Washington State Legislature Adopts Law Restricting Noncompetition Agreements
After several years of failed attempts, the state of Washington passed a law on April 17, 2019 that will significantly limit the enforceability of noncompetition agreements under Washington law. Governor Jay Inslee has not yet signed the act into law, but it is expected that Governor Inslee will promptly do so. Here are some key aspects of the act:
1. Income Threshold
The income threshold is likely to be the most widely reported facet of the act. Employers may not enter into or enforce a “noncompetition covenant” unless the restricted employee’s yearly earnings exceed $100,000. The $100,000 figure will be adjusted annually for inflation by the Washington State Department of Labor and Industries based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). If the individual is an independent contractor, the income threshold is $250,000, which will also be adjusted for inflation. Employers will have to track whether restricted-employee compensation keeps pace with inflation, or the noncompetition covenants will become unenforceable. Compensation is the amount that appears in box 1 of an employee’s IRS form W-2 or payments reported on an independent contractor’s 1099.
2. Definition of “Noncompetition Covenant”
The definition of “noncompetition covenant” is notable not for what it includes (any agreement that prohibits or restrains an individual from engaging in a lawful profession, trade, or business), but for what it expressly excludes. Notably, the new limits do not apply to the following:
a. Nonsolicitation agreements, which extends to solicitations of (a) former coworkers to cease employment and (b) employer’s customers to cease or reduce business with the employer
b. Confidentiality agreements
c. Agreements prohibiting use or disclosure of trade secrets or inventions
d. Agreements entered into relating to the sale of a business or franchise
3. 18-Month Presumption
According to the new law, noncompetition covenants exceeding 18 months are presumed to be “unreasonable and unenforceable.” Employers may rebut this presumption, but it requires a high burden—“clear and convincing evidence” that a longer duration “is necessary to protect the party’s business or goodwill.”
4. Layoffs Affecting Enforceability.
Noncompetition covenants are unenforceable if the employee is discharged as a result of a layoff, unless the agreement requires that the employer pay the employee’s base salary during the period of enforcement. The employer may offset these payments if the employee obtains noncompetitive employment, although it is not clear if the employee is required to do so. The law does not define “Layoff.
5. Compensation Changes
If an employer hires an individual at less than the $100,000 income threshold, it may require that employee to enter into a noncompetition covenant that becomes enforceable if and when his or her compensation exceeds the threshold. If an employer wishes to do so, it must disclose the terms and conditions of the agreement prior to the acceptance of the offer of employment and disclose that the agreement may be enforceable in the future.
The act also incorporates the general rule that a noncompetition covenant may be entered into during employment if it is supported by independent consideration. In other words, employers may require employees to enter into a noncompetition covenant at any time, as long as they follow the procedures set forth in the act.
6. Still Subject to Existing Law
Even if a noncompetition covenant otherwise complies with the act (an employee’s compensation exceeds the threshold and the duration is less than 18 months), the noncompetition covenant must still comply with existing common law standards (i.e., it must be reasonable in duration, scope, and geographic area).
7. Forum Selection and Choice of Law
If an employee is “Washington-based,” then the following provisions are invalid: (a) provisions that select a forum outside Washington and (b) provisions that deprive employees of the benefits of Washington law (e.g., choice of law clauses). Because the act speaks about depriving of the “benefits” of Washington law, it is unclear if the agreement could apply the law of a state that goes further than Washington, such as California. Whether an employee is “Washington-based” is often unclear, and Washington courts apply complicated choice of law principles in making that determination.
8. Outside Employment
Distinct from the noncompete portions of the act, employers may not restrict supplemental or outside employment of current employees who make less than twice the applicable state minimum wage. This provision does not apply if the employer can show the outside employment raises safety issues or interferes with reasonable and normal scheduling expectations of the employer, and it does not alter the existing common law duty of loyalty to the employer.
Employers may want to pay particular attention to the enforcement scheme in the new act, which has wide-ranging consequences for both existing and future noncompetition covenants. Subject to the exceptions below, an employee may bring a private cause of action if his or her noncompetition covenant violates the provisions of the act.
a. Retroactive Effect and Counterclaims. The act applies retroactively to all proceedings commenced after its effective date, “regardless of when the cause of action arose.” Employers may want to check whether their existing agreements comply with the new act and, if not, decide whether to enter into new agreements (supported by independent consideration). Employers may seek to enforce existing agreements that violate the act and hope that a court or arbitrator will modify/reform the agreement. However, there may be consequences for doing so; the act penalizes an employer if its existing agreement is modified or if the employee brings a counterclaim claiming the agreement violates the act. If an existing noncompetition covenant violates the act (even if it is modified/reformed), the employer must pay either actual damages or $5,000 (whichever is greater), plus reasonable attorneys’ fees and costs, to the employee. Given this potential exposure (or consequences), employers may want to consider entering into new agreements with their employees.
b. New Agreements and Counterclaims. For a noncompetition covenant entered into after the effective date of the act, an employee may bring a counterclaim if the employer is seeking to enforce the terms of the noncompetition covenant. Further, it appears that an employee may bring a stand-alone claim regarding a new agreement if the agreement’s terms alone violate the act, even if the employer is not actively seeking to enforce the agreement. The potential exposure (or consequences) described above apply equally, and an employee may recover damages (actual or statutory), attorneys’ fees, and costs. As such, employers may want to ensure that their new agreements strictly comply with Washington common law and the act.
Given these changes, employers may want to review their existing noncompetition covenants to ensure compliance with Washington law and the act and consider a strategy to bring their agreements into compliance.