Noncompete bill presents new challenges for employers

Next steps for employers: Review existing noncompete agreements, develop a strategy

Signing papers
Catherine Morisset and Gulsah Senol

Finding that “workforce mobility is important to economic growth and development,” Washington recently passed a new law that will significantly restrict noncompetition agreements with both employees and independent contractors. Gov. Jay Inslee signed the bill into effect on May 8, ushering in a new era for restrictive covenants in the state.

The new law includes provisions against moonlighting and no-poach agreements and creates a new cause of action against employers who seek to enforce agreements that violate the new law.

Washington employers who rely on noncompetition covenants to protect their companies must satisfy the new stringent conditions or face a cause of action from covered workers.

New Limits

Under existing law, Washington courts enforce and uphold agreements that meet three reasonableness factors. This new law scraps that analysis and replaces it with a restrictive structure.

Salary Threshold

Most significantly, noncompete clauses will be automatically unenforceable unless the employee earns $100,000. For independent contractors, a similar restriction will take effect, but the salary threshold will be $250,000. These figures will be adjusted annually for inflation, meaning that employers will need to verify the requisite salary exists every year.

Time Limit

The law also presumes that a noncompete covenant longer than 18 months post-employment is unreasonable and unenforceable. For a longer duration, a party must prove by clear and convincing evidence that the extended duration is necessary to protect the party’s business or goodwill.

Timing of Agreement

Similar to existing law, the new statute makes it clear that employers must disclose any noncompete covenant in writing to a prospective employee no later than the time the employee accepts an offer of employment, even if the covenant will not take effect until a later date due to a foreseeable change in the employee’s compensation. Existing employees must be provided new, independent consideration for agreeing not to compete. Under existing law, continued employment alone is generally insufficient consideration where the employee is “at will.”

Garden Leave

For employees terminated as a result of a layoff, a noncompetition covenant will be considered void unless the employer provides compensation equivalent to the employee’s base salary at the time of the termination for the entire noncompetition period, minus any compensation earned through subsequent employment.

Other Provisions

Moonlighting: An employer may not prohibit an employee who earns less than twice the state minimum wage from working a second job or supplementing their income as an independent contractor or in self-employment. The law lists no express exception for work performed for a direct competitor, although it also states that the prohibition is not intended to alter an employee’s “common law duty of loyalty or laws preventing conflicts of interest.”

Franchisee Poaching: A franchisor may not restrict a franchisee from soliciting or hiring an employee of a franchisee of the same franchisor or any employee of the franchisor.

Forum Selection/Waiver: The law requires that all Washington employees and independent contractors be able to adjudicate a non-compete agreement in Washington. Any agreement that would deprive an employee or contractor of substantive protections of the new law is unenforceable.

Exceptions

The new law applies only to “noncompetition covenants,” which includes “every written or oral agreement by which an employee or independent contractor is prohibited or restrained from engaging in lawful profession, trade or business of any kind.” However, it does not cover covenants entered into conjunction with the sale of a business or franchise. “Non-solicitation” and confidentiality agreements to protect trade secrets also are not included. A non-solicitation essentially mans an agreement that prohibits an ex-employee’s solicitation of any co-worker or customer to leave the employer.

New Liability for Employers

If an employer violates the new law – meaning a noncompete agreement is deemed to be entirely unenforceable or even partially unenforceable – the State Attorney General or the affected employee may sue the employer. Successful employees will be entitled to recover the greater of their actual damages or a statutory penalty of $5,000, plus their attorneys’ fees and costs.

Similarly, an employer may bring an action to seek enforcement of the agreement, but keep in mind that if a court or arbitrator “blue pencils” or just partially enforces the agreement, the employee will still be entitled to damages and attorney’s fees.

When Does It Take Effect?

While the new law does not take effect until Jan. 1, 2020, it will apply to all proceedings commenced after the effective date, regardless of when the cause of action arose, meaning the law applies retroactively to covenants signed before January 2020. While this may encourage suits to enforce current agreements before the end of the year, the law also cautions: “(a) cause of action may not be brought regarding a noncompetition agreement signed prior to the effective date of this section if the noncompetition covenant is not being enforced.”

What Are Your Next Steps?

Employers should review existing noncompete agreements and develop a strategy for existing and new employees moving forward to ensure compliance with the law. Any noncompete should be narrowly and carefully drafted based on the new conditions to avoid issues of enforceability.

One crucial challenge will be to ensure pay increases keep up with the annual inflation adjustments to the average wage. Thus, the enforceability of a noncompete could change from one year to the next.

Catharine Morisset and Gulsah Senol are both attorneys with Fisher Phillips, specializing in employment law. They can be reached at cmorisset@fisherphillips.com and gsenol@fisherphillips.com.

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