DC’s Noncompete Ban—A Law of Unintended Consequences
Just as the calendar was turning to 2021, the Council of the District of Columbia threw District of Columbia employers a late-breaking curveball that most did not see coming. The Ban on Non-Compete Agreements Amendment Act of 2020 (D.C. Act 23-563) was passed by the Council on December 15, 2020, and signed by Mayor Muriel Bowser on January 11, 2021. The legislation, which will create a near-total ban on noncompete agreements, took the Washington, D.C., business community by surprise. The final text is substantially broader than the more modest bill that was proposed originally, and the legislation goes well beyond laws enacted in other jurisdictions to curtail the use of post-employment noncompete agreements.
When the act was introduced in October 2019 as Bill No. B23-0494, it was aimed at insulating workers making less than three times the minimum wage from being required to sign noncompete agreements. By making noncompetes unenforceable against employees below a certain income floor, the bill protected lower-wage employees from being forced to sign noncompetes to keep their jobs. This approach tracked the path taken by several other states to curtail the use of noncompetes. Before putting the bill to a vote, however, the Council changed direction by removing the income cap from the bill. With only two exceptions, the version approved by the Council and signed by the mayor amounts to an all-out ban on agreements and policies that contain noncompete provisions.
By removing the income cap, the act’s proscription against post-employment noncompetes applies to employees at all salary levels. The cap’s removal also creates a near-total prohibition on exclusive employment arrangements between employers and their active employees. Without the income cap, a provision that would have protected the right of hourly employees to work second jobs effectively outlaws policies that prohibit any current employees from working for competitors or opening competing businesses of their own. It is unclear whether the latter result was intended or unintended by the act’s drafters, but it has left employers with grave concerns about how to protect company assets from unauthorized use by their D.C. employees. These concerns are particularly serious for the District’s law firms, professional sports teams, television networks, and other media that customarily rely upon exclusive employment arrangements to protect their brands and ensure the loyalty of highly compensated employees.
Frequently Asked Questions
Question 1. Who is covered by the act?
Answer 1. The act’s definitions of “employee” and “employer” are broad and are subject only to four narrow exemptions. An “employee” under the act includes any “individual who performs work in the District on behalf of an employer and any prospective employee who an employer reasonably anticipates will perform work on behalf of the employer in the District.”
“Employer” is defined as “an individual, partnership, general contractor, subcontractor, association, corporation, or business trust operating in the District, or any person or group of persons acting directly or indirectly in the interest of an employer operating in the District in relation to an employee, including a prospective employer,” but excluding the D.C. government and the federal government.
Q2. Is the act limited to low-wage or nonexempt employees?
A2. Unlike the laws of states such as Maryland and Virginia, the act’s prohibition against noncompete provisions is not limited to low-wage workers and does not contain an exemption for highly paid employees or employees exempt from overtime under the Fair Labor Standards Act.
Q3. Are any employees excluded?
A3. The act excludes only four defined categories of workers: (1) individuals who volunteer for “educational, charitable, religious, or nonprofit organization[s]”; (2) “lay member[s] elected or appointed to office[s] within … any religious organization and engaged in religious functions”; (3) “casual babysitter[s]”; and (4) “medical specialist[s].”
The term “medical specialist” is defined to include “an individual who performs work in the District on behalf of an employer engaged primarily in the delivery of medical services and who:
(A) Holds a license to practice medicine;
(B) Is a physician;
(C) Has completed a medical residency; and
(D) Has total compensation of at least $250,000 per year.
Q4. What is prohibited by the act?
A4. The act does more than render noncompliant agreements void or unenforceable. In fact, there are three different ways in which an employer’s actions can violate the act.
- An employer “may [not] require or request that an employee sign an agreement that includes a non-compete provision,” which is defined as “a provision of a written agreement between an employer and an employee that prohibits the employee from being simultaneously or subsequently employed by another person, performing work or providing services for pay for another person, or operating the employee’s own business.”
- The act bars an employer from “hav[ing] a workplace policy that prohibits an employee from: (1) [b]eing employed by another person; (2) [p]erforming work or providing services for pay for another person; or (3) operating the employee’s own business.”
- The act also states that an employer may not “retaliate or threaten to retaliate against an employee” for (1) refusing to sign or comply with a noncompete provision prohibited by the act; (2) failing to comply with a noncompete provision or a workplace policy made unlawful by the act; or taking steps to complain about, ask for information about, or inform certain others about, a noncompete provision or policy.
Q5. Are there any industry-specific rules?
A5. Employers in the healthcare industry and the radio and broadcast industry may want to take note of this legislation because of provisions specifically applicable to them.
Healthcare employers. Employers that employ healthcare workers may want to be attuned to the definition of “medical specialists.” The act permits employers to require physicians to sign noncompete agreements, but only if the physicians meet the criteria of “medical specialists,” and they are provided with the noncompete provision and statutory notice “at least 14 days before” the noncompete provision must be executed.
Broadcast industry. With respect to the broadcast industry, the act repeals the Broadcast Industry Contracting Freedom Act of 2002, D.C. Official Code § 32-571 et seq., which made most post-employment noncompete agreements in the broadcasting industry unenforceable except for sales representatives. Employers in this industry will become subject to the same restrictions as other employers covered by the act, meaning that noncompete agreements with sales representatives will now be prohibited prospectively. Employers in this industry will face a unique challenge to the extent that contracts with on-air talent contain exclusivity provisions that prevent the employees from performing similar services for any other broadcast employer in the market.
Q6. Does the act require any written notice by employers?
A6. Yes, the act requires employers to provide employees with a written notice stating as follows: “No employer operating in the District of Columbia may request or require any employee working in the District of Columbia to agree to a non-compete policy or agreement, in accordance with the Ban on Non-Compete Agreements Amendment Act of 2020.”
The notice must be provided no later than (a) 90 calendar days after the act’s “applicability date” (discussed below); (b) 7 calendar days after an individual becomes an employer’s employee; and (c) 14 calendar days after an employer receives a written request for the notice from an employee.
Q7. Does the act prohibit the use of confidentiality agreements?
A7. The act’s prohibition on the use of “non-compete provisions” does not extend to “[a]n otherwise lawful provision that restricts the employee from disclosing the employer’s confidential, proprietary, or sensitive information, client list, customer list, or a trade secret, as that term is defined in section 2(4) of the Uniform Trade Secrets Act of 1988, effective March 16, 1989 (D.C. Law 7-216; D.C. Official Code § 36-401(4)).”
Q8. Does the act prohibit the use of nonsolicitation agreements?
A8. The act does not expressly include or exclude nonsolicitation agreements. By its terms, the act’s prohibition against “non-compete provisions” applies to clauses that “prohibit” employment, working, or providing services. That is different from a nonsolicitation clause, which prohibits certain activities but does not prohibit an employee from working for or being employed by another employer or providing services to another employer. A typical nonsolicitation clause merely prohibits an individual from soliciting business from a defined set of customers in the course of employment. Such a clause does not, in the ordinary sense, “prohibit” an individual from “being … employed by” a competitor or from “performing work” for or “providing services to” a competitor, as long as he or she does not solicit business from covered customers.
Q9. Is there any exception for restrictive covenants executed as part of the sale of a business?
A9. Yes. The act permits an employer to maintain “[a]n otherwise lawful provision contained within or executed contemporaneously with an agreement between the seller of a business and one or more buyers of that business wherein the seller agrees not to compete with the buyer’s business.”
Q10. By what date is compliance required?
A10. For many employers, the date by which employers must be in compliance with the act has been a source of confusion. The act contains an “effective date” as well as a separate “applicability date” but does not explain how the two concepts operate.
In compliance with the District of Columbia Self-Government and Governmental Reorganization Act, Pub. L. 93-198, 87 Stat. 774 (1973) (codified as D.C. Code § 1-201.01 et seq.) (commonly known as the “District of Columbia Home Rule Act”), the act was published in the District of Columbia Register on January 15, 2021, and transmitted to the speaker of the U.S. House of Representatives and the president of the U.S. Senate on February 1, 2021, for a mandatory 30-day period of congressional review. Absent a congressional resolution disapproving the act during the review period, the act will become law. According to the Council’s Legislative Information Management System, the act is projected to become law on March 15, 2021.
However, the cost of the act was not covered by the District’s existing budget and financial plan, according to the November 19, 2020, fiscal impact statement issued by the District of Columbia’s Office of the Chief Financial Officer. Under the District of Columbia Omnibus Authorization Act, acts “which are accompanied by fiscal impact statements which reflect unbudgeted costs, shall be subject to appropriations prior to becoming effective.” This requirement is reflected in section 302 of the act, which states that it will not become applicable until “the date of inclusion of its fiscal effect in an approved budget and financial plan” of the District of Columbia. That event is not expected to occur until sometime in the September 2021 or October 2021 time period. The applicability date will mark the point at which employers will be required to comply with the act
Q12. Is there a grandfather provision that preserves existing noncompete agreements or workplace policies already in effect?
A12. There is no “grandfather” clause per se, but existing agreements survive by operation of the applicability date. The act states that a noncompete provision contained in an agreement that is “entered into on or after the applicability date of this title … shall be void … and unenforceable.” By implication, agreements entered into before the applicability date are not rendered void or unenforceable by the act. There is no parallel provision that saves an existing workplace policy from the act’s prohibitions. Accordingly, employers may want to amend any noncompliant policies as of the applicability date.
Q13. How will the act be enforced?
A13. The act provides aggrieved employees with a private cause of action as well as the right to submit administrative complaints to the mayor. Employees who commence civil actions are authorized to recover reasonable attorneys’ fees. Section 105 of the act authorizes the mayor to issue rules to implement the provisions of act, “including rules requiring employers to keep, preserve, and retain records related to compliance.”
Q14. What liability and penalties can an employer face for violations?
A14. If an employer is found to have violated the act by requesting or requiring an employee to sign an agreement containing a noncompete provision (section 102(a)), maintaining a prohibited workplace policy (section 102(c)), or failing to provide the notice required by the act (section 102(e)), the employer is liable “for each violation to each employee or medical specialist subjected to the violation for monetary relief in an amount not less than $500 and not greater than $1,000.” The act further states that “[a]n employer that attempts to enforce a non-compete provision that is unenforceable or void” faces liability of “not less than $1,500” to each employee. An employer that violates the act’s anti-retaliation provision faces liability in an amount between $1,000 and $2,500 for each instance of retaliation to each employee. The liability for subsequent violations increases to not less than $3,000 per employee. The act contains separate provisions authorizing the mayor to assess an administrative penalty of not less than $350 and not more than $1,000 for each violation, and a penalty of not less than $1,000 for each violation of the act’s anti-retaliation provisions.
The sweep of the act’s definition of “non-compete provision” raises concerns beyond per se noncompete agreements. To deal with these consequences (whether intended or unintended), employers may want to consider reviewing employment agreements that call for exclusive employment or require executives to dedicate their “full time and attention” to their jobs. Employers also may want to consider reviewing policies that proscribe conflicts of interest or prohibit employees from undertaking jobs that would require them to use or disclose confidential information. Deferred compensation or equity grant agreements that terminate benefits or vesting in the event that an employee goes to work for a competitor may also warrant consideration.