The Council of the District of Columbia is considering a new bill that would ban the use of non-compete restrictions for workers below certain income thresholds—and impose stiff penalties upon employers who include such restrictions in their agreements. Introduced on October 8, 2019, the Ban on Non-Compete Agreements Amendment Act of 2019 (“the Bill”) places D.C. in line to join a growing number of states where non-compete restrictions upon low-income—and, in some cases, relatively high-income—employees are unenforceable.
The Bill would ban the use of non-compete agreements for employees who work in D.C. and who earn up to three times the D.C. minimum wage: $87,654 annually under current law. The Bill would ban such restrictions not just in written agreements, but also in an employer’s “workplace policy” whether in writing (i.e., through an employee handbook) or as a matter of the employer’s practice. Not only would such restrictions be void as a matter of law, but any employer who had such restrictions in place, regardless of whether or not the employer enforced them, would be separately liable to each affected employee in an amount “not less than $500 and not greater than $1,000.” Employers who attempt to enforce non-compete restrictions that fall below the Bill’s income threshold would be liable to affected employees in an amount “not less than $1,500.” Finally, employers who retaliate against employees for either (1) alleged violations of non-compete restrictions that would be unenforceable under the Bill or (2) inquiring about or informing an employer that the employer’s non-compete restrictions may be unenforceable under the Bill, would be liable to each such employee in an amount “not less than $1,000 and not more than $2,000.” Beyond liability to affected employees, the Bill would also empower the Mayor of the District of Columbia to impose fines for violations of the Bill in an amount up to $500, except for retaliatory conduct for which the fine would be at least $1,000.
While the Bill may yet undergo significant changes before enactment, several provisions should raise concerns for any employers in the District of Columbia. First and foremost, the bar on non-compete restrictions for employees earning less than $87,654 annually would give D.C. the second-highest income threshold for jurisdictions with similar statutes, behind only Washington state ($100,000 for W2 employees and $250,000 for independent contractors). While other jurisdictions have justified income-based non-compete statutes as necessary protections for low-wage workers, the Bill’s income requirement is nearly 40% higher than the U.S. median household income. Compared to similar recently-enacted statutes in Maine ($48,560 annually), Maryland ($31,200), New Hampshire (200% of the federal poverty level), or Rhode Island ($31,225 for an individual and $64,375 for a family of four), the Bill would apply not just to “low-wage” workers, but workers who earn significantly higher amounts as well.
While the relatively high income threshold may present challenges for some employers, determining whether employees fall under the income threshold in the first place is not a straightforward calculation. First, the Bill’s income threshold is tied to the D.C. minimum wage—not the federal minimum wage—which has changed 8 times in the last 14 years and is scheduled to change again in 2020. While the Bill is clear that it would not apply to agreements retroactively, it also does not specify how a future change in the D.C. minimum wage would affect pre-existing agreements. Put differently, an employee earning $43.50 per hour would be over the current income threshold and a non-compete would be enforceable against that employee under the Bill (assuming the agreement is entered into post-enactment). However, as currently drafted, the Bill would appear to invalidate that same non-compete restriction when the D.C. hourly minimum wage goes up by $1, as it is scheduled to do next July.
Perhaps more concerning is the fact that the Bill’s income calculation formula is based on the employee’s “regular rate of pay” and includes salaried employees. For salaried employees, that regular rate of pay is calculated on the basis of “the average amount paid per hour worked during the most recent calendar quarter, which shall be determined by dividing the total amount paid during the calendar quarter by the total number of hours worked in the calendar quarter.” For salaried employees for whom an employer may not track hours worked, the question of which employees fall under the Bill’s threshold may be difficult to determine, and even more difficult considering that the Bill implies that the determination of regular rate of pay should be made on a quarterly basis. A salaried employee with an abnormally busy quarter may work enough hours so that their “regular rate of pay” falls below the Bill’s income threshold, despite being above the threshold in a normal quarter.
The Bill is only limited to non-compete agreements—it does not restrict the use of non-solicitation or confidentiality agreements. However, unlike other jurisdictions that bar restrictions on post-employment restrictive covenants, the Bill would also not allow employers to restrict employees below the income threshold from being simultaneously employed, even on a full-time basis. And unlike Washington state’s recently-enacted non-compete statute, which only prohibits simultaneous-employment restrictions on employees earning less than two-times the state minimum wage, and even then only so long as the additional job does not raise safety issues, there are no such limitations in the Bill. A D.C. employee earning $85,000 annually could not be prevented from holding another position with another employer—even, theoretically, a competitor. While the Bill makes it clear that employers can still takes steps to protect trade secrets, it would appear that a prohibition on an employee who falls below the income threshold from accepting simultaneous employment at a competitor would be unenforceable.
As indicated above, the Bill would impose significant penalties upon employers who attempt to use non-compete agreements in violation of the Bill. Less clear is the exact mechanism for enforcement of those penalties. Unlike other jurisdictions that have enacted statutes providing for similar fines against employers who attempt to enforce non-compete agreements against low-wage employees, the Bill creates direct liability and a private right of action for affected employees, in addition to potential fines imposed by the Mayor of D.C. Moreover, while some categories of liability are capped, there is conspicuously no limit on the liability of an employer who attempts to enforce a non-compete agreement that is unenforceable under the Bill.
The Bill was either co-introduced or co-sponsored by 9 of the Council’s 13 members, and thus appears to enjoy significant support. While any passage would also be subject to Congressional review, there are several provisions of the Bill that will likely create significant concerns for employers based in D.C. Particularly in light of the Bill’s method of calculating regular rate of pay and already-scheduled changes to D.C.’s minimum wage, employers in D.C. should carefully consider whether employees with non-compete restrictions come close to the Bill’s income threshold, and consider amending their agreements accordingly.