IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog article has been provided by business attorney Victoria Bartow of Equinox Business Law Group (www.equinoxbusinesslaw.com):
Changes to Washington Non-Compete Laws
Update: Governor Inslee signed this legislation on May 9, 2019, making it law. Changes will go into effect on January 1, 2020.
Washington’s State’s Governor Jay Inslee is very likely to sign a new bill regulating non-competition agreements. The new law places restrictions on which workers can be subject to non-competition agreements and specific terms. If signed, this law will take effect on January 1, 2020, however, current non-compete agreements with workers would be affected because after January 1, 2020, any provisions in older agreements that violate the new law are unenforceable.
The practical outcome (if the bill is signed into law) is that your employees who are subject to agreements that are not compliant with the new law will have to sign new agreements that are. After all, what is the point of having a non-compete agreement that is unenforceable? As an employer offering a new agreement, you’ll also be required to offer additional consideration to the employee. Consideration, or something of value given in exchange, can be in the form of additional pay or benefits, a promotion or a fixed term of employment. An offer to simply continue employment is not sufficient consideration when requiring an employee to sign a new non-compete agreement.
Basics of the New WA Non-compete Law
Here’s a look at the basic principles that make up the new non-compete law in Washington. If the law goes into effect, these guidelines will affect your contracts with employees and independent contractors:
- Under the new law, a non-compete clause or agreement is only enforceable where the employee is earning more than $100,000 per year. For independent contractors, the threshold jumps to $250,000 per year. These thresholds are also tied to inflation with new thresholds calculated each year.
- After January 1, 2020, any worker that earns less than the established threshold is not bound and the agreement is void and not enforceable.
- Non-competition agreements that are more than 18 months in duration are unenforceable unless the employer can show by clear and convincing evidence that a longer agreement is necessary. *Note that this standard is very difficult to meet.
- Employers must disclose the terms of the non-compete in writing prior to or at the same time the employee accepts an offer.
- If an employee is laid off, an employer can only enforce the non-compete agreement if the agreement includes compensation equivalent to the employee’s base salary for the duration of the agreement. So, if you layoff an employee but still want to prevent the employee from working for a competitor, you better be able to pay up.
- If the employee starts a new job, you can subtract out that compensation from your calculation.
- The bill deters overly broad non-competition agreements by imposing statutory damages (plus attorney fees and other costs) if a court or arbitrator finds the agreement violates the new law or if the court or arbitrator rewrites, modifies, or “blue-pencils” a non-compete.
- “Blue-penciling” is when a court or other deciding body strikes or invalidates part of an agreement and then rewrites or modifies the offending parts and enforces the modified version. (For example, before this new law a court could find the duration of a 5-year non-compete to be unreasonable, so it could modify the duration to 2 years.)
Practical Application of Changing Non-Compete Laws
Some businesses may still approach these changes by drafting the terms of each non-compete as broadly possible in the employer’s favor and if at a later date a court modifies it then so be it. However, the new law deters impedes this practice by imposing the $5,000 minimum damages unless the employer is absolutely compliant and victorious in its suit against the employee. So in short, it is now a more risky gamble for the employer to write an overly broad provision, and it is even more of a gamble to try to enforce it. The new law forces the employer to both use narrowly tailored non-competition clauses and give serious consideration before seeking to enforce it.
The Bill does not restrict other agreements like NDAs, confidentiality agreements, trade secrets or inventions or non-solicitation. It only addresses non-competes which are defined as “every written or oral 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.”
Next Steps for Employers
Employers should begin reviewing their current non-competition agreements with legal counsel to ensure they are 1) necessary and 2) enforceable. They should also review any other restrictive covenant agreement like NDAs and non-solicitation agreements to be sure they offer the protection needed. You may not as easily be able to prevent an employee from working for a competitor but you can keep your confidential information confidential and prevent solicitation of your employees.
Need assistance reviewing and updating your non-compete agreements and restrictive covenants? Reach out today to talk to one of our attorneys who put business first.
If you have questions related to non-competition agreements Michelle Bomberger, CEO & Managing Attorney for the Equinox Law Group, would welcome the opportunity to discuss the situation with you and/or connect you to member of her firm with relevant experience. Ms. Bomberger can be reached at (425) 250-0205 or firstname.lastname@example.org
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