The new law takes effect on January 1, 2020 and will apply to all existing noncompete agreements with employees and independent contractors. At that time, the use of noncompete agreements for Washington-based employees and independent contractors will be substantially limited and enforcement actions for lawful agreements will be riskier and costlier for employers.
Historically, Washington law has permitted the use of noncompetition agreements, although the courts only enforce noncompete restrictions to the extent they are reasonable and necessary to protect legitimate business interests. If a court or arbitrator determines a noncompete agreement is overly broad in some aspect, the court or arbitrator may rewrite, modify or “blue pencil” certain terms of the noncompete agreement (for example, if an employee is prohibited from providing competing services within a 10-mile radius of the employer’s location and the court determines 7 miles is more appropriate to protect the employer’s business interests). The practical result of this process is that parties often include overly broad noncompete restrictions and accept the terms may not be enforceable at the outer bounds and/or that a reviewing court may modify or rewrite the restrictions in an enforcement action.
The new law throws a wrench into this practice by allowing employees or independent contractors to recover a statutory penalty of at least $5,000 (plus any actual damages that exceed this amount) and attorney fees if a court or arbitrator rewrites or modifies any aspect of a noncompetition agreement. This means that even if a party prevails in an action to enforce a noncompete agreement against a former employee or independent contractors, but the court determines that some aspect of the agreement is overly broad, the enforcing party will still be liable for the penalty and/or damages and the former worker’s attorney fees. In response to this change, we recommend everyone carefully examine the noncompete restrictions (including existing agreements) to confirm the terms comply with the law.
New Law Imposes Other Significant Changes for Noncompete Agreements
The new law imposes other restrictions that significantly affect noncompetition agreements, including the following:
- The law provides that a noncompetition covenant does not include (a) a nonsolicitation agreement (which is narrowly defined by the statute); (b) a confidentiality agreement; (c) a covenant prohibiting use or disclosure of trade secrets or inventions; (d) a covenant entered into by a person purchasing or selling the goodwill of a business or otherwise acquiring or disposing of an ownership interest; or (e) a covenant entered into by a franchisee when the franchise sale is registered with the State of Washington or exempt from such registration.
- The law prohibits noncompetition agreements for all employees whose W-2 earnings are less than $100,000 per year and independent contractors paid less $250,000 per year. These thresholds will be adjusted annually for inflation.
- Any noncompetition restriction with an employee that lasts longer than 18 months will be presumed to be unenforceable unless the employer can demonstrate through clear and convincing evidence the longer duration is necessary to protect the employer’s business. This limitation does not apply to independent contractors.
- In order to enforce a noncompetition agreement against an employee who is let go as a result of a “layoff” (a term that is not defined in the bill), the employer must continue to pay the employee his or her base salary during the period of enforcement, less any compensation the employee receives from subsequent employment. Again, this limitation does not apply to independent contractors.
- Employers must disclose the terms of the noncompete agreement to employees in writing no later than the time the person accepts an offer of employment (and not on the employee’s first day of work). If the agreement becomes enforceable only at a later date due to changes in the employee’s pay, the employer must notify employees of that possibility. This limitation does not apply to independent contractors.
- Out-of-state forum selection provisions will not be enforced against Washington-based employees or contractors, regardless of where the employer is based.
- The new law takes effect on January 1, 2020, but its restrictions will likely apply retroactively to all existing noncompetition agreements signed before that date.
Key Takeaways for Employers
These changes considerably limit the scope and enforceability of noncompete agreements. We recommend the following actions to prepare for the changes:
- Anyone who is a party to a noncompete agreement should immediately review it to determine their compliance with the new law.
- Parties interested in enforcing an existing noncompete should make any necessary revisions to the noncompete restrictions in existing agreements, keeping in mind that these changes may require additional financial consideration to be enforceable. Because the new law does not affect the enforceability of nonsolicitation, confidentiality or trade secret agreements (although the definition of nonsolicitation agreements is fairly narrow in the statute), the parties should review these as well to determine whether the agreements should be revised or updated to provide additional protections.
- Employers should put measures in place to confirm that prospective employees are provided noncompete agreements in writing at the same time as the job offer to allow the employees sufficient time to review the terms.