Employers in Washington State will soon face greater obstacles entering into and enforcing noncompetition agreements. On May 8, 2019, Governor Jay Inslee signed new legislation, ESHB 1450 (informally referred to as the “Washington Noncompete Law”), which creates an array of requirements for noncompetition agreements, including a prohibition for workers making $100,000 or less annually, an 18-month presumptive restricted period, advance notice to prospective employees, and potential penalties for noncompliance, among other obligations.
Employers should begin assessing their current noncompete agreements to determine compatibility with the statute. Failure to follow the new requirements—starting January 1, 2020—could result in significant financial exposure to employers and invalidation of their noncompetition covenants.
Washington’s Current Noncompete Framework
For decades, noncompete agreements (although disfavored) have been enforceable in Washington to the extent that they were, or could be modified to be: (1) reasonable in scope, duration, and geographical territory, (2) narrowly tailored to protect a legitimate business interest, and (3) not detrimental to the public interest. The Washington Noncompete Law departs dramatically from the common law in some regards, while preserving other principles. We anticipate that Washington courts will continue to rely on case law to determine reasonableness and whether a particular noncompete is necessary to protect an employer’s legitimate business interest, but the law implements additional, and sometimes highly specific, preconditions to enforcement and consequences for imprecise drafting.
The following important changes are on the way for employers seeking to rely on and enforce noncompetition agreements in Washington.
- Noncompetes will be void and unenforceable for workers making $100,000 or less in earnings per year.1 For independent contractors, the earnings threshold is $250,000 from the party seeking enforcement, and is not annualized. These dollar amounts are pegged to inflation and will increase on a variable basis on January 1st each year.
- Employers must disclose the terms of the noncompete in writing no later than an employee’s acceptance of the job offer. As a practical matter, this means employers should provide the noncompete agreement no later than the offer of employment to a candidate. Unless the employee’s acceptance of employment occurs simultaneously with their first day of work, employers will no longer be able to provide a noncompete agreement to an employee for signature on their first day of work.
- Restricted periods exceeding 18 months are presumptively unreasonable and unenforceable. The presumption can be rebutted by clear and convincing evidence that a longer period is necessary to protect the party’s business or goodwill.
- For laid-off employees, noncompetes are void and unenforceable unless the employer pays the base salary for the restricted period (i.e. so-called “garden leave”).
- The Washington Noncompete Law creates a cause of action for “a person aggrieved by a noncompetition covenant,” and also for the attorney general on behalf of an individual or a class of employees. Courts are required to implement a $5,000 penalty or actual damages—whichever is greater—plus reasonable attorneys’ fees and costs for violations of the statute or where a judge or arbitrator “reforms, rewrites, modifies, or only partially enforces” a noncompete covenant.
- For noncompetes executed prior to Jan. 1, 2020, causes of action may not be brought if the employer does not seek to enforce the noncompete.
- Noncompetes executed after Jan. 1, 2020 get no such reprieve. Employees are empowered to bring declaratory actions seeking to invalidate noncompliant agreements, and may seek the $5,000 penalty (or actual damages), costs, and attorneys’ fees.
- For Washington-based employees, the law voids contract provisions that require adjudication of disputes outside of Washington or otherwise deprive employees of the protections or benefits of the new law
- If an employer chooses to modify or revise a current employee’s noncompete agreement, the new agreement must be supported with new, adequate, and independent consideration.
- The law purports to apply retroactively for proceedings initiated after January 1, 2020.
Key Takeaways for Employers
This law will transform the noncompete landscape in Washington and greatly restrict the use and enforcement of noncompetes going forward. Employers are encouraged to reassess their current noncompete language and practices for compliance and establish protocols for implementing revised agreements, if necessary.
- Employees Bound by Noncompetes Executed prior to January 1, 2020 – Many employees in Washington are bound by noncompete covenants, some executed years or decades ago. It is likely that the majority do not comply with the Washington Noncompete Law, either in procedural execution or the substantive terms. If an employer chooses to (or must) seek to enforce the noncompete after January 1, 2020, the statute, as drafted, arguably applies and noncompliant noncompetes may be void and unenforceable in addition to exposing an employer to possible damages—even if the noncompete was executed prior to January 1, 2020. Unfortunately the law is not clear on the scope of its possible retroactive effect, and we expect that the courts may need to clarify the boundaries.
- Declaratory Judgments for Noncompetes Executed after January 1, 2020 – There is no amnesty in the law for noncompetes executed after January 1, 2020. This likely means that a noncompliant noncompete executed after the effective date could subject an employer to a $5,000 penalty or actual damages, plus attorneys’ fees and costs, for each aggrieved party who brings or joins an action for declaratory relief.
- Low-Wage Employees – Employers who currently use noncompetes with employee populations making less than $100,000 per year should: (1) consider alternatives to noncompetes, (2) carefully word their noncompete covenant to give it future enforceability, and/or (3) cease using noncompetes in Washington.
- Multi-State Employers – For employers headquartered in other states, it will no longer be acceptable to use a boilerplate noncompete agreement in Washington. The agreement will require precision drafting and adjustments to comply with Washington law.
Nonsolicitation, Confidentiality, and Trade Secret Agreements Not Affected
The Washington Noncompete Law expressly exempts from its restrictions (1) nonsolicitation, (2) confidentiality, (3) trade secret, and (4) invention assignment agreements. Employers may be wise to revisit their confidentiality, nondisclosure, trade secret, invention, and nonsolicitation agreements in light of the new noncompete landscape. Many protections sought by employers may be permissible under those separate agreements without the risk inherent to the new noncompete framework.
Sale of Business Not Affected
Noncompete agreements entered into by purchasers or sellers of a business are excluded from the new law. However, because the exception is limited to “a person purchasing or selling the goodwill of a business or otherwise acquiring or disposing of an ownership interest,” non-seller/non-purchaser employees who transfer as part of the sale will likely be covered by the new law.
The statute forbids employers to restrict moonlighting activities for workers making less than twice the state’s minimum hourly wage ($13.50 per hour starting January 1, 2020, or approximately $56,000 per year). However, the moonlighting restriction carves out broad exceptions for safety, “reasonable and normal scheduling expectations,” duty of loyalty, employee policies regarding conflicts of interest, among others.