Washington state has joined the ranks of an ever-growing number of states that impose significant restrictions on employee non-compete agreements. On May 9, 2019, Governor Jay Inslee signed House Bill 1450, titled “An Act Relating to restraints, including noncompetition covenants, on persons engaging in lawful professions, trades, or businesses,” into law. The Act will go into effect on January 1, 2020. We reported on the bill in detail in March.
This change to Washington law is significant. Businesses with employees or independent contractors in the state should revisit their non-compete agreements and take the necessary steps to ensure compliance with the Act by the end of this year. Among other things:
- The law requires advance notice of non-competes “no later than the time of the acceptance of the offer of employment,” and “independent consideration” for any non-compete entered after commencement of employment;
- Only employees earning an annual salary exceeding $100,000, or independent contractors earning $250,000 (adjusted annually for inflation) can be bound by non-competes. See our previous post for potential confusion concerning these thresholds;
- The employer must pay the employee’s base salary (less any compensation the employee earns elsewhere) during the restriction period if the employee is terminated, otherwise the agreement is unenforceable;
- The new law includes a presumption (rebuttable by clear and convincing evidence) that non-competes with a duration longer than 18 months are unreasonable and unenforceable;
- The new law includes a private right of action to persons who believe they are subject to a non-competition agreement in violation of the Act. Attorneys General can also bring an action on behalf of one or more persons. If a violation of the law is found, the employer must pay the higher of the actual damages or a statutory penalty of $5,000 plus reasonable attorney’s fees and related costs and expenses. This mandatory obligation to pay would apply if a court or arbitrator reformed, modified or only partially enforced a non-compete restriction.
- The new law applies to agreements with franchisees as well, but the limitations are focused on only no-raid (i.e., nonsolicitation of employees) provisions; and
- Non-competes must be governed by Washington law if the employee is “Washington-based,” and such individuals cannot be forced to litigate the non-compete outside of Washington state.
Notably, the Act contains a very murky retroactivity clause that will undoubtedly be challenged during the infancy of the law: “The act takes effect January 1, 2020, and applies to all proceedings commenced on or after the effective date, regardless of when the cause of action arose. Otherwise, the law applies prospectively.” The Act also provides that an action may not be brought on a noncompetition covenant signed prior to January 1, 2020, unless the noncompetition covenant is being enforced. It is not clear what is meant by “being enforced.” This appears to mean that while the while the law goes into effect on January 1, 2020, it potentially impacts agreements that were signed before the effective date. It is very likely that both of these provisions will be challenged under provisions of the U.S. Constitution that bar states from passing laws that impair the obligations of contracts.
We’ll continue to monitor the Act as new law and provide updates as it becomes interpreted and applied.