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New Non-Compete Law Going into Effect on January 1, 2020.

New Non-Compete Law Going into Effect on January 1, 2020.
August 2, 2019 dominick

   In early 2019, the Washington legislature passed a law severely restricting the use of non-compete agreements by employers.   The new law goes into effect on January 1, 2020 however, employers should review and revise their non-compete agreements now, ensuring they meet the following criteria.  

 

 1.      $100,000 Annual Salary Threshold.  

 

     The new law prohibits employers from requiring non-compete agreements for employees who make less than $100,000 per year.  Additionally, starting on Jan. 1, 2020, all non-compete agreement with employees earning less than $100,000 per year will be nullified.  

     The salary threshold is another example of laws which work for the west side of the state (particularly King County and surrounding areas), but not necessarily in other areas of the state.   It is undisputed that wages in the Seattle area are typically much higher than in Eastern Washington. A position which pays $65,000 in Spokane could be as much as $100,000 or more in Seattle, even when the duties and responsibilities are substantially the same.  This means employers on the west side of the state have more tools at their disposal to protect its interests and employers on the east side of the state do not.  

     Interestingly, the law also purports to prohibit an employee who earns less than $100,000 from voluntarily entering into a non-compete contract.  This situation could arise where an employer offers a position to a potential employee at $65,000 per year if they do not sign a non-compete or, alternatively, at $75,000 per year if they voluntarily sign a non-compete.  This could open the law up to a legal challenge on the basis that it unreasonably restricts a party’s right to contract.  

     However, I do not recommend anyone try to contract around this salary threshold requirement.  Washington law is very employee-friendly and there is established caselaw which states an employee cannot contract away their statutory employment rights in most cases (i.e., agree to be paid less than minimum wage).  Moreover, this new non-compete law also contains a provision which nullifies any agreement which “deprives the employee of the protections and benefits” of the new law and imposes strict penalties for an employer violating any provision of this new law.    

 

2.      18-Month Enforcement Period for Non-Competes.  

 

     The new law also prohibits the enforcement period of a non-compete being longer than 18 months.  Typically, non-compete agreements have an enforcement period of one to three years. And current Washington case law states a court can “blue-line” (i.e., edit) a noncompete if they feel some provisions are too onerous on the employee and a lesser term will still protect the legitimate business interests of the former employer.  The enforcement period length is oftentimes the first provision to be “blue lined” by a judge.   

     The new law also states that starting on January 1, 2020, an existing non-compete which purports to require a longer period of time will be considered “unreasonable” under the statute and reduced to 18 months unless an employer can prove, by clear and convincing evidence, that a longer time period is necessary to protect its business.  

     This exception allowing for longer enforcement periods, is a hollow remedy. First, the higher burden of proof (clear and convincing standard vs. preponderance of the evidence standard) means that employers will have an even more difficult burden proving a need for a longer enforcement period.  Second, if the employer fails to meet this burden of proof, it will be subject to an automatic penalty (or actual damages, whichever is more) and must pay the employee’s attorney’s fees and costs. Conversely, if the employer prevails, it cannot recover its attorney’s fees and costs from the employee. 

     In sum, an 18-month enforcement period would be considered a reasonable restraint and sufficient to protect a former-employer’s legitimate interests instances.  Even if this new law did not exist, an employer would have an uphill battle trying to show why a longer enforcement period is necessary. It is our recommendation that all non-competes be reduced to an 18-month period unless the employer believes there is overwhelmingly high need for a longer time-period and can prove a longer enforcement period is absolutely necessary to protect its interests.  

 

3.      Additional Consideration Required for Existing Employees.  

 

     Existing employees who are required by their employer to sign a non-compete (which otherwise meets the criteria above) must provide that employee with independent consideration (i.e., a bonus, pay raise, promotion, etc.) for the new agreement.  Simply requiring an employee to sign the non-compete, otherwise they will be terminated, will not be sufficient and may lead to additional penalties if the employer does terminate them.   

     Requiring additional consideration when a contract is modified is basic element of contract law.   Where two parties are in an existing contract and the first party wants to impose additional duties/restrictions upon the second party, the first party must offer additional “consideration” (i.e., a benefit or compensation) be to the second party in exchange for the additional duties/restrictions.  

     Under this new law, the existing relationship between employer and employee is viewed as a contractual relationship even when the employment is at-will.  The terms of that contract are the agreed hours, wages, benefits, duties, etc. Therefore, if an employer wanted to impose additional restrictions, such as a new non-compete agreement, the employer must offer a tangible benefit to the employee as consideration.  

     Notably, the statute does not state how much consideration will be adequate and leaves it to the employer and employee to decide.  In most contract lawsuits, courts hesitant to rule on whether the agreed consideration is adequate. Typically, the courts will leave it to the parties who negotiated the contract modification to determine whether consideration was enough to support the modification.  

     In the employment context, a promotion, a pay raise, a transfer to a more favorable position, or even a one-time bonus would likely be sufficient consideration.  Even nominal consideration, such as a onetime $1 bonus, may be enough to support a non-compete considering the employee is making $100,000 or more per year and is likely sophisticated and capable of negotiating their own employment contracts.  However, employers should err on the side of caution and offer the employee more than just a nominal bonus or benefit in exchange for executing a non-compete agreement.  

 

4.      Employers Cannot Prohibit Some Employees from Having Second Job. 

 

     The new law will prohibit employers from having rules or policies which restrict employees from keeping second jobs.  Any employee who earns less than two times the state minimum wage may have a second job provided:

         b. The services offered by the employee in their second job do not raise issues of safety for the employer, fellow employees or the public; 

         c. The second job does not interfere with the reasonable and normal scheduling expectations of the first employer; and

         d. The second job does not run afoul of obligations of loyalty, trade secrets and laws regarding conflicts of interest.  

     By way of an example, an employee may keep a 9am to 5pm office job, then have a second job working nights and weekends for an employer in a wholly unrelated industry.  If, however, the night/weekend job starts to encroach into the hours the employee is expected to work at her office job, the office job employer can ask the employee to quit her night/weekend job.  Likewise, if the hours worked at the second job have an adverse impact on the employee performing her tasks for the first employer (i.e., falling asleep at work because of lack of sleep), the first employer can ask the employee to quit their second job.  

     Certainly, this presents a risk in the construction industry.  Safety will always be paramount and employees who have side jobs which keep them up all hours of the night will undoubtably cause a safety concern.  For employees who keep side jobs, it will be incumbent on their employers to monitor their work performance to ensure safety is not a concern. Employers are responsible for nearly all jobsite injuries which occur, either to the employee themselves, or the public at large.  

 

5.      To Enforce a Non-Compete against Laid Off Employees, the Employers Must Pay Their Base Salary through the Enforcement Period.  

 

     If an employee, who has an otherwise valid non-compete agreement under this new law, is laid off, that employer must continue to pay the employee’s base salary if that employer wants to enforce the non-compete.  The reasoning behind this law is basic fairness to the employee. Employers should not be allowed to hire someone, then lay them off, and prohibit the former employee from earning a living in their chosen trade. Simply put, if an employer lays an employee off, the new law presumes there is no harm to the former employer if the former employee goes to work for someone else.  

     There will likely be a legal battle down the road to determine whether an employee was laid off or terminated.  Currently, Washington case law does not clearly spell out what “laid off” means and the term is not defined in the new statute either.   Oftentimes an employer will tell a person who is being terminated that they are being “laid off” just to ease the stress of an already uncomfortable situation, even though an employer has no intent to hire them back later.  

     Starting in 2020 however, where an employer simply elects to terminate an employee at will and the termination is not related to misconduct (i.e., the person just doesn’t fit in, their skill set isn’t applicable, etc.), that employer will have to be upfront and clearly state that employee is terminated.  Otherwise an employer may be stuck with either an obligation to pay a base salary for 18-months or an unenforceable non-compete.  

 

6.      Any Litigation over Non-Competes Must Occur in Washington and Governed By Washington Law.  

 

     The statute requires that any dispute over a non-compete must be resolved in Washington state, either by litigation, arbitration or other method.  This prevents employers from inserting a venue provision requiring employees to litigate any dispute over the non-compete in some far flung location, thereby lessening the chance the employee will actually litigate it.  

     Additionally, the statute will nullify any other provision which ‘[…] deprives [the employee] of the protections and benefits […].” of the new law.  While the statute does not explicitly spell out what this means, the most common application will be to nullify “choice of law” provisions requiring the agreement to be interpreted under a different state’s laws (which presumably will be more favorable to employers) or by awarding attorney’s fees to an employer (as explained further below).  Simply put, if you are a Washington based employer or your employees reside in Washington, any non-compete agreement must comply with this statute.  

 

7.      Penalties and Attorney’s Fees for Violations.  

 

     There is a one-way attorney’s fee provision in the new law, meaning if a court or arbitrator finds the non-compete agreement violates this new law or a judge or arbitrator blue lines, modifies or partially enforces the agreement, the employer must pay employee their actual damages or a $5,000 penalty (whichever is greater) and must pay the employee’s attorney’s fees and costs.  

     There is no statutory basis for the employer to recover its attorney’s fees or costs if a court or arbitrator upholds the non-compete agreement in toto and/or rules that no violation exists.  Currently, most non-compete agreements have a provision stating that if either party takes legal action to enforce the non-compete agreement, the prevailing party is entitled to an award of attorney’s fees and costs.  However, there is an argument to make that the state intended this new law to be very employee friendly, including the one-way attorney’s fees provision. Therefore, a “two-way” prevailing party attorney’s fee provision could, arguably, “deprive the employee […] of the protections or benefits” of this new law.  Therefore, even having a prevailing party attorney’s fee provision would violate this new law, and the employee automatically prevails and would be awarded their attorney’s fees and costs.    

     There is one protection for employers under this new law. For a former employee to recover any damages, penalties and attorney’s fees against their former employer, that employer must attempt to enforce an illegal non-compete agreement first.  For example, an employee sign a non-compete agreement a number of years back and that agreement violates various provision of this new law. If that employee goes to work for someone else and the former employer takes no action to enforce the old agreement, that former employer cannot be found liable for violating this new law.  

Final Takeaways

      Employers should take a close look at their existing non-compete agreements.  If the non-compete agreements run afoul of these new requirements, employers are encouraged to seek guidance on how they can be revised to comply with this new law, or whether it would be better to abandon the existing non-compete agreements and start anew.  Likewise, employers are advised to review the agreement with their counsel to ensure the agreement complies with this new law before making any attempt to enforce the non-compete agreement.