Effective January 1, 2020, Washington enacted a noncompete statute which, among other things, required employers to satisfy notice obligations and compensation thresholds to use noncompete agreements with employees and independent contractors. As we previously described, Washington's original statute:
- Requires advance notice of non-competes "no later than the time of the acceptance of the offer of employment," and "independent consideration" for any non-compete entered after commencement of employment;
- Only employees earning an annual salary exceeding $100,000, or independent contractors earning $250,000 (adjusted annually for inflation) can be bound by non-competes;
- The employer must pay the employee's base salary (less any compensation the employee earns elsewhere) during the restriction period if the employee is terminated, otherwise the agreement is unenforceable;
- The new law includes a presumption (rebuttable by clear and convincing evidence) that non-competes with a duration longer than 18 months are unreasonable and unenforceable;
- The new law includes a private right of action to persons who believe they are subject to a non-competition agreement in violation of the Act. Attorneys General can also bring an action on behalf of one or more persons. If a violation of the law is found, the employer must pay the higher of the actual damages or a statutory penalty of $5,000 plus reasonable attorney's fees and related costs and expenses. This mandatory obligation to pay would apply if a court or arbitrator reformed, modified or only partially enforced a non-compete restriction.
- The new law applies to agreements with franchisees as well, but the limitations are focused on only no-raid (i.e., nonsolicitation of employees) provisions; and
- Non-competes must be governed by Washington law if the employee is "Washington-based," and such individuals cannot be forced to litigate the non-compete outside of Washington state.
Effective June 6, 2024, certain amendments will become effective and have retroactive effect. Notably:
- The definition of a "noncompetition covenant" will include "agreements that directly or indirectly prohibit the acceptance or transaction of business with a customer";
- The customer non-solicitation exception will be limited to "current" customer only, not former or prospective customers;
- The employer's obligation to provide notice of the terms of the noncompete is clarified to be before "initial oral or written" acceptance of an offer (vs. prior to "acceptance of employment");
- Non-parties to a noncompete agreement may now have standing to pursue claims under Washington's statute against current or past employers who have imposed agreements in violation of the statute;
- Any adjudication relating of a noncompete agreement must be litigated in Washington and under the substantive laws of Washington; and
- A cause of action can be brought with respect to noncompetition covenants signed before January 1, 2020 if the covenant is being "explicitly leveraged."
One last amendment is particularly notable regarding noncompetes entered into as part of a sale of business. Consistent with other states which impose some curtailment on employee noncompete agreement, Washington carved out noncompete agreements entered into as part of a sale of business from its statute. Effective June 6, that exception will be limited to owners who sell at least one percent of the business. The one percent threshold stands in notable contrast to the FTC's proposed threshold of a 25% ownership interest for the sale of business exception to apply. Particularly in certain high-growth sectors, key owners and business leaders often own less than 25% of a business, yet would impose significant risk to a buyer if allowed to compete. By allowing noncompetes generally and providing an exception to its statute based on a 1% threshold, Washington is taking a more pragmatic and business-centric view of noncompetes while still fostering its goal of employee mobility.
Employers in Washington are advised to review their noncompete agreements to ensure compliance with these new amendments.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
