We’re Not California, Yet: Washington Enacts Some Limitations on Noncompetition Agreements and Moonlighting Bans

Washington has not gone as far as California, which generally bars all forms of noncompetition agreements. However, after several years of unsuccessful attempts, the Washington legislature has just passed Engrossed Substitute House Bill 1450, which enacts significant limitations on noncompetition agreements and prohibits employer policies that would ban moonlighting, although with significant exceptions. The Governor’s signature on the bill is expected soon.

Stoel Rives has been deeply involved in the extensive negotiations during the legislative process leading up to the enactment of ESHB 1450. We advise that Washington employers with noncompetition agreements with their employees must carefully review those agreements, and many employers may need to either revise or revoke them. Similarly, employers with restrictions on outside work by their employees will need to review those policies.

Limitations on noncompetition agreements

ESHB 1450 creates certain restrictions on noncompetition agreements. But, it is important to keep the overall structure of the bill in mind: if the employer is compliant with these new restrictions, noncompetition agreements will otherwise be evaluated by—and, potentially, enforced under—long-standing common law rules. However, the limitations of the new law will form the preliminary inquiry as to a noncompetition agreement’s enforceability.

First, a noncompetition agreement will be void unless the employee earns annual compensation above $100,000 (indexed for inflation on a going-forward basis). While that figure may seem high, the legislative negotiations reduced that threshold from the sponsors’ original proposal, which would have set that the limit at more than $180,000. Moreover, through the legislative process the definition of what counts as “earnings” for these purposes was substantially broadened. It now includes all compensation that would be reported on “Box 1” of the employee’s W-2 form.

Additionally, the noncompetition agreement must be disclosed, in writing, to the employee prior to the employee’s acceptance of the offer of employment. Interestingly, the statute allows for noncompetition agreements that the employee might “grow into.” That is, an employer may require as a condition of employment that an employee sign a noncompetition agreement at the time of hire that would not be effective currently because of the level of the employee’s compensation, so long as the agreement makes clear that it would be enforceable once the employee receives compensation in excess of the statutory minimum.

Consistent with existing law, the statute mandates that any noncompetition agreement entered into after the commencement of employment must be supported by new consideration. The other major substantive restriction on the contents of noncompetition agreements is their duration. The statute prescribes that any noncompetition agreement longer than 18 months must be presumed invalid, unless the employer can show, by clear and convincing evidence, that there is a substantial business need for the longer term.

ESHB 1450 also creates an entitlement to so-called “garden leave,” when an employer attempts to enforce a noncompetition agreement against a laid-off employee. In that event, the employer must compensate the employee, at the employee’s base salary, for the period of time for which the noncompetition agreement is to be enforced. Interestingly, the entitlement to garden leave arises only on layoff. Earlier versions of the bill would have extended garden leave to any employee terminated without just cause, but that provision was stripped from the bill.

The statute permits noncompetition agreements to be entered into by independent contractors, but establishes different thresholds. For independent contractors, a noncompetition agreement is only valid if the independent contractor earns $250,000 in the year from that agreement; again, that figure is indexed to inflation.

As one might expect, the legislature enacted provisions to preclude out-of-state employers from evading the effect of the new law. A noncompetition agreement is void if it requires a Washington-based employee or independent contractor to litigate claims regarding the agreement outside of Washington, or would deprive the Washington resident of the benefits of the new statute.

With those limitations, noncompetition agreements remain permissible under Washington law. However, parties seeking enforcement of a noncompetition agreement still must satisfy the long-standing common law requirements to enforce such an agreement. These include the obligation to demonstrate that the employer has a protectable interest that would support the effort to restrain the employee from competing. Moreover, it would still be the employer’s obligation to demonstrate that the geographic scope, as well as the scope of competitive activities foreclosed by the agreement, was reasonable.

In that regard, the statute creates a substantial risk for a party seeking to enforce a noncompetition agreement. Specifically, Washington law has long allowed so-called “blue pencil” alterations of a noncompetition agreement. If a court determined that a noncompetition agreement was in some regard unreasonable—for example, if it covered too wide of a geographic area—the court would modify the agreement to enforce it to a level that was reasonable. ESHB 1450 makes clear that such an approach is still viable—but with a substantial risk. If an agreement is modified or rewritten by the court, the party seeking enforcement is subject to a penalty of statutory damages, as well as payment of the employee’s attorneys’ fees.

Moonlighting

The statute bars employer policies that prohibit employees from holding other jobs or self-employment. This prohibition applies to any employee making less than twice the state minimum wage. There are, however, important exceptions.

First, the employer may bar moonlighting if it raises safety concerns. The example cited throughout the legislative process was that employers could preclude their employees from taking additional employment if doing so would leave them so fatigued so as to be a danger to themselves or the public. Additionally, the statute allows employers to restrict alternative employment, in order to preserve their normal scheduling requirements. Employees may not excuse themselves from work simply because they have another job. Moreover, the restrictions regarding moonlighting are subject to two other important carve-outs. The new statute does not preclude the employer from enforcing the ordinary common law duty of loyalty or statutory restrictions on conflicts of interest.

Interestingly, the statute makes an important limitation on how the moonlighting bar may be enforced, most readily discerned by contrasting the provisions relating to noncompetition agreements. An employee covered by an invalid noncompetition agreement need not wait for an employer to seek enforcement, but can commence an affirmative claim against the employer to have the noncompetition agreement declared invalid. Not so with the moonlighting provisions; affirmative enforcement, such as by a declaratory judgment action, is limited to the attorney general. On the other hand, an employer that seeks to enforce an invalid moonlighting bar will have a difficult time responding to the lawsuit for a wrongful termination in violation of public policy.

What is an employer to do?

Employers that have previously utilized noncompetition agreements must carefully evaluate whether those agreements pass muster under the new statute. If not, employers should either revoke or revise those agreements prior to the statute’s January 1, 2020 effective date. (Remembering that any new noncompetition agreement must still be supported by new consideration.)

Moreover, employers should consider alternatives to noncompetition agreements. The statute specifically provides that it does not apply to nonsolicitation agreements, confidentiality agreements, trade secret agreements, or agreements entered into in the context of the purchase or sale of a business. The statute also carved out franchise agreements, which are otherwise covered by Washington law. The permissible terms of a nonsolicitation agreement, in particular, were broadened through the legislative process. Agreements that prevent the employee from any efforts to cause customers to cease doing business with the employer, or merely just reduce the volume of that business, may properly be proscribed by a nonsolicitation agreement.

Finally, employers should be creative as to alternative ways to enforce some of the interests involved in noncompetition agreements. For example, many employers have utilized noncompetition agreements as a way of recouping the investments made in an employee, for things such as training or establishing the employee in the employee’s profession. There are alternative ways of addressing these concerns, such as formal agreements for the employee to re-pay training costs or other investments if the employee leaves within certain time periods. Such agreements should remain enforceable after the enactment of ESHB 1450.

Similarly, the statute contains opportunities for employers that remain concerned about alternative employment by their employees. Policies that are at articulated in terms of safety issues arising from undue fatigue, or that make clear that the employer will insist that its normal scheduling practices be followed, remain legitimate. Attempting to delineate what would be encompassed within the employee’s duty of loyalty would also be a useful exercise.

Conclusion

Washington’s new statute regarding noncompetition agreements and moonlighting policies demands attention from Washington employers. Properly structured noncompetition agreements remain viable, as do properly based policies regarding moonlighting. Employers must, however, address these new limitations. Stoel Rives labor and employment attorneys are fully conversant with ESHB 1450 and are ready to help.