Washington will soon join the growing number of states that have placed severe restrictions on employee non-compete agreements. On May 8, 2019, Governor Jay Inslee signed House Bill 1450 into law, limiting the enforceability of non-competition agreements found in employment contracts. The new law, which will go into effect on January 1, 2020, represents a significant change for employers who do business in Washington, which previously placed few restrictions on the use of non-compete agreements.
Under the new law, employers will only be permitted to enforce non-compete agreements against employees or independent contractors who earn over a certain salary threshold. Specifically, non-competes will only be enforceable against 1) an employee who earns more than $100,000 per year or 2) an independent contractor who earns more than $250,000 per year specifically from the employer requiring the non-compete (as opposed to the independent contractor's total yearly earnings, which are irrelevant for purposes of this analysis). These earning levels will be adjusted annually to account for inflation.
Further, even if a worker falls into one of these two categories, the non-compete agreement will only be enforceable if it:
- Restricts competition for a period of 18 months or less from termination of services and
- Is disclosed in writing at the time the employee accepts the offer of employment; or
- If signed later than the time of acceptance of employment, the employee is provided "independent" consideration in exchange.
The law assumes that any non-compete agreement for a period greater than 18 months post-termination of services is unenforceable. An employer can rebut this presumption, but the standard is high. The employer must prove by clear and convincing evidence that a duration of 18 months or longer is necessary to protect the employer's business or goodwill.
The law also contains a restriction on the enforceability of non-competes in the event an employee is laid off. The non-compete agreement will only be enforceable if the laid-off employee is paid an amount equivalent to the employee's base salary (at the time of termination) for the duration of the period of enforcement minus all compensation the employee earns through subsequent employment during that same period. Note that this restriction does not apply if the employee is terminated for cause or voluntarily resigns.
Additionally, the statute contains a forum selection provision which provides that non-competition agreements signed by Washington-based employees or independent contractors are void and unenforceable (1) if the covenant requires the employee or independent contractor to adjudicate a non-competition agreement outside of the state; and (2) to the extent it deprives the employee or independent contractor of the protections or benefits of the new law.
If an employer violates the provisions of the new law, the employer could be subject to a $5,000 penalty per employee, plus attorney's fees. This means employers must consider the potential ramifications of enforcing non-compete agreements before the law goes into place at the beginning of next year. Please note, however, that this new statute does not apply to sale of business agreements.
Most troubling is that while the law goes into effect on January 1, 2020, it explicitly applies to all actions that commence on or after the effective date, "regardless of when the cause of action arose." This potentially impacts agreements that were signed prior to the effective date, though we expect this may be challenged before the new year.
The new prohibitions on non-compete agreements in Washington have the potential to greatly impact employers in the state both positively (as it may become easier for organizations to seek out and retain talent) and negatively (as many companies will not have the financial ability to pay employees or consultants to enforce a non-compete in the event of a layoff).
Massachusetts recently passed a similar law, which went into effect in October 2018. Although it is still too early to determine its impact, Massachusetts employers have been struggling to determine what is considered adequate compensation for non-compete agreements signed after the employment period starts. Washington's new law also does not define what is considered "independent" consideration, so this issue will likely be ripe for litigation.
Washington employers should work with counsel to carefully review employment agreements and discuss proper consideration for current employees who may have to sign new agreements. Washington employers should also note that they still have important protections, as this new law does not prohibit enforcement of customer or employee non-solicitation agreements, confidentiality agreements, or agreements prohibiting the use or disclosure of trade secrets or inventions.
We will continue to monitor this new law as regulation and other clarifying information becomes available prior to the January 1 effective date. For more information, please contact either of the authors.