Companies may be wary of noncompete covenants

The passage of HB 1450 severely restricts the use of noncompetition agreements

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Joseph Vance
JOSEPH VANCE Miller Nash Graham & Dunn

Washington employers that rely on noncompetition covenants to protect their companies will be facing an entirely new and more restrictive landscape in 2020. With the passage of HB 1450, Washington has joined Oregon and California, as well as several other states, in adopting a law severely restricting the use of noncompetition agreements. On top of the added restrictions, the new law creates a brand-new cause of action against employers that seek to enforce agreements that violate the new law. This “poison pill” provision may make many companies stop using noncompete covenants altogether.

Common law already restricts noncompetition covenants, which must be both reasonable and necessary to protect the company’s business. The new bill does not eliminate those requirements for covenants in effect now or going forward. But effective Jan. 1, 2020, noncompetition covenants will have to meet several additional requirements in order to be enforceable:

For Employees

  • The employee’s W-2 earnings (in box 1) paid the prior year, annualized and calculated as of either the date on which the employer seeks to enforce the covenant or the date on which employment ends (whichever occurs first), must exceed $100,000 in 2020. The earnings threshold will be adjusted annually for inflation.
  • The employer must disclose the covenant in writing to a prospective employee no later than when the person accepts a job offer, even if the covenant is enforceable only if the employee reaches a specified income level in the future.
  • If the employee signs the covenant after starting work, the employer must pay independent consideration (such as a raise or bonus).
  • If the employee is laid off, the employer must pay the employee his or her last base salary for the period during which the covenant is being enforced, less whatever the employee earns from new employment while the covenant is enforced.
  • A covenant restricting competition for more than 18 months following separation is presumptively unreasonable and unenforceable. An employer can overcome that presumption with clear and convincing evidence that it needs a longer restriction to protect its business or goodwill.

For Independent Contractors

  • To enforce a noncompetition covenant against an independent contractor, in 2020 the annualized earnings paid to the independent contractor the prior year must exceed $250,000. As with employees, this earnings threshold will be adjusted annually for inflation.
  • If the independent contractor is a performer, the duration of the noncompetition covenant cannot exceed three calendar days.

To be enforceable, a noncompetition covenant cannot require that a Washington-based employee litigate or arbitrate the covenant outside Washington. Likewise, such a covenant is void and unenforceable to the extent that it deprives the employee or independent contractor of any of the bill’s protections or benefits.

In addition, beginning Jan. 1, 2020, an employer may not restrict or prohibit an employee earning less than twice the state minimum wage from having a second job, supplementing the person’s income by working for another employer, working as an independent contractor or being self-employed. In 2020, the state minimum wage will be $13.50, meaning that any employee earning less than $27.00 per hour cannot generally be prohibited from moonlighting. After 2020, the state minimum wage will be adjusted annually for inflation, so this threshold pay level will change each year.

An employer can prohibit moonlighting when it would raise issues of safety for the employee, coworkers or the public, or would interfere with the employer’s reasonable and normal scheduling expectations.

Notwithstanding these moonlighting provisions, employees continue to have the same obligations to their employers under existing law, including the common-law duty of loyalty. Thus, for example, an employer can prohibit an employee from moonlighting at a job that would present a conflict of interest.

Significantly, not only does the new statute restrict the use of noncompetes, it also for the first time imposes heavy consequences on employers that violate the new rules. For example, if any part of a noncompetition covenant is found to be unenforceable or is modified, the employer will be liable for the other party’s damages (or a minimum $5,000 penalty) plus attorney fees and costs – even if the covenant is still partly enforced. So, for example, if an employer seeks to enforce a one-year noncompete and the court determines that only a six-month restriction was reasonable, the employer would be required to pay the other party a minimum $5,000 penalty, plus the other party’s attorney fees and costs. This new liability adds a whole new dynamic in determining whether or not to use noncompete covenants.

While the law will require many companies to review and revise their restrictive agreements, it is not the end of restrictive covenants in Washington. Employers still have a number of different options to protect against former employees stealing customers or trade secrets. For instance, the law does not apply to nonsolicitation covenants (except between franchisors and franchisees), so employers can still restrict former employees from directly soliciting company clients or company employees to move their business or quit their jobs. The new statute also specifically excludes provisions protecting a company’s trade secrets from the definition of noncompetition covenants. Additionally, the bill specifically states that it does not amend or modify the Washington Uniform Trade Secrets Act, or any actions that a company could bring under that statute to protect its trade secrets.

Joseph Vance is a partner with law firm Miller Nash Graham & Dunn. He has more than 20 years’ experience representing clients in a wide variety of complex litigation in both state and federal court in Washington and Oregon. He can be reached by phone at 360-619-7032 or by email at joseph.vance@millernash.com.

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