Washington state employers that rely on noncompetition agreements will face a dramatically different legal landscape beginning Jan. 1, 2020, when a new noncompetition law takes effect.
ENGROSSED SUBSTITUTE HOUSE BILL 1450
Key Elements of the New Law
Under the new law, noncompetition agreements will be void and unenforceable against an employee under the following conditions:
- The employer fails to disclose the terms of the agreement in writing to the prospective employee no later than the time of acceptance of the offer of employment.
- The noncompetition agreement is entered into after the start of employment, unless the employer provides independent consideration (such as a promotion, bonus or other benefit).
- The employee’s earnings from the employer do not exceed $100,000 per year annualized, to be adjusted for inflation.
- The employee is laid off, unless the employer provides compensation equivalent to the employee’s base salary for the period of enforcement minus compensation earned through subsequent employment.
Noncompetition agreements with a duration exceeding 18 months will also be presumed unreasonable and unenforceable, but this presumption will be rebuttable with clear and convincing evidence that a longer duration is necessary to protect the party’s business or goodwill. And employees earning less than twice the state minimum wage of $12.00 per hour may not be prohibited from having an additional job, supplementing their income by working for another employer, working as an independent contractor or being self-employed.
Interestingly, noncompetition agreements will also be void and unenforceable against independent contractors unless their earnings from the party seeking enforcement exceed $250,000 per year, to be adjusted for inflation. And noncompetition agreements also may not require an employee or an independent contractor to adjudicate the noncompetition agreement outside of Washington state.
Penalties Under the New Law
The new law will apply to any legal proceeding that is commenced after Jan. 1, 2020, regardless of when the cause of action arose or when the noncompetition agreement was signed.
There will be stringent penalties for employers who craft or seek to enforce noncompetition agreements that violate the above requirements. Specifically, if a court or arbitrator determines that an agreement violates the new law or reforms, rewrites, modifies or only partially enforces a noncompetition agreement, the employer must pay the employee/independent contractor the greater of their actual damages or a $5,000 statutory penalty, plus reasonable attorneys’ fees, expenses and costs incurred in the proceeding.
Importantly, for noncompetition agreements signed on or after Jan. 1, 2020, employees or independent contractors may bring a declaratory judgment action to invalidate unlawful noncompetition agreements and receive the above remedies. However, after Jan. 1, 2020, employers that seek to enforce unlawful noncompetition agreements, including agreements signed before Jan. 1, 2020, will be subject to the above remedies.
Given this new legal landscape, employers should begin the process of re-evaluating their existing noncompetition agreements to ensure they will be enforceable when the new law takes effect in six months.