What Washington’s New Law on Non-Compete Covenants Means for Employers
The Washington State Legislature enacted a new law that goes into effect January 1, 2020, and applies to existing and future noncompetition covenants, including “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.”
The new rules could present a big risk to employers that don’t take steps to comply prior to January 1. Violation of the new law or any reform, rewrite, modification or partial enforcement of a noncompetition covenant triggers the hiring organization’s liability for damages (with a minimum of $5,000), attorney fees, expenses and costs.
Holmquist + Gardiner, which specializes in employment law for businesses and business owners, can help you understand how the law applies to your business and the steps you need to take to bring your agreements into compliance.
How Provisions Effect Your Employee & Contractor Agreements
The new law stipulates that non-competition covenants are void and unenforceable unless sufficient earnings are paid to an employee or independent contractor.
“Employee's earnings from enforcement, when annualized, exceed [$100,000] per year” as reported in box 1 of the W‐2. For independent contractors, earnings (payments on IRS Form 1099‐MISC.) from the party seeking enforcement exceed $250,000 per year.
Additionally, non-competes for independent contractors are not allowed when provisions require adjudication in another state and deprive independent contractors of benefits of the law.
These additional factors also render your employee covenants void and unenforceable:
The covenant is properly disclosed in writing no later than the time of the acceptance of an employment offer. If the agreement becomes enforceable only at a later date due to changes in the employee's compensation, the employer must disclose that the agreement may be enforceable against in the future.
There is layoff protection. If the employee is terminated via a layoff unless enforcement of the noncompetition covenant includes compensation equal to base salary at the time of termination for the period of enforcement minus compensation earned through subsequent employment during the enforcement period.
The duration is 18 months or less except in extraordinary cases. A tolling provision adds any period during which an employee violates the covenant to the duration of the covenant. The employer may rebut with “clear and convincing evidence that a duration longer than eighteen months is necessary to protect the party's business or goodwill”
How Your Business Should Respond
Complying with the new law requires employers to carefully review and revise non-competition covenants. We can help you execute the following steps to ensure compliance:
Evaluate existing agreements’ compliance with the new law in consultation with your legal counsel.
Determine if you can meet requirements with a unilateral full or partial waiver or amendment, or do nothing beyond establishing policies to prevent accidental “enforcement” that which triggers obligations/remedies under the new law.
Assess whether you can avoid the act when crafting new agreements by stating this intent in the contract, identify the exception and use the language of the statute and determine employee or independent contractor status.
Identify independent consideration in post-engagement agreements.
Consider a clause that only engages noncompetition provisions if earnings threshold is met
Document proper disclosure and preserve this evidence (for your employees only).
Limit duration to 18 months and consider removing tolling provision (for your employees only).
Create a plan for layoffs that includes defining the base salary (if not obvious), providing an option to pay or waive non-compete, and creating a procedure for ex‐employees to report other income.
Make sure your business agreements meet the new requirements before January 1. If you have questions about how the new law may impact your organization, please contact Holmquist + Gardiner.
