New Washington Legislation Affecting Noncompetition Agreements
Effective January 1, 2020, this new law will prohibit all noncompetition agreements for employees whose W-2 earnings are less than $100,000 annually, and for independent contractors paid less than $250,000 per year. The legislation states that those amounts will be adjusted annually for inflation, just one aspect of this law which could pose a headache for employers. Another headache might be created if an employee’s compensation changes during the period of his employment, falling below or rising above the mark of enforceability.
Noncompetition agreements with restrictive periods longer than 18 months are presumed unreasonable. That is, unless the employee is a performer in the entertainment industry, where the duration is limited to three days.
If an employee or contractor is “Washington-based,” agreements are void if: (1) they require that disputes be adjudicated outside Washington or, (2) they deprive the employee of the “benefits” of Washington-law. Independent consideration is needed to enter into a noncompetition agreement in the course of employment. Additionally, if an employer wants to keep a noncompetition agreement in place after an employee has been laid off, then the employer must pay the employee their base salary during the period of enforcement, offset by any earnings the employee receives during that period of time.
The new law will make it more perilous still for employers to enforce broad noncompetition agreements in court. The act applies retroactively to all proceedings commenced after its effective date, “regardless of when the cause of action arose.” Additionally, for any noncompetition agreement entered into after the effective date of the act, an employee may bring a counter-claim if the employer is seeking to enforce the terms of an illegal noncompetition covenant, and the act appears to allow the employee to bring a stand-alone claim regarding a new agreement if the agreement’s terms alone violate the act, whether or not the employer is seeking to enforce the agreement. If the agreement is held to violate the new law, or if any part of it has to be modified to make it “reasonable,” then the employer must pay the employee the greater of $5,000.00 or his or her actual damages, plus the employee’s attorney fee, expenses and costs.
Some may state that this is a case of bad facts creating bad law. The legislation stems from a franchise sandwich shop that attempted to keep its low-wage employees from working for other sandwich shops. As a result, the law prohibits anti-moonlighting restrictions for employees who earn less than twice Washington’s minimum wage, including moonlighting for a competing company. It would also forbid franchisers from restricting franchisees from soliciting or hiring employees of the franchiser or another franchisee.
Employment lawyers have seen a swath of noncompetition agreements used by employers whose main concern is the misappropriation of their client and customer lists. The goal of most employers has not been to prevent employees from working upon separation from their place of employment but to prevent them from soliciting clients when they leave. For this reason, most situations are satisfied with a non-solicitation/nondisclosure/confidentiality agreement. The use of noncompetition agreements has been excessive. Additionally, employers have been handing out noncompetition agreements to all employees, regardless of whether their departure would actually have an impact on the business. Courts have long held that a noncompetition agreement is unenforceable in the absence of a legitimate business necessity. A receptionist is highly unlikely to necessitate a noncompetition agreement; a vice president of sales might present a different situation.
With an eye on the employee’s earnings, employers should review all restrictive clauses and covenants in employment agreements, offer letters and standalone agreements for compliance with this new legislation in anticipation for its passage into law. The attorneys at Beresford Booth would be pleased to assist you with this review and ensuring your business’s compliance with the new laws.
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