Washington State Adopts Legislation Restricting Noncompetition Agreements

From JDSupra, Suzanne Thomas discusses a new statute in Washington that limits non-compete agreements for employees and some independent contractors. Suzanne writes:

Under the new law, a noncompetition covenant is void and unenforceable against an employee or, as applicable, an independent contractor:
Unless (1) the employer discloses the terms of the covenant in writing to the prospective employee no later than the time of the acceptance of the offer of employment, and (2) if the agreement becomes enforceable only at a later date due to changes in the employee’s compensation, the employer specifically discloses that the agreement may be enforceable against the employee in the future;
If the covenant is entered into after the commencement of employment, unless the employer provides independent consideration for the covenant….
Unless the employee’s earnings from the party seeking enforcement, when annualized, exceed $100,000 per year. The Washington Department of Labor and Industries (L&I) will adjust this dollar amount annually for inflation;
If the employee is terminated as the result of a layoff, unless enforcement of the noncompetition covenant includes compensation equivalent to the employee’s base salary at the time of termination for the period of enforcement minus compensation earned through subsequent employment during the period of enforcement; and….
Unless the independent contractor’s earnings from the party seeking enforcement exceed $250,000 per year. L&I will also adjust this dollar amount annually for inflation.
Practice Notes:
While it is beyond the scope of this alert to discuss misclassification risks, if an independent contractor is subjected to a non-compete, the non-compete is a factor that may impact any misclassification analysis.
Unlike the definition of “Earnings” for employees, the $250,000 threshold for independent contractors is not annualized.
Additionally, by way of key highlights:
A franchisor may not restrict, restrain, or prohibit a franchisee from soliciting or hiring an employee of a franchisee of the same franchisor or any employee of the franchisor;
A provision in a noncompetition covenant signed by an employee or independent contractor who is “Washington-based” is void and unenforceable if it requires adjudication of the noncompetition covenant outside of Washington or to the extent it deprives the employee or independent contractor of the protections or benefits of the legislation;
Practice Note: The term “Washington-based” is not defined but arguably could apply to employees of Washington-based employers, employees who are assigned to an office or location in Washington, or employees who spend a substantial amount of work time in Washington.
A court or arbitrator must presume that any noncompetition covenant with a duration of 18 months or more after termination of employment is unreasonable and unenforceable. A party seeking enforcement may rebut the presumption by proving by clear and convincing evidence that a duration longer than 18 months is necessary to protect the party’s business or goodwill;
Employers may not restrict an employee earning less than twice the applicable state minimum hourly wage ($13.50 per hour as of January 1, 2020) from having another job, working for another employer, working as an independent contractor, or being self-employed, unless such additional services (1) raise issues of safety for the employee, co-workers, or the public, or (2) interfere with reasonable and normal scheduling expectations of the employer;
Practice Note: There is no prohibition on an employee working for a competitor.
The new law generally displaces conflicting tort, restitutionary, contract, and other Washington laws pertaining to liability for competition by employees or independent contractors with their employers or principals, as appropriate. On the other hand, the law is not intended to revoke, modify, or impede the development of the common law.
Practice Note: These provisions generally leave unclear the impact of the legislation on the common law duty of loyalty of employees and Washington law that has previously allowed courts to modify or reform non-compete clauses to render them enforceable (a so-called “blue pencil” clause).