On May 8, 2019, Washington Governor Jay Inslee signed into law a new statute regulating noncompetition covenants for employees and independent contractors. The new law, which is effective as of January 1, 2020, will dramatically change the landscape for noncompetition covenants in Washington. It also prohibits a franchisor from restricting the hiring of certain employees, and it restricts an employer’s ability to prevent moonlighting.

Noncompetition Covenants

Among the new law’s provisions:

• Noncompetition covenants will be void unless the employee earns over $100,000 per year from that employer. A company may not enforce a noncompetition covenant against an independent contractor unless the contractor earns over $250,000 per year from that company. Both of those amounts will be adjusted annually for inflation.
• An employer must disclose the terms of a noncompetition covenant to a prospective employee in writing no later than the acceptance of the offer of employment. If the covenant is to become enforceable only at a later date due to changes in the employee’s compensation, the employer must specifically disclose that the covenant may be enforceable against the employee in the future.
• If the covenant is entered into after the commencement of employment, the employer must provide independent consideration to the employee for the covenant.
• If the employee is terminated because of a “layoff” (a term not defined in the law), the covenant will be void unless the employer pays the employee his or her base pay during the period of enforcement, less compensation the employee may earn through other employment during that period.
• Covenants in excess of 18 months are presumed to be unreasonable and unenforceable. An employer may rebut that presumption only by proving by clear and convincing evidence that a longer duration is necessary to protect the employer’s business or goodwill.
• A noncompetition covenant relating to a performer and a performance space may not exceed three days.
• A provision in a noncompetition covenant signed by a Washington-based employee or independent contractor is unenforceable if it requires the employee or independent contractor to adjudicate a noncompetition covenant outside of Washington, or if it deprives the employee or independent contractor of the protections of the new law.
• If a court or arbitrator finds a noncompetition covenant unenforceable, or reforms, rewrites or modifies a covenant, the employer must pay the employee or independent contractor the greater of his or her actual damages or $5,000, plus attorneys’ fees and costs.
• The law provides new guidelines, but it does not otherwise revoke existing law. Courts may still review covenants to ensure that they meet Washington’s traditional reasonableness standards. Those standards require that a covenant be reasonable in geographic scope and duration and be reasonably necessary to protect the legitimate interests of the employer. As a result, a court might still determine that, for example, a 12-month noncompetition covenant is unreasonable under the circumstances of a particular case.

The law does not apply to agreements for the nonsolicitation of employees or customers, confidentiality agreements, covenants prohibiting use or disclosure of trade secrets or inventions, or covenants entered into in connection with the sale of a business (including registered franchise offerings).

Franchises

Under the new law, no franchisor may restrict a franchisee from hiring an employee of (i) a franchisee of the same franchisor, or (ii) the franchisor.

Moonlighting

If an employee earns less than twice the applicable state minimum hourly wage, an employer may not prohibit the employee from moonlighting, unless the performance of the second job raises issues of safety for the employer, coworkers, or the public, or interferes with the reasonable scheduling expectations of the employer.

Actions for Employers

While the bill nominally has an effective date of January 1, 2020, and it applies to all proceedings commenced on or after that date, it will apply retroactively to agreements entered into before that date. As a result:

• Employers, and companies engaging independent contractors, should review their existing noncompetition covenants and consider amending them (which may require providing additional consideration to affected employees or contractors);
• Companies asking employees or independent contractors to enter into new noncompetition covenants should draft them, beginning now, to comply with the new law; and
• Companies considering commencing an enforcement proceeding on or after January 1, 2020, should take into account the effect of the new law. Some covenants will no longer be enforceable, and enforcement of compliant covenants will be riskier and more expensive.

For more information regarding the new law, or for assistance in reviewing and revising your noncompetition covenants, please feel free to contact members of our employment law group, including Robert Van Cleve, Eric Lansverk, Laurie Lootens Chyz, and Matt Weger.

^{The information contained in this update is provided for informational purposes only. It should not be construed as business, legal, accounting, tax, financial, investment or other advice on any matter and should not be relied upon for such.}