New Restrictions on Non-compete Agreements

On May 8, 2019, the Governor signed a new law passed by State Legislators which creates additional restrictions on non-compete or non-competition agreements or covenants in Washington State. These agreements, often signed at the onset of employment, restrict a departing employee from competing with their former employer, usually by working for a new employer in the same area and industry. The law specifically does not apply to other common employment contracts including non-solicitation and confidentiality agreements.

The current law in Washington

In general in Washington a non-compete agreement will be enforced if it is supported by consideration (either signed when first hired, or supported by independent consideration if signed later, like a bonus connected with signing), and (1) the restraint is necessary to protect the employer’s business or goodwill, (2) the covenant does not an impose on the employee any greater restraint than is reasonably necessary to secure that business or goodwill, and (3) enforcement of the covenant would not injure the public through loss of the employee’s service and skill. Emerick v. Cardiac Study Ctr., Inc., 189 Wn. App. 711, 721-22, 357 P.3d 696 (2015), review denied 185 Wn.2d 1004 (2016). Courts will evaluate the reasonableness of the agreement based on its geographic and temporal restrictions, and a court may enforce the agreement but change or limit how long it will last and what distance it extends. Id. at 724.

The new statute

The new law sets additional requirements for forming valid non-compete agreements:

• The employer discloses the terms of the non-compete in writing no later than when the employee accepts the offer of employment (or later if independent consideration is given).
• The employee earns more than $100,000 per year. Or the independent contractor earns $250,000 per year from the employer proposing a non-compete. (These amounts will be adjusted annually for inflation.)
• The employer compensates employees that are laid off but still subject to non-compete agreements. AND
• The non-compete agreement doesn’t cover a period longer than 18 months. (Covenants over 18 months are presumed unreasonable and unenforceable and must be rebutted by clear and convincing evidence the longer duration is necessary to protect the employer’s business or goodwill.)

Also, non-competition covenants signed by a Washington-based employee or independent contractor are not enforceable if they require the covenant be adjudicated outside Washington (no forum shopping), and Washington-based employees and independent contractors cannot waive the benefits or protections of the new law.  The law says it does not revoke, modify or impede the development of the common law, so these new restrictions only add to the applicable limitations already developed (e.g., regarding time and distance).

The law addresses some other common situations such as franchises and moonlighting. Franchisors may not prohibit franchisees from hiring employees of other franchisees or of the franchisor. Employers may not prevent employees making less than double the state minimum wage from having additional jobs (aka moonlighting) so long as there are no safety issues, interference with reasonable and normal scheduling expectations, or a conflict of interest or breach of other law or rules like the duty of loyalty.

One major addition with the law is it allows for private causes of action (or action by the State Attorney General) by employees for violations of the law, including the ability to recover actual damages, or a statutory penalty, plus reasonable attorneys’ fees and costs.

What employers can do to be prepared

The law takes effect January 1, 2020. It applies prospectively, but it does apply to all proceedings commenced on or after the effective date, regardless of when the cause of action arose, and it doesn’t apply to an agreement signed before the effective date if the agreement is not being enforced. So it seems that any non-competition agreements sought to be enforced after January 1, 2020, will need to meet these additional requirements to be upheld.

If an employer wishes to have a fully enforceable non-compete agreement for qualifying employees, it would be wise to update any current agreement and provide new consideration for the employee to sign.

Of course the law is brand new and has not yet been tested in the courts. It will be interesting to see how this develops over the next year or two.