Legislators in the Commonwealth of Virginia, the site of Patrick Henry’s infamous “Give me liberty, or give me death” speech, have enacted legislation that gives more liberty to low-wage workers looking to leave for greener pastures, joining the ranks of many other states that have passed similar restrictions (stay tuned for a post soon on Indiana’s own recently passed non-compete legislation application to physicians). While the new law was passed quietly, it’s not particularly surprising that the Commonwealth sought to join the trend of restricting non-competes for low earners (see for example similar efforts in DC, Maryland, Maine, New Hampshire, Washington, and Massachusetts)—especially in light of the COVID-19 pandemic that is sending unemployment rates soaring.
Effective July 1, 2020, upon Governor Northam’s approval of SB 480 (the “Act”), no Virginia employer may enter into, enforce, or threaten to enforce a covenant not to compete against a low-wage employee. In contrast to the recent law in the State of Washington, the Act does not apply retroactively; instead, the Act applies to restrictions entered into on or after July 1, 2020. Additionally, employers must post a copy of the Act or a summary approved by the Virginia Department of Labor and Industry in an area where the employer has posted other notices required by state or federal law.
Who is a “low-wage employee”?
By statutory definition, a low-wage worker is an individual whose average weekly earnings for the 52 weeks prior to termination are less than the average weekly wage in Virginia, as computed pursuant to Va. Code Ann. § 65.2–500(B). As of July 1, 2020, that threshold will be $1,137 per week. For employees who have worked fewer than 52 weeks, the average weekly earnings will be calculated by dividing the employee’s total earnings by the number of weeks actually worked. The law also provides that the term “low-wage employee” includes independent contractors who are paid an hourly rate that is less than the median hourly wage for all occupations in the Commonwealth for the previous year, as reported by the Department of Labor’s Bureau of Labor Statistics (as last updated by the Bureau in May 2019, $20.30 per hour).
However, the law does contain a number of ambiguities with respect to who will be considered a “low-wage employee”:
- First, the law is silent as to what is considered “earnings”—employers are likely to argue that bonuses or other non-standard compensation should be considered in the computation of average weekly earnings, while employees on the cusp of the threshold will presumably argue that such compensation should be excluded.
- Even if at the time of execution, the employee’s compensation exceeded the earnings threshold, it’s unclear whether an employer would be liable for violation of the Act if at the time of the employee’s departure, the average weekly earnings were less than Virginia’s average weekly wage. Given that the Act prohibits employers from not just entering into but also enforcing or threatening to enforce non-competes against low-wage workers, arguably an agreement that was valid at execution could be non-compliant if the employee’s earnings dipped in the year prior to departure (in light of recent events, hardly an impossibility), or stayed stagnant or even increased but failed to keep pace with the average weekly Virginia earnings.
- Similarly, for agreements entered into at the time of employment, employers will presumably need to estimate whether an employee’s weekly earnings will exceed the law’s earnings threshold, which may get tricky. For example, would a business violate the Act if it asks a new employee to sign a non-compete agreement, where the employee is anticipated to make $50,000 in salary, but the company expects that he or she will be paid a $20,000 bonus that would bring the weekly earnings over the statutory floor when averaged per the Act?
- In another ambiguity, also included within the definition of low-wage worker are “interns, students, apprentices, or trainees employed, with or without pay, at a trade or occupation in order to gain work or educational experience.” However, it is unclear whether such individuals would be considered “low-wage” even if their earnings exceeded the statutory threshold.
- Finally, low-wage workers do not include those whose “earnings are derived, in whole or in predominant part, from sales commissions, incentives, or bonuses.” Despite the use of the phrase “predominant part,” the Act does not define what the threshold level is for this exclusion, thereby teeing up potential litigation in the future.
What type of agreements are subject to the law?
The Act defines a covenant not to compete as “a covenant or agreement, including a provision of a contract of employment, between an employer and employee that restrains, prohibits, or otherwise restricts an individual’s ability, following the termination of the individual’s employment, to compete with his former employer.” Furthermore, the covenant “shall not restrict an employee from providing a service to a customer or client of the employer if the employee does not initiate contact with or solicit the customer or client.” This represents a significant departure from many other recent restrictive covenants laws, which have generally carved out customer non-solicitation provisions from their scope (including relatively new laws in Washington and Massachusetts). The Act does not apply to agreements that forbid the misappropriation of trade secrets or proprietary or confidential information.
What happens in the event an employer violates the statute?
Virginia joins the ranks of states like California, Washington, and Maine that won’t merely strike down an agreement that fails to comply with state law, but actually impose liability upon an employer who runs afoul of the statute. Indeed, unlike its Maryland counterpart, the Act provides workers with a private right of action that allows for remedies beyond a mere judicial invalidation of a non-compete that a simple declaratory judgment action would allow. The employee may sue any former employee or “other person that attempts to enforce a covenant not to compete.” If successful, the employee may recover her liquidated damages, lost compensation, and reasonable costs and fees, including attorneys’ and expert witness fees. The court has authority to grant declaratory and injunctive relief, including voiding the covenant at issue and enjoining the employer from enforcing the covenant. If faced with such a lawsuit, the employer may not retaliate or discriminate against an employee who sues under the Act.
The private right of action, though, is not without limitations. The employee must bring the suit within two years of the latter of the (a) signing of the covenant not to compete; (2) learning of the covenant not to compete; (c) termination of the employment relationship; or (d) the employer’s enforcement of the covenant not to compete. In practice, of course, few employees would wait more than two years after their employment ends or their employer sought to enforce their non-compete to initiate an action to enjoin enforcement of such an agreement.
Additionally, even if an employee does not sue for violation of the statute, the Commissioner of the Virginia Department of Labor and Industry may independently determine that an employer has committed a violation of the Act, and will impose a civil penalty up to $10,000 for each violation. Query whether an employer would be fined $10,000 for each non-compliant agreement, or if it would only be subject to a one-time $10,000 penalty for widespread use of a form agreement that violates the statute.
Finally, failure to comply with the Act’s requirement that employers post a copy of the statute or approved summary will result in civil penalties; after an initial written warning, a second violation will receive a fine of up to $250, and subsequent violations will be penalized up to $1,000 for each violation.
How can employers ensure that they are complying with the Act?
There are a number of steps employers with Virginia operations should take in anticipation of the new requirements:
- First and foremost, in each Virginia location, employers should conspicuously post a copy of the Act in an area where the employer has posted other applicable laws.
- Additionally, employers with Virginia operations should take steps to ensure that agreements entered into on or after July 1, 2020, are not applied to Virginia workers (whether employees, independent contractors, interns, or others) who earn about $60,000 per year or less on an annualized basis.
- Likewise, companies should carefully calculate the employee’s average earnings before seeking or threatening to enforce a non-compete, in the event that an employee’s average earnings have dipped below the statutory threshold due to a pay cut, a lower than usual bonus, or mere failure of wages to keep pace with Virginia’s average weekly wage.
- Employers should also ensure that their restrictive covenants agreements do not prohibit workers from providing services to a customer or client, if those individuals do not initiate contact (i.e. non-acceptance of business clauses).
- Finally, while the law does not mandate application of Virginia law to Virginia residents as some other state legislation has done, given the potential liability for violations of the statute, businesses with Virginia-based employees or contractors would be well-advised to comply with the requirements of the Act, even if their standard agreement designates another law as controlling.
As always, employers are advised to consult with trusted counsel well-versed in implementation, interpretation, and rollout of restrictive covenants to ensure compliance with the law.