Change of Law: Hospital Action Required
To: Hospital Legal Counsel and Government Affairs Staff
From: Jaclyn Greenberg, JD, LLM, Policy Director, Legal Affairs
JaclynG@wsha.org | (206) 216-2506
Subject: New State Law Restricts Use of Noncompete Agreements
Purpose
The purpose of this bulletin is to provide an overview of recent changes to Washington’s laws restricting employers’ use of noncompete agreements. RCW 49.62 went into effect January 1, 2020, and impacts both new and existing agreements with employees and independent contractors.
Applicability/Scope
RCW 49.62 applies to all private and public employers in the State of Washington who employ one or more employees or who contract with one or more persons for their personal labor.
Recommendation
- Review this bulletin and RCW 49.62.
- Consider how the law impacts the enforceability of your hospital or health system’s existing noncompete agreements and whether any agreements should be modified.
- RCW 49.62 applies retroactively to noncompete agreements executed prior to January 1, 2020, however, a cause of action may not be brought regarding an agreement executed prior to January 1, 2020, if the agreement is not being enforced.
- Revise any sample or proposed noncompete agreements as necessary to comply with RCW 49.62.
- If an agreement executed on or after January 1, 2020, does not comply with the law, an employee or independent contractor may bring a declaratory action to invalidate the agreement and seek damages or a statutory penalty.
- Avoid using noncompete agreements with employees making less than $100,000 per year or independent contractors earning less than $250,000 per year.
- Consider whether the law’s moonlighting provisions have any impact on your hospital or health system’s personnel policies.
Overview
Restrictions on the Use of Noncompete Agreements: RCW 49.62, which took effect January 1, 2020, imposes significant restrictions on employers’ use of noncompete agreements (referred to in the law as “noncompetition covenants”[i]). Under the law, a noncompete agreement is void and unenforceable unless the annual earnings from the employer are more than $100,000 for an employee or $250,000 for an independent contractor. (The Department of Labor & Industries will adjust these dollar thresholds annually for inflation.)
In addition, the employer must disclose the terms in writing to the prospective employee by the time the employee accepts the offer of employment. If the agreement only becomes enforceable later due to changes in compensation, the disclosure to the employee must indicate that the agreement may be enforceable against the employee in the future. For noncompete agreements that are entered into after employment begins, the employer must provide independent consideration.
A noncompete agreement with a duration exceeding 18 months is presumed to be unreasonable and unenforceable, unless the party seeking to enforce the agreement can prove by clear and convincing evidence that the duration is necessary to protect their business or goodwill.
If an employee is terminated as the result of a layoff, a noncompete agreement is void unless enforcement of the agreement includes compensation equivalent to the employee’s base salary for the period of enforcement, minus any compensation earned from subsequent employment.
Any provision in a noncompete agreement that requires adjudication out-of-state by a Washington-based employee or contractor is void and unenforceable. Provisions that deprive the employee or contractor of the protections of the law are similarly void and unenforceable.
Moonlighting: If an employee earns less than double the state minimum wage, an employer may not restrict, restrain, or prohibit the employee from having an additional job, supplementing the employee’s income by working for another employer, working as an independent contractor, or being self-employed. However, this does not apply if the services raise safety issues or interfere with the employer’s reasonable and normal scheduling expectations. An employee’s obligations to the employer under existing law (e.g., the common law duty of loyalty and laws preventing conflicts of interest) are unchanged.
Enforcement and Penalties: The injured person or the Attorney General may bring suit to enforce the law; however, a suit may not be brought regarding an agreement that was signed before January 1, 2020, if the agreement is not being enforced.
If a court or arbitrator finds that a noncompete agreement violates the law, or if a court or arbitrator modifies or partially enforces a noncompete agreement, the employer must pay the aggrieved person his or her actual damages or a penalty of $5000, whichever is greater, plus attorneys’ fees and costs.
Application: The law applies to all proceedings regardless of when the cause of action arose. In other words, the law applies retroactively to agreements entered into prior to the law’s effective date of January 1, 2020, if those agreements are being enforced.
RCW 49.62 displaces any conflicting laws related to liability for competition by employees or independent contractors (other than laws related to trade secrets).
Background
For decades, Washington courts have enforced noncompete agreements to the extent they are reasonable, modifying agreements as necessary by limiting their duration or geographic scope. Under the common law, courts consider the following three questions to determine reasonableness:
- Is the restraint necessary to protect the employer’s business or goodwill?
- Does the agreement impose any greater restraint than is reasonably necessary to secure the employer’s business or goodwill?
- Does enforcing the agreement injure the public through loss of the employee’s service and skill to the extent that the court should not enforce it?
In recent years, the Washington Legislature showed increasing interest in displacing the common law on noncompete agreements. Previous proposals would have restricted the use of noncompete agreements with employees in specific industries and professions (such as physicians), as well as hourly employees, part-time or temporary employees. Previous proposals also would have made longer noncompete agreement durations presumptively unreasonable.
WSHA worked with the Association of Washington Business on this issue and is pleased that the law, as enacted, recognizes the validity of noncompete agreements in certain circumstances and addresses the concerns that WSHA raised during the 2019 legislative session.
WSHA’s 2020 New Law Implementation Guide
Please visit WSHA’s 2020 implementation guide online, where you will find a list of the high priority laws that WSHA is preparing resources and information on to help members implement the new laws, as well as links to resources such as this bulletin. In addition, you will find the Government Affairs team’s schedule for release of upcoming resources on other laws and additional resources for implementation.
References
[i] “Noncompetition covenant” includes 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. A “noncompetition covenant” does not include: (a) A nonsolicitation agreement; (b) a confidentiality agreement; (c) a covenant prohibiting use or disclosure of trade secrets or inventions; (d) a covenant entered into by a person purchasing or selling the goodwill of a business or otherwise acquiring or disposing of an ownership interest; or (e) a covenant entered into by a franchisee when the franchise sale complies with RCW 19.100.020(1).
