Earlier this year, Washington adopted a new law—Engrossed Substitute House Bill 1450—that places significant restrictions on the enforceability of non-competition agreements. The law applies to “every written or oral covenant, agreement, or contract by which an employee or independent contractor is prohibited or restrained from engaging in a lawful profession, trade, or business of any kind.” Importantly, the law does not address nonsolicitation, confidentiality, or trade secrets agreements. Employers using non-competition agreements should understand the key provisions of the law—which takes effect on January 1, 2020—and how they affect their non-competition agreements.
Significant Provisions of Washington’s New Law
Notice and Independent Consideration: An employer must disclose the terms of the non-competition agreement in writing to a prospective employee no later than the time of acceptance of the offer. If the agreement would only become enforceable at a later date due to changes in the employee’s compensation, the employer must specifically disclose that the agreement may be enforceable against the employee in the future. Alternatively, a non-competition agreement can be enforceable if entered into after the start of employment, but only if the employer provides “independent consideration.”
Compensation Threshold: For a non-competition agreement to be enforceable, an employee’s or independent contractor’s “earnings” from the party seeking enforcement must exceed certain thresholds. An employee’s annualized earnings must exceed $100,000 per year, while an independent contractor’s earnings must exceed $250,000 per year. These dollar amounts will be adjusted annually for inflation.
Further, the law provides that employees earning less than two-times the state minimum wage may not be restricted from working an additional job (even for a competitor), so long as the additional job does not raise issues of safety or interfere with the employer’s normal scheduling expectations. Nonetheless, the employee’s ability to hold an additional job “does not alter the obligations of an employee to an employer, including the common law duty of loyalty and laws preventing conflicts of interest and any corresponding policies addressing such obligations.”
Garden Leave: If an employee is terminated as a result of a layoff, a non-competition agreement is void unless the employee is compensated at his or her base salary at the time of termination for the entire period of enforcement, less compensation earned through subsequent employment during the restricted period.
Restricted Period: A court or arbitrator must presume that any non-competition covenant with a duration exceeding 18 months after termination of employment is unreasonable and unenforceable. However, a party seeking enforcement may rebut the presumption by proving by clear and convincing evidence that a duration longer than 18 months is necessary to protect the party’s business or goodwill.
Venue and Governing Law: A provision in a non-competition covenant involving a Washington-based employee or independent contractor is void and unenforceable if the covenant (1) requires the employee or independent contractor to adjudicate a non-competition agreement outside of Washington, or (2) deprives the person of protections under the new law.
Franchises: A franchisor cannot restrict, restrain, or prohibit in any way a franchisee from soliciting or hiring any employee of (1) the franchisor or (2) a franchisee of the same franchisor.
Enforcement: If a court or arbitrator determines that the agreement violates the new law, or decides to reform, rewrite, modify or only partially enforce it, the party seeking enforcement must pay the aggrieved person the greater of $5,000 or his/her actual damages, plus the aggrieved person’s reasonable attorneys’ fees, expenses and costs incurred in the proceeding.
The law will apply to any claims asserted on or after January 1, 2020 regarding non-competition agreements, even if the agreement was signed prior to that date. However, a cause of action cannot be brought regarding non-competition covenant signed prior to January 1, 2020 if the non-competition covenant is not being enforced.