The Disappearing Non-Competition Clause
Posted on August 2, 2019 by Shannon L. Trivett
There are big changes on the horizon for non-competition agreements in Washington State. On May 8, 2019, Governor Inslee signed House Bill (“HB”) 1450 a new statewide law restricting the use of non-competition agreements in employment contracts. Non-competition agreements are often used as a means of restricting a former employee’s ability to work for a competitor and have generally been enforceable in Washington State, until the passage of HB 1450.
HB 1450 applies to all employers in Washington State and takes effect January 1, 2020, although it will potentially apply to existing non-competition agreements and non-competition agreements signed in 2019.
HB 1450 codifies the long-standing requirement that a non-competition agreement must be supported by adequate consideration in order to be enforceable. If the agreement is signed by a new employee at the start of employment, the employment itself is adequate consideration. If the agreement is signed after the start of employment, it must be accompanied by separate consideration (i.e., a material bonus or raise, etc.) to be enforceable.
However, HB 1450 also imposes significant new requirements that non-competition agreements must meet in order to be enforceable.
First, the exact terms of a non-competition agreement must be disclosed to a new employee in writing prior to the employee’s acceptance of employment. If the agreement is structured to only become effective due to a later triggering event during employment (i.e., a promotion, etc.), an employer must disclose that fact at the beginning of employment as well.
Second, a non-competition agreement can only apply to an employee making at least $100,000 or more per year. If the agreement is with an independent contractor, the contractor must be making at least $250,000 per year from the employer. These numbers will be adjusted annually every year by the Department of Labor and Industries to account for inflation.
Third, a non-competition agreement must be “bought out” by the employer if the employee is laid off. Put differently, if the employee is terminated as part of a lay off (and not based on performance), the employer must pay the employee his or her base salary for the length of the non-competition agreement, less outside compensation received by the employee during that same period.
Finally, a non-competition agreement generally cannot exceed 18 months, unless an employer presents clear and convincing evidence that a longer time period is necessary, and the agreement cannot require that lawsuits be brought outside of Washington State.
HB 1450 also contains specific restrictions regarding franchising agreements, employee moonlighting, and performance venues. Specifically, a franchisor cannot prevent a franchisee from hiring an employee of the franchisor or another franchisee. Also, an employee earning less than twice the state minimum wage cannot be restricted from working an additional job so long as doing so does not interfere with safety or scheduling. Finally, a non-competition agreement between a performer and a performance venue cannot exceed three days.
If the employer attempts to enforce a non-competition agreement that is not compliant with the HB 1450, the employer may be liable for an employee’s actual damages or a $5,000 statutory penalty (whichever is greater), attorney fees, and costs. Importantly, these damages are now recoverable against the employer in the same amount even if a non-competition agreement is only partially unenforceable. This is yet another change to the law. Previously, if a court determined a non-competition agreement was too geographically broad or too long in duration, the court would simply re-write the agreement with more reasonable and narrower geographic or temporal limitations and with no penalties to the employer. Now, employers will still be liable for damages for enforcing agreements that a court might previously have simply re-written.
Notably, HB 1450 does not affect customer non-solicitation agreements, confidentiality agreements, agreements regarding trade secrets or inventions, agreements regarding the sale of a business, or franchise agreements. Accordingly, these kinds of agreements may be good alternatives to consider using where a non-competition agreement is unlikely to be enforceable (for example, when the employee makes less than $100,000 annually).
As a result of HB 1450, employers should review the terms of non-competition agreements that are already in place to determine the continued enforceability of those agreements and the effect those agreements may have on employees subject to future layoffs. Going forward, employers should carefully consider, on a case-by-case basis, whether they can require an employee to agree to a non-competition agreement pursuant to HB 1450. Even if the circumstances allow for a non-competition agreement, employers should take care to craft a narrowly tailored restriction so as to avoid a potential penalty from the Court for violation of the law.
If you are an employer and feel you need help assessing, drafting, or enforcing an employment or non-competition agreement, our employment attorneys here at Lasher, Holzapfel, Sperry, & Ebberson are ready, willing, and able to take your call.