In ourAlertspublished January 22, 2021, February 17, 2021, and March 17, 2022, we detailed the Washington, D.C., Ban onNon-CompeteAgreements AmendmentActof 2020. Among other provisions, had it taken effect, the 2020 Act would have rendered void and unenforceable any agreement prohibiting an employee from working for a competitor following employment and while the employee is still employed by the employer. The ban on so-called in-term restrictive covenants?standard provisions that prevent an employee from simultaneously working for a competitor of his or her employer?would have been the first of its kind.
After numerous delays to address concerns raised by the business community about the impact of the 2020 Act, on July 27, 2022, Mayor Muriel Bowser signed the Non-Compete Clarification Amendment Act of 2022, which amends the 2020 Act. The new Act walks back many of the controversial provisions of the 2020 Act, including the ban on both in-term and post-termination noncompetition provisions, but includes a number of burdensome provisions that will require employers to regularly make disclosures to all covered employees, including those who are not asked to sign noncompetition agreements. The Act includes a number of notable provisions that impact employers with workers in Washington, D.C. Specifically, the new law, which takes effect on October 1, 2022:
- Permits an employer to enter into a "non-compete
provision" with a "highly compensated
employee" (see definitions below). To be valid and
enforceable, a non-compete provision entered into on or after
October 1, 2022, with a highly compensated employee must specify
the functional and geographic scope of the restriction, and may not
last longer than a year (and no more than two years for a medical
specialist) from the date of separation of employment. Under the
Act:
- A "non-compete provision" is defined as a provision in a written agreement or a workplace policy that prohibits an employee from performing work for another for pay or from operating the employee's own business, subject to certain exclusions outlined below; and
- A "highly compensated employee" is defined as a person, other than someone in broadcasting, who either: (i) is reasonably expected to earn compensation of $150,000 or more (or $250,000 or more for medical specialists); or (ii) has earned total compensation greater than or equal to that amount in the 12 months immediately preceding the date on which the proposed term of noncompetition is to begin. "Compensation" includes: hourly wages; salary; bonuses or cash incentives; commissions; overtime premiums; vested stock, including restricted stock units; and other payments provided on a regular or irregular basis, but does not include "fringe benefits other than those paid to the employee in cash or cash equivalents." These thresholds will increase for the calendar year beginning on January 1, 2024, based on changes in the Consumer Price Index for All Urban Consumers in the Washington Metropolitan Statistical Area from the previous year;
- Prohibits employers from requiring or requesting that a covered employee sign an agreement or comply with a workplace policy that includes a non-compete provision. A "covered employee" is defined as anyone who performs work for pay in the District of Columbia (an "employee") who is not a highly compensated employee and: (i) who spends (or, in the case of a new hire, is reasonably anticipated to spend) over 50 percent of the employee's work time for an employer in the district; or (ii) whose work for an employer is (or, in the case of a new hire, will be) based in the district, and who regularly spends (or, in the case of a new hire, is reasonably anticipated to spend) a substantial amount of the employee's work time for that employer in the district, and not more than 50 percent of the employee's work time for that employer in another jurisdiction. A non-compete provision with a covered employee that violates this provision is void and unenforceable;
- Significantly narrows the ban on in-term restrictive
covenants by excluding from the definition of a
non-compete provision an otherwise lawful provision that prohibits
or restricts an employee from: (a) disclosing, using, selling or
accessing the employer's confidential or proprietary
information; or (b) accepting money or a thing of value for
performing work for a person other than the employer, during the
employee's employment with the employer, because the employer
reasonably believes the employee's acceptance of money or a
thing of value under such circumstances will: (i) result in the
employee's disclosure or use of the employer's confidential
or proprietary information; (ii) conflict with the employer's,
industry's or profession's established rules regarding
conflicts of interest; (iii) constitute a conflict of commitment if
the employee is employed by a higher education institution; or (iv)
impair the employer's ability to comply with District of
Columbia or federal laws or regulations, a contract or a grant
agreement. Employers that maintain a workplace policy including one
or more of these exceptions (as most employers do in their employee
handbooks and/or conflicts of interest policies) must provide a
written copy of such a policy:
- Within 30 days after the employee's acceptance of employment with the employer;
- Within 30 days after October 1, 2022; and
- Any time such policy changes;
- Allows an otherwise lawful provision that relates to the sale of a business or provides a long term incentive to an employee;
- Requires that employers provide a non-compete provision to a prospective employee in writing at least 14 days before the prospective employee starts work (or, in the case of a current employee, at least 14 days before the employee must execute the agreement containing the non-compete provision);
- Mandates that, when an employer proposes that a highly compensated individual enter into a noncompetition agreement, the employer must provide the employee with the following notice:
- The District of Columbia Ban on Non-Compete Agreements Amendment Act of 2020 limits the use of non-compete agreements. It allows employers to request non-compete agreements from "highly compensated employees" under certain conditions. [Name of employer] has determined that you are a highly compensated employee. For more information about the Ban on Non-Compete Agreements Amendment Act of 2020, contact the District of Columbia Department of Employment Services (DOES);
- Contains strict anti-retaliation provisions, including a prohibition on retaliating against a covered employee who refuses to agree to or comply with a non-compete provision that violates the terms of the Act or who asks about a provision in a workplace policy or employment agreement that the employee reasonably believes violates the Act; and
- Subjects employers to liability, including strict liability in some instances, for violations of the Act. Both the mayor and the D.C. attorney general are empowered to enforce the Act. The mayor may assess an administrative penalty of no less than $350 and no more than $1,000 for each violation of the Act. Aggrieved employees also may sue employers for violating the Act. In addition to all of the other remedies available in such a lawsuit, the Act imposes strict liability for certain violations. The penalties differ depending on the section of the Act, and range from $250 (for a violation of the section requiring disclosures of a workplace policy that falls into one of the exceptions to the definition of a non-compete provision, such as a policy prohibiting conflicts of interest) to "not less than" $3,000 (for any "subsequent" violation of this same section or the section prohibiting an employer from entering into a non-compete provision with a covered employee). Significantly, these penalties apply for each affected employee.
The text of the Act leaves a number of key questions unanswered. For example, the Act does not specifically address customer nonsolicitation and/or employee nonsolicitation provisions. On the one hand, employers may argue that customer nonsolicitation and employee nonsolicitation provisions do not, by their nature, typically "prohibit an employee from performing work for another for pay or from operating the employee's own business" and, therefore, fall outside the definition of a "non-compete provision." On the other hand, the exclusions to the definition of a non-compete provision omit customer nonsolicitation and/or employee nonsolicitation provisions. Among the enumerated exclusions are provisions prohibiting an employee from disclosing, using, selling or accessing the employer's confidential or proprietary information, which also do not, on their face, typically "prohibit an employee from performing work for another for pay or from operating the employee's own business." The legislative history of the Act suggests that the Committee on Labor and Workforce Development, to which the Act was referred, viewed nonsolicitation provisions differently than noncompetition provisions, yet the final text of the Act does not address either customer nonsolicitation or employee nonsolicitation provisions.
Another unanswered question in the age of remote work is whether an employee who is physically located outside of the District of Columbia but working for an employer in the district is "working for pay in the District" and, conversely, whether an employee who is physically located in the district but working for an employer and/or affiliated with an office outside the district is "working for pay in the District."
What This Means for Employers
Although the Act is not retroactive, in light of the significant statutory penalties associated with noncompliance, companies with District of Columbia-based employees or independent contractors should engage counsel to reevaluate their current and prospective restrictive covenant agreements and exit procedures.
For More Information
If you have any questions about thisAlert, please contact Lawrence H. Pockers, Shannon Hampton Sutherland, Bryan Shapiro,any of theattorneysin our Employment, Labor, Benefits and Immigration Practice Group, any of theattorneysin our Non-Compete and Trade Secrets Groupor the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.
