By Karen Sutherland

Effective January 1, 2020, a new law goes into effect that regulates noncompetition clauses and agreements, whether written or oral (commonly known as “noncompetes”).  This article is a broad overview of some of the frequently asked questions about the new law.  This article should not be relied on, however, as it is not a complete analysis of the law.

  1. Who does the new law apply to?
    The definitions of “employer” and “employee” are borrowed from an existing statute (RCW 49.17.020) that is very broad.  “Employer” covers all persons, business entities, charitable organizations, the State of Washington, and all counties, cities, municipal corporations, public corporations, and political subdivisions of the state.  “Employee” covers all employees and all independent contractors who contract with employers to provide personal labor.
  1. What types of noncompetes are limited by the new law?
    Every written or oral covenant, agreement, or contract by which an employee or independent contractor is prohibited or restrained from engaging in a lawful profession, trade, or business of any kind.
  1. Are any noncompete clauses enforceable under the new law?
    Yes, but only if they meet the following criteria:
  • Earnings test: Annualized earnings exceed $100,000 per year in 2020 (for employees) or $250,000 per year (for independent contractors), calculated at the earlier of the date of separation of employment or the date of enforcement. This threshold adjusts annually for inflation.
  • Consideration for the noncompete: For new employees, the employer must disclose the terms of the noncompete in writing no later than when the employment offer is accepted. If a noncompete signed by a new employee becomes enforceable only at a later date due to changes in the employee’s compensation (e.g., if their pay was too low to meet the threshold when their employment began), the employer must specifically disclose that the agreement may be enforceable against the employee in the future.  For noncompetes entered into after employment begins, the employer must provide independent consideration for the covenant.
  • If the employee is laid off: If the employee is laid off, the employee must receive compensation equivalent to the employee’s base salary at the time of termination, minus compensation earned through subsequent employment during the period of enforcement. The statute does not define “layoff,” so it is unclear what actions on the part of the employer would trigger the requirement to pay the employee during the noncompete period.
  • Limitation on length: Any noncompetition covenant with a duration exceeding eighteen months after termination is presumed to be unreasonable and unenforceable. This presumption may be rebutted by proving by clear and convincing evidence that a duration longer than eighteen months is necessary to protect the party’s business or goodwill.  However, if the covenant is between a performer and a performance space or a scheduler for a performance space, the covenant can’t exceed three days.
  • Additional limits on franchisors: Franchisors can’t stop a franchisee from soliciting or hiring any of the franchisor’s employees or any employees of another franchisee.
  • Moonlighting: Employers can’t stop employees who earn less than twice the state minimum hourly wage from having an additional job, working as an independent contractor, or being self-employed. However, there are some limits on what moonlighting an employer has to allow.  If the moonlighting would raise safety issues for the employee, coworkers, or the public, or if it interferes with the employer’s reasonable and normal scheduling expectations, then the employer can prohibit it.  Also, moonlighting employees still have to comply with their legal obligations to the employer, such as the common law duty of loyalty and laws prohibiting conflicts of interest and policies addressing such obligations.
  • Venue and choice of law: Employees and independent contractors can’t be required to adjudicate a noncompete outside of this state, and they can’t be deprived of the protections or benefits of the law.
  1. What are the penalties for violating the new law?
    Either the Attorney General or a person aggrieved by their noncompete can bring an action to enforce the law.  Damages for a proven violation include the greater of actual damages or a $5,000 penalty, plus reasonable attorney’s fees, expenses, and costs incurred in the proceeding.  The same damages, expenses, and costs apply if a court or arbitrator reforms, rewrites, modifies, or only partially enforces a noncompete.
  1. Does the new law apply to a noncompete that is connected to the purchase or sale of an ownership interest in a business?
    There new law does not apply to a covenant entered into by a person purchasing or selling the goodwill of a business or otherwise acquiring or disposing of an ownership interest in the business.
  1. Are covenants not to compete entered into by a franchisee when the franchise sale complies with RCW 19.100.020(1) allowed under the new law?
    Yes.
  1. How does the new law affect a noncompete that was signed before the new law goes into effect?
    The new applies to all proceedings commenced on or after January 1, 2020, regardless of when the cause of action arose.  A court or arbitrator may rewrite, modify, or reform the noncompete or only partially enforce it, but as noted in FAQ No. 4, if that happens, then the party seeking enforcement must pay the aggrieved person’s damages, reasonable attorney’s fees, expenses, and costs.
  1. What if I have an existing noncompete that is not being enforced?
    A lawsuit or arbitration can’t be brought regarding a noncompete signed prior to the effective date of the new law if the noncompete is not being enforced.
  1. Are nonsolicitation agreements that prohibit an employee from soliciting another employee to leave the employer allowed under the new law?
    Yes, if they are drafted to apply upon termination of employment.
  1. Are nonsolicitation agreements that prohibit an employee from soliciting the employer’s customers allowed under the new law?
    Yes, if they are drafted to apply upon termination of employment.
  1. Are confidentiality agreements allowed under the new law?
    Yes.
  1. Are covenants prohibiting the use or disclosure of trade secrets or inventions allowed under the new law?
    Yes.
  1. Does the new law displace existing, tort, restitutionary, contract, and other laws of Washington State?
    Yes, if existing law conflicts with the new law.  However, the law protecting trade secrets (chapter 19.108 RCW) still applies.  The new law also does not revoke, modify, or impede the development of common law (such as cases interpreting the new law).

 

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This article is a broad overview.  It is not legal advice, and it should not be relied on for any purpose.  Karen Sutherland is the Chair of the Employment & Labor Law at Ogden Murphy Wallace, P.L.L.C.  She can be reached at 206-447-7000 or by email at ksutherland@omwlaw.com.