limits the duration of noncompete agreements between performers, performance spaces, and schedulers to three calendar days.
Brandi B. Balanda
Brandi has wide-ranging experience successfully litigating large, complex cases, from defending a senior executive against the largest trade secret claim asserted in Washington to prosecuting fraud, contract, and fiduciary duty claims related to the financing of major real estate development projects.