New Non-Compete Restrictions to Take Effect in the District of Columbia in October 2022
Many employees in the District of Columbia will soon be protected by the new Non-Compete Ban going into effect in October 2022. The “Ban on Non-Compete Agreements Amendment Act of 2020” (“the 2020 Act”) was signed into law January 11, 2021, and codified March 16, 2021. As originally written, the Ban on Non-Compete Agreements was one of the broadest bans of non-compete agreements in the country. However, under intense pressure from D.C. employers to amend the Act to include additional exemptions from the definition of eligible employees, the Council of the District of Columbia pushed back the applicability date repeatedly and several councilmembers introduced amendments reducing protections for employees. This summer, on July 12, 2022, the Council passed the Non-Compete Clarification Amendment Act of 2022 (“the Amended Act”), scaling down protections for employees and constructing exemptions helpful to employers. The Amended Act is scheduled to go into effect October 1, 2022. The legislation is not retroactive, so it will not alter the enforcement of pre-existing non-compete agreements.
Generally, non-compete agreements prevent employees from using their expertise in their practice area at a comparable employer or competitor. Some non-competes prohibit comparable employment at any competitor, but many are limited in some way, for example in geographic or temporal scope. Non-competes limit employees’ abilities to move from one job to the next and thereby reduce their ability to seek better compensation, work environments, and enhanced promotion opportunities at comparable employers. Many non-competes explicitly forbid “moonlighting” or working for two comparable employers at the same time. Some employees, particularly part-time employees, work multiple jobs to make ends meet. For example, many fitness instructors make ends meet by teaching similar fitness classes for multiple employers. Restrictions on moonlighting therefore impair the ability of significant portions of the workforce to enjoy full employment.
The original 2020 Act would have prohibited employer use and enforcement of non-compete agreements for nearly all employees working in the District of Columbia. The Amended Act introduces several significant limitations eroding the original protections for employees, including exempting from protection as-defined “highly compensated employees” and permitting employers to impose certain anti-moonlighting restrictions.
The Amended Act: Not Merely a “Clarification”
The use of “Clarification” in the title of the Amended Act is misleading. The Amended Act is no mere “clarification”: it significantly dismantles protections for employees that were present in the original 2020 Act.
Key Changes in the Amended Act
Expansion of Employees Exempted from Protection
The 2020 Act prohibited District of Columbia employers, as defined in the Act, from requiring or requesting that an employee sign an agreement that includes a non-compete provision. A non-compete provision was defined as one that “prohibits the employee from being simultaneously or subsequently employed by another person, performing work or providing services to pay for another person, or operating the employee’s own business.” The 2020 Act did not prohibit non-solicitation covenants. Further, the 2020 Act explicitly permitted contracts prohibiting employees from using or disclosing confidential or proprietary employer information or trade secrets.
In the Amended Act, an “employer” is an “individual, partnership, general contractor, subcontractor, association, corporation, or business trust operating in the District,” or any person(s) acting directly or indirectly in the interest of an employer operating in the District in relation to an employee (including a prospective employer), and excludes the District and United States governments. And an “employee” is an “individual who performs work for pay in the District on behalf of an employer” or an “individual to whom the employer has made an offer of employment and whom an employer reasonably anticipates will perform work for pay on behalf of the employer in the District.”
Ultimately, a “covered employee” who is protected from being required to sign non-compete agreements is defined as an employee who is not “a highly compensated employee” (discussed further below) and, depending on whether work has commenced or has yet to commence, the employee either spends or is anticipated to spend more than 50% of their work time for the employer working in the District, or the employee regularly spends or is anticipated to spend a substantial amount of work time for the employer in the District and not more than 50% of work time for that employer in another jurisdiction.
There are further exceptions to who constitutes an “employee”: in the 2020 Act, only some employees were exempt from protection under the non-compete ban: babysitters, lay members elected or appointed to office within the discipline of any religious organization and engaged in religious functions, volunteers (as-defined), and medical specialists (as-defined).
The Amended Act expanded exempt employees to include “highly compensated employees,” which the Amended Act defined as those whose total annual compensation is at minimum $150,000, or, if the employee is a “medical specialist,” $250,000. “Compensation” means “all monetary renumeration an employer may pay or promise an employee,” and includes hourly wages, salary, bonuses or cash incentives, commissions, overtime premiums, vested stock including restricted stock units, and other payments provided on a regular or irregular basis. It does not include “fringe benefits other than those paid to the employee in cash or cash equivalents.”
One special industry exception states that “broadcast employees” are excluded from the definition of “highly compensated employees” regardless of their compensation. The Amended Act includes provisions allowing for an annual increase in the minimum threshold total compensation to reflect the annual average increase in income in the area. Proponents of the Amended Act note that only a small percentage of employees are affected by this change, but the amendments nonetheless limit the number of employees protected by the non-compete ban.
However, even “highly compensated employees” who may be required to sign non-compete agreements are entitled to some protection in the form of limitations on those non-compete agreements. The Amended Act requires that any non-compete must contain a clear geographic limitation on the work restriction; specifies the permitted length a non-compete for non-medical specialists (365 days or less following separation) and medical specialists (730 days or less following separation); and establishes notice requirements (employers must give employees a 14 days’ notice before the employee starts work or is expected to sign the non-compete agreement).
Carve-Outs of What Constitutes a Non-Compete Agreement
The 2020 Act prohibited employers from restricting an employee from working for another not only after their employment, but also while employed by the employer. This moonlighting provision was unusual compared to non-compete bans in other states and it was clearly helpful to employees trying to make ends meet by working for more than one employer at the same time.
Under the Amended Act, a non-compete does not include an agreement that prohibits or restricts an employee from moonlighting where the “employer reasonably believes” the employee’s moonlighting will: “(I) Result in the employee’s disclosure or use of confidential employer information or proprietary employer information; (II) Conflict with the employer’s, industry’s, or profession’s established rules regarding conflicts of interest; (III) Constitute a conflict of commitment if the employee is employed by a higher education institution; or (IV) Impair the employer’s ability to comply with District or federal laws or regulations, a contract, or a grant agreement….”
As discussed above, the original 2020 Act already included the first carveout permitting employers to prohibit employee disclosure or use of confidential or proprietary employer information. So, the first carveout is not new. However, the additional carveouts could prove problematic for employees and courts. Allowing for moonlighting bans whenever an employer “reasonably believes” the second job could cause one of the identified problems gives an initial and significant advantage to employers who want to curtail their employees’ efforts to increase their incomes. Further, the standard of “reasonable belief” will require definition by the courts as litigants challenge the imposition of moonlighting restrictions.
Importantly, the Amended Act retained the anti-retaliation provisions of the original 2020 Act. These provisions protect employees from employers taking retaliatory actions, which the Amended Act defines as “tak[ing] an adverse action, including a threat, verbal warning, written warning, reduction of work hours, suspension, or termination against one or more employees.”
Employers are prohibited from retaliating against an employee for (1) refusing to agree to a prohibited non-compete; (2) failing to comply with a prohibited non-complete; (3) asking, informing, or complaining about the existence, applicability, or validity of a provision in a workplace policy or employment agreement that the employee reasonably believes is prohibited, or asking an employer, coworker, lawyer or agent, or a governmental entity for a copy of such a provision; or (4) asking the employer for information required under the Act to be provided to the employee.
With respect to penalties for employers, the Amended Act specifies consequences for employer non-compliance, including administrative penalties ranging from $350 to “not less than $3000.” Aggrieved persons are permitted to file an administrative complaint or a civil action in court.
Under the Amended Act, employers with a workplace policy including one or more of the exceptions to the definition of a non-compete provision (so, for example, an employer that does require its employees to sign agreements restricting employees from using or disclosing confidential or proprietary employer information) are required to comply with specific notice requirements. Employees should inform themselves of their rights under the Amended Act, especially with the changes introduced by the amendments. They should also be aware of the protections this Act provides them with respect to their employer’s retaliatory actions. Anyone unsure of the validity of such an agreement should seek legal advice.
Had the 2020 Act gone into effect as-passed, it would have been the most comprehensive ban on non-competes in the country. Even with the significant changes in the Amended Act, the ban represents a trend towards expansion of employee protections from employer restrictions on employees’ ability to seek better employment opportunities.