United States: Washington State Lawmakers Seek To Partially Ban Non-Competes

As readers of this blog well know, there is a growing trend of state legislatures seeking to limit or outright ban non-competes. (See here, here, and here as just a few examples of state efforts to curb non-competes—not to mention the proposed federal legislation and international efforts—in the last six months.) Last week, the Washington Senate jumped on the bandwagon by passing a bill with a 30–18 vote that would severely limit the enforceability non-competes. (Similar efforts failed last year, as we reported here.)  Some of the key features of this year's bill are as follows:

  • The bill defines "noncompetition covenant" as "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" and does not include, among others, non-competes arising out of the sale of a business, non-solicitation agreements, confidentiality agreements, and covenants prohibiting the use or disclosure of trade secrets. The bill's express exclusion of non-solicitation agreements distinguishes the bill from more restrictive states like California.
  • Non-competes would be unenforceable against employees earning $100,000 a year or less and independent contractors earning $250,000 a year or less from the company seeking enforcement. Moreover, this threshold is adjusted annually for inflation, resulting in a moving target for employers and employees alike. For example, an employee making $100,001 when the bill becomes law (if it indeed does) may be subject to a binding, enforceable non-compete—but if his or her compensation does not keep pace with the cost of inflation, it would be unenforceable. Then, if the employee got a raise that brought his or her compensation equal to or greater than the cost of inflation increase, the non-compete would again be enforceable.
  • Adding to the confusion, the bill defines earnings as "the compensation reflected on box one of the employee's . . . form W-2 that is paid to an employee over the prior year, or portion thereof for which the employee was employed, annualized and calculated as of the earlier of the date enforcement of the noncompetition covenant is sought or the date of separation from employment" or, for independent contractors, payments reported on internal revenue service form 1099-MISC. The reference to box 1 of the employee's W-2 reveals that employers will need to determine an employee's wages after adjusting gross pay based on deductions for 401k, medical flexible spending accounts, and other relevant deductions. This could result in a bizarre scenario where an employee who maxes out his or her retirement account could be under the $100,000 threshold, resulting in unenforceability of the non-compete, whereas an employee with the same exact job and who makes the same exact base salary—but does not fully fund a retirement account—earns more than the threshold, and thus his or her agreement is enforceable.
  • The bill contains a notice provision, whereby the employer must disclose the terms of the non-compete in writing to new employees "no later than the time of the acceptance of the offer of employments." It further provides that "if the agreement only becomes enforceable only at a later date due to changes in the employee's compensation," (say, if an employee was hired at a salary of $100,000 or less but later got a raise that increased his or her salary over the $100,000 benchmark), the employer must "specifically disclose[] that the agreement may be enforceable against the employee in the future." This provision appears to allow employers to require their employees making $100,000 or less to sign non-competes, provided that the agreements specify that the non-compete provision will not be enforceable unless and until the employee's compensation meets the threshold earnings. Needless to say, this is likely to result in confusion, especially with employees who don't believe their agreements will be enforced but who ultimately meet the $100,000 threshold at a later date. The bill does not appear to require any advance notice to existing employees asked to sign a non-compete, nor does it include a notice provision for independent contractors.
  • For existing employees who are asked to sign a non-compete, the employer must provide consideration above and beyond continued employment.
  • Non-competes will not be enforceable against laid off employees, unless enforcement includes compensation for the entirety of the non-compete period; this compensation must be equivalent to the employee's base salary at the time of termination, less any compensation that the employee earns through subsequent employment during the period when the non-compete is in effect.
  • The bill would also create a rebuttable presumption that non-compete clauses binding employees for more than 18 months post-termination are "unreasonable and unenforceable." Employers seeking to rebut the presumption will need to provide "clear and convincing evidence" that a restriction exceeding 18 months is necessary to protect its "business or goodwill." This presumption does not appear to apply to independent contractors. (Oddly specific, but notable for those in the performing arts: the maximum permissible duration for a non-compete between "a performer and a performance space, or a third party scheduling the performer for a performance space," is three calendar days.)
  • Under the bill, Washington-based employees or independent contractors could not be required to litigate the non-compete provision outside of Washington, nor is it permissible for a clause to "deprive[] the employee or independent contractor of the protections or benefits of" the bill—including, presumably, if the agreement includes a choice of law that is less friendly to employees or independent contractors than the proposed Washington law. It is unclear whether an agreement that includes a choice of law provision designating a more employee-friendly law (such as California law) would be enforceable under this bill. In any event, if the bill passes, employers with a workforce in Washington would have to keep the limitations of the bill in mind when rolling out non-competes to their Washington-based employees and contractors, even if there would otherwise be a good reason to use another state's law.
  • The bill also provides that no franchisor may restrict, restrain, or prohibit a franchisee from soliciting or hiring any employee of a franchisee of the same franchisor, or any employee of the franchisor itself.
  • Separate and apart from the provisions regarding non-competes, the bill prohibits employers from preventing employees who make less than twice minimum wage from having other employment unless the "specific [additional] services to be offered by the employee raise issues of safety for the employee, coworkers, or the public, or interfere with the reasonable and normal scheduling expectations of the employer."
  • The bill provides a private right of action (in addition to enforcement by the attorney general), and permits recovery of the greater of actual damages or a $5,000 penalty, plus reasonable attorneys' fees and costs. Notably, these remedies are also available against a company attempting to enforce a non-compete where the court or arbitrator "reforms, rewrites, modifies, or only partially enforces any noncompetition covenant." Accordingly, if this bill passes, employers will need to prudently draft their non-compete agreements and carefully consider litigation strategy if they intend to enforce a non-compete that a court may deem overly broad, as they may wind up facing counterclaims subjecting them to damages, attorneys' fees, and costs, even for good faith efforts to enforce agreements they believed to be reasonable and enforceable.
  • The bill "displaces conflicting tort, restitutionary, contract, and other laws of this state pertaining to liability for competition by employees or independent contractors with their employers or principals, as appropriate" but does not displace or modify the Uniform Trade Secrets Act.

If passed, the bill would take effect on January 1, 2020.

The bill's sponsor, Marko Liias, was quoted saying:  "While non-compete clauses are useful in protecting proprietary information, they have become far too commonplace—a tool to stifle innovation rather than one to protect it." Recognizing the value of protecting trade secrets and intellectual property, the bill takes aim at those non-competes being used in low-paying industries like fast food and grocery, which have generated significant media criticism: "When 14 percent of workers who make $40,000 a year or less are forced to sign non-compete agreements, it is clear that these arrangements are being used for purposes other than protecting trade secrets," said Liias. "There are clearly instances in which these provisions make sense, but they should not be used simply to limit workers' employment options."

It's unclear whether the bill will gather enough votes in the Washington House of Representatives, but we'll be sure to report back with updates.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions