Do you own and operate a business in Washington state? If you do, there are some new Washington noncompete rules going into effect January 1 that you should be aware of.
What is a Noncompete Agreement?
House Bill 1450
Impact on Business Owners
Current Washington Noncompete Rules
New Washington Noncompete Rules
New Cause of Action
Unaffected Agreements
What Does This Mean for Your Business?
Important Next Steps
Conclusion
What is a Noncompete Agreement?
A noncompete agreement is a tool many employers use to protect against employees leaving after the company spends time and money to train them. Often employees leave to work for a competitor, meaning the business actually sees a negative return on investment.
A noncompete generally says that an employee cannot work for a competitor for a specific amount of time after leaving the company. When applied, these agreements can be a powerful tool for businesses. However, the State of Washington now severely restricts the use of noncompete agreements.
House Bill 1450
Recently, the State of Washington passed ESHB 1450. This law significantly restricts the use of noncompetition agreements by employers. Under the new rules, Washington employers will be unable to enforce noncompetition agreements against most employees and contractors.
This law is intended to make the state more friendly to today’s mobile workforce. Employees tend to move from job to job more often now than they did in the past. Overall, this law is friendly to employees. However, it could have a negative impact on small businesses.
Impact on Business Owners
If you currently have a noncompete agreement in place, or if you plan on using a noncompete in the future, you will likely need to make significant changes to continue using that agreement after January 1, 2020. Violation of these new rules could result in statutory damages.
Next, I will outline the new Washington noncompete rules below. If these changes apply to you, or you’re not sure if they apply to you, reach out to our office to have your existing employment materials reviewed.
Current Washington Noncompete Rules
Noncompetition agreements were generally enforceable in the past, so long as they were: (1) reasonable in scope, duration, and geographical territory; (2) narrowly tailored to protect a legitimate business interest; and (3) not detrimental to public interest.
New Washington Noncompete Rules
Beginning January 1, 2020, any noncompetition agreement will be void and unenforceable against:
- W-2 Employees earning under $100k* per year
- 1099 Contractors earning under $250k* per year
*These dollar amounts will be adjusted for inflation each year.
Employers who pay employees or contractors more than the threshold amounts listed above may enter and enforce noncompete agreements, but must adhere to the following rules:
- The terms of any noncompete must be disclosed prior to the employee’s acceptance of a job offer. If you fail to disclose the terms you must offer other consideration, or the noncompete will be unenforceable.
- Any noncompete with a term longer than 18 months will be unenforceable unless you are able to show a court that a longer period is necessary.
- If you lay employees off, you must pay their base salary for the period of enforcement of a noncompete, or else the noncompete will be void and unenforceable.
- For Washington-based employees, any noncompete with a choice of law provision placing adjudication outside the state of Washington is void.
- If a noncompete is altered in any way, there must be additional consideration, or the new noncompete will be unenforceable.
New Cause of Action
In addition to the new rules, there is also a new cause of action for “a person aggrieved by a noncompetition covenant.” Employees can now sue employers if they are subject to a noncompete that doesn’t conform with the new laws. Employees will be entitled to the greater of $5,000 or actual damages, plus costs and attorneys’ fees.
If the noncompliant noncompete existed before January 1, 2020, there is no issue unless the employer seeks to enforce the noncompete. For agreements that go into effect after January 1, employees can sue regardless of whether the employer actually tries to enforce the agreement.
Unaffected Agreements
This new law will not affect:
- Noncompete agreements in conjunction with the sale or purchase of a business;
- Non-solicitation agreements;
- Confidentiality agreements;
- Trade secret agreements; or
- Invention assignment agreements.
Employers may need to revisit those agreements and ensure they are not attached to a noncompete, which may be unenforceable.
What Does This Mean for Your Business?
Do you have employees who make less than $100,000 per year? Do you hire 1099 contractors who make less than $250,000 per year? If your answer is yes to either of those questions, this law will impact you.
Therefore, to protect yourself and your business from a lawsuit, your employment agreements must comply with the new laws.
Important Next Steps
To ensure your business is ready for these new laws, you should – at a minimum – do the following:
- Review your employment materials. This includes employment agreements and any other documents that might contain noncompetition language.
- If you are unsure whether the new law applies to you, have an attorney review your employment materials.
- If necessary, replace any noncompete clauses or agreements with things like confidentiality, non-solicitation, and non-disparagement clauses.
These steps are relatively simple with little cost to you or your business. However, taking these steps can save you in the long term.
Conclusion
In short, this law represents a substantial change to the availability of noncompete protections for employers. As a result, business owners need to ensure their employment materials are compliant by January 1, 2020. If not, employers risk significant monetary damages.
Please don’t hesitate to reach out with any questions or concerns you may have. We can help ensure that you and your business are ready for the changes coming January 1.
Halverson Law, PLLC specializes in Business Law and provides expertise in Intellectual Property, Trademark, Marijuana Law, and Personal Injury.
Greg Simpson is a transaction attorney with a passion for helping business owners navigate complex issues that arise at all stages of operation.