The Demise of Non-Compete Agreements in Washington
By: Steven J. Whitehead
On May 9, 2019, the state of Washington joined Massachusetts, Utah, Idaho, Colorado, Illinois and Nevada in curtailing the use of employee non-competition covenants. Montana has long restricted the enforceability of such covenants, and under the laws of the states of California, North Dakota and Oklahoma, employee non-compete agreements are essentially illegal.
Washington’s Bill 1450, which takes effect on January 1, 2020, does not prohibit employee non-competition covenants, but it does significantly increase the requirements for obtaining enforceable covenants from employees. In determining that “workforce mobility is important to economic growth” and that agreements that limit competition or hiring “may be contracts of adhesion that may be unenforceable,” the law restricts the categories of workers who may be bound by a non-compete to (1) employees who make more than $100,000 per year and (2) independent contractors who earn more than $250,000. These amounts are to be adjusted annually based on inflation. Further, if an employer seeks to bind an employee to a non-competition covenant, it must provide the agreement to the employee “no later than the time of the acceptance of the offer of employment.” If an employer seeks to bind a current employee to a non-compete covenant, it must provide consideration beyond continued employment.
Covenants that extend in duration to more than 18 months post-employment are presumed to be invalid, although that presumption can be rebutted if the employer proves under a more robust “clear and convincing” standard that the length of the covenant is “necessary to protect the party’s business or goodwill.” Lastly, an employer cannot enforce an otherwise valid covenant not to compete against any employee who “is terminated as the result of a layoff” unless the employer pays to that employee the equivalent of the employee’s base salary for the period of the covenant. This amount can be reduced by other income earned by the former employee.
Employers who attempt to enforce invalid covenants face penalties. The employer may be sued by the state’s Attorney General or by the impacted employee, who, if successful, may be awarded the greater of his/her actual damages or a statutory penalty of $5,000, plus attorneys’ fees, expenses and costs. The former employee is entitled to such damages where a court or arbitrator determines that the covenant is only partially enforceable or reforms (blue-pencils) the covenant. Fortunately, employees may not bring such claims based on non-compete agreements that were executed before the effective date of the statute if the employer is not seeking to enforce the restrictions. The statute also “displaces conflicting tort, restitutionary, contract and other laws of this state pertaining to liability for competition by employees or independent contractors with their employers or principals.” Presumably, this means that employers can no longer sue a former employee’s new employer for tortious interference with a contract. Employers cannot avoid the impact of the Washington law by choosing the law of another state to govern the contract or by selecting a forum outside Washington – the statute prohibits both.
While heavily regulating the use of non-compete covenants, the new law does not affect the enforceability of employee or customer non-solicitation covenants or non-disclosure agreements. Accordingly, Washington employers may still restrict their employees from post-employment solicitation of the employer’s customers or other employees or the disclosure and/or use of confidential information and trade secrets. The use of such covenants or agreements can apply to employees no matter the amount of their compensation.
Employers who have employees or independent contractors in Washington that are bound by restrictive covenant agreements should review those agreements and, if necessary, conform them to the new statutory restrictions. Lawyers from Taylor English’s Employment and Labor Relations group are available to assist in this process.