Big Changes Coming to Washington State Law on Non-Competition Agreements

When Governor Jay Inslee signs HB 1450, which is 100% expected, Washington State law governing non-competition agreements will shift significantly pro-employee and pro-independent contractor.  Once signed by Governor Inslee, this law will become effective on January 1, 2020. 

The very first section of HB 1450 sets the tone: "The legislature finds that workforce mobility is important to economic growth and development [and] that agreements limiting competition or hiring may be contracts of adhesion that may be unreasonable."  
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HB 1450 defines a non-competition covenant to include "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."  (Note the inclusion of both written and oral agreements in this very broad definition; see exclusions at the Note below).   

Under this upcoming law:  

• there exists a reputable presumption that non-competition agreements running longer than 18-months from the separation date, are unreasonable and unenforceable unless the employer can demonstrate by clear and convincing evidence that a longer duration is necessary to protect its business or goodwill; 
• non-competition agreements cannot be enforced against an employee who earns less than $100K annually or an independent contractor that is paid less than $250K annually) based on Box 1 of the employee's W-2 or the contractor's IRS Form 1099.  (These figures to be adjusted for inflation, further complicating matters).  

Under this new statute, employee non-competition agreements are void and unenforcible unless:

• the employer discloses to the new-hire in writing the terms of the non-competition agreement at the time the offer of employment is presented to the new hire (in other words, provide a full copy at the time of the offer letter); 
• if the employer requires the new-hire to enter into an employee non-competition agreement that will become effective if the employee's compensation crosses the $100K annual threshold, the employer must disclose in writing that it may be enforceable in the future  (in other words, add this to the standard form employee non-competition agreement); 
• if the employee non-competition agreement is entered into the after the new-hire's start date, it must be supported by new and independent consideration; 
• if an employer pursues an enforcement action against an laid-off employee subject to an  non-competition agreement (i.e. earns more than $100k), and the employer pursues an enforcement action, the employer must continue to pay the laid-off employee compensation equal to his or her base salary, less income earned from the laid-off employee's new employer.

​For Washington based employees and independent contractors, non-competition covenants are void if they require adjudication outside of Washington or deprive the person of the protections under the
new law.

​This new law includes the following remedy provisions, which are very pro-employee and pro-independent contractor: 

• if a court or arbitrator determines that a non-competition covenant violates this chapter, the violator must pay the aggrieved person the greater of his or her actual damages or a statutory penalty of five thousand dollars, plus reasonable attorneys' fees, expenses, and costs incurred in the proceeding; 
• if a court or arbitrator reforms, rewrites, modifies, or only partially enforces any non-competition covenant, the party seeking enforcement must pay the aggrieved person the greater of his or her actual damages or a statutory penalty of five thousand dollars, plus reasonable attorneys' fees, expenses, and costs incurred in the proceeding.

Thus, even in cases where the court or arbitrator modifies, or blue pencil's the agreement, the employer is still on the hook for paying statutory remedies.

Once signed, this law will become effective on January 1, 2020; however, it can be retroactively applied to non-competition agreements that were entered into before January 1, 2020, under two circumstances: 

• first, this new law cannot be used in in legal action that is commenced before January 1, 2020.  
• second,  a cause of action may not be brought regarding a competition agreement signed prior to January 1, 2020, if the non-competition covenant is not being enforced (appears to mean this new law cannot be used by an employee plaintiff seeking a declaratory judgment when the employer is not seeking enforcement).

Note:  The following are excluded from the definition of a non-competition covenant:

• non-solicitation clauses that restrict employees from soliciting remaining employees and current customers (thus, all is not lost as the new law will continue to allow employers to protect their established customer relationships);  
• restrictive covenants prohibiting the use or disclosure of trade secrets or inventions;
• restrictive covenants between persons buying or selling the goodwill or assets of a business.

Contact Mark D. Walters
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