Noncompetition covenants are a common element of employment, especially in high tech fields where innovation is exponential and trade secrets important to keep that way. Startups, in particular, often ask their employees to sign a noncompetition covenant to safeguard their intellectual property. Although the need for these covenants is understandable, the covenants can have the unintended effect of hindering innovation by restricting employees’ rights to leave their jobs to work for a competitor. Thus, an employee might find it not possible to choose the work the employee seeks and to receive greater compensation for the employee’s expertise.
In 2019, the Washington legislature addressed some of these issues by passing new legislation narrowly targeting noncompetition covenants. This legislation, which became effective January 1, 2020, substantially changed Washington law applicable to a noncompetition covenant.
Prior Law on Noncompetition Covenants
Courts have wrestled with the merits of noncompetition covenants and their sometimes punitive effects on employees for many years. In 1927, the Washington Supreme Court adopted the law developing nationwide regarding the enforceability of a noncompetition covenant. In short, the restraint on the employee imposed by a covenant must be reasonable under the circumstances. To determine whether the restraint is reasonable, a court should consider what has become known as the three-factor test. For a court to uphold a noncompetition covenant, the covenant must answer these three questions in the affirmative:
Is the noncompetition covenant necessary to protect the business or the goodwill of the employer?
Does the covenant impose a necessary restraint, within reason, to protect the employer's business or goodwill?
Does the need for the covenant outweigh the public’s interest in the loss of the employee’s service and skill?
Must Be Reasonable in Scope
Interwoven into these questions is the scope of a noncompetition covenant as to time, place and activity. For example, a covenant that prevented a tech employee from working in the State of Washington for ten years in Internet technology would certainly be unenforceable. On the other hand, a covenant that prevented the employee from working in Seattle for six months for competitors in the employer’s same line of business likely would be enforceable.
The New Noncompetition Covenant Law
The new law changes the old law in a number of respects. At the outset, the new law carefully defines what a noncompetition covenant is, a “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.” The law goes on to state what a noncompetition covenant is not:
a nonsolicitation agreement
a confidentiality agreement
a covenant prohibiting use or disclosure of trade secrets or inventions
a covenant entered into by a person purchasing or selling the goodwill of a business or otherwise acquiring or disposing of an ownership interest
a covenant entered into by a franchisee when the franchise sale complies with law
When Noncompetition Covenants Void and Unenforceable
The new law lists circumstances when a noncompetition covenant is void and unenforceable against an employee.
The employer must disclose, in writing, the terms of the noncompetition covenant to the employee not later than the time that the employee accepts an offer of employment.
If the covenant does not come into effect until a later date due to changes in the employee’s compensation, the employer also must disclose that fact.
If the employer and the employee enter into the covenant after the time of employment, the employer must give something to the employee or pay money to the employee in exchange for the covenant.
The covenant must include compensation equal to the employee’s base salary for the length of time the covenant is in effect if the employee is laid off, offset by other money the employee might make during that period.
The employee’s salary must exceed $100,000 per year, the amount to be adjusted annually for inflation, for the covenant to be enforceable.
If the person subject to a covenant is an independent contractor instead of an employee, the covenant is not enforceable unless the independent contractor makes over $250,000 per year, also to adjusted annually for inflation.
If the noncompetition covenant may not require arbitration between an employer and employee, or business and independent contractor, outside the State of Washington.
A court must presume that a noncompetition covenant for a period exceeding eighteen months after termination is unreasonable and unenforceable. A business may rebut this presumption with clear and convincing evidence that more than eighteen months is necessary to protect the business or its goodwill.
Additional Jobs Allowed
A noncompetition covenant cannot prevent an employee who makes less than twice Washington’s minimum wage from having an additional job or from working for another employer, working as an independent contractor, or becoming self-employed.
Penalties for Violation
The new law states that Washington’s Attorney General may enforce the law. Alternatively, a person my file suit to enforce it himself. If a court or arbitrator determines that the noncompetition covenant violate the law, then the employer or business must pay the employee of independent contractor the greater of their actual damages and $5,000 plus reasonable attorneys’ fees, expenses and court costs.
Noncompetition Covenant Compliance is Critical
The new law marks a substantial change to Washington’s noncompetition covenant law. From this brief overview of the law, it is clear that compliance should not be difficult. Employers and businesses should be sure to comply with the new law rather than be sued by a former employee when trying to enforce a covenant.