Employment

Non-Compete Agreements In Washington State

By Mark Tyson

November 02, 2018

*Recently enacted non-compete legislation in Washington takes effect on January 1, 2020. You can learn more about the coming changes here.

Employee non-compete agreements are as prevalent as they are controversial, particularly in tech hubs like Seattle in Washington State. A non-compete is an agreement where a worker, in exchange for being given a job by an employer, agrees not to work for a competitor of the employer or start a business that will compete with the employer.

Tip: Non-competes are often inserted as a separate clause within an employment agreement. So, if you’ve been given an employment agreement, make sure to keep an eye out for a non-compete clause.

The idea behind the use of these agreements, at least from the employer’s perspective, is to prevent employees from learning confidential information (e.g., trade secrets) and then later using it to gain a competitive advantage after leaving the company.

But for workers, the reality is that non-competes may hamper their ability to find new employment and/or start new companies, and so employees often want to know how to get out of a non-compete agreement in Washington.

While it’s worth noting the debate around the use of non-competes, the aim of this post isn’t to engage with that debate—rather, it’s to describe the current state of of the law concerning non-compete agreements in Washington.

Let’s get started with the big question…

Are Non-Competes Enforceable In Washington?

Historically in Washington State, employee non-competes were typically enforceable so long as their restrictions were “reasonable” as determined by the courts. However the Washington legislature passed a law, set to go into effect in 2020, that considerably restricts the circumstances in which non-comepte agreements will be enforceable. You can learn more about these restrictions in more detail in the linked post below.

With the adoption of the new statutory restrictions on non-compete agreements, these agreements will not be enforceable under the following circumstances, in pertinent part:

The employer fails to disclose the terms of the non-compete in writing to the employee before the employee accepts the offer of employment;
The employee makes $100,000 or less in earnings annually;
An independent contractor makes $250,000 or less annually;
The employee is terminated as a result of a layoff and isn’t paid “garden leave” compensation equivalent to the employee’s base salary at the time of termination;
The length of the non-compete exceeds 18 months after employment ends (unless the employer can prove a longer non-compete is necssary to protect its business or goodwill)
The non-compete requires an employee or contractor to adjudicate the non-compete outside the state of Washington;
The non-compete deprives an employee or contractor of the protections or benefits under Washington’s new non-compete laws;

In the event that these statutory restrictions, which can be found at RCW 49.62, do not preclude enforcement of the non-compete, then courts will still apply the common law standard of reasonableness before enforcing non-compete agreements.

In determining what is “reasonable,” Washington courts consider the following issues:

Whether the restraint is necessary for the protection of the business or goodwill of the employer.
Whether the restraint imposes no greater restriction on the employee than is reasonably necessary to secure the employer’s business and goodwill.
Whether the loss of the employee’s services does not injure the public to the degree that would justify non-enforcement of the covenant.

There can be a variety of different types of restrictions that a court may consider in assessing whether a non-compete is reasonable. But there are two particular types that are so common that it makes sense to address them in detail. These two types of restrictions are based on (1) time and (2) geography.

How Long Is A Reasonable Restriction?

One of the features of the law is a presumption that any non-compete exceeding 18 months after employment is unreasonable and unenforceable. This presumption may be rebutted, but only by clear and convincing evidence (a fairly high evidentiary burden) that a longer duration is necessary to protect the party’s business or goodwill.

In effect, this imposes a time limit of 18 months on non-competes. The high burden of proof required to show a need for a longer non-compete, coupled with the uncertainty and cost of litigation, will deter just about every employer from attempting to insert a longer non-compete period into the agreement.

How Geographically Broad Is A Reasonable Restriction?

Non-competes are typically limited to a certain geographic area. As with restrictions on time, the permissible restrictions on geographical area have been dealt with on a case-by-case basis by Washington courts, as part of the three-part test for reasonableness.

Washington courts have been willing to enforce specific geographical restrictions that cover clients the employee worked with while still working for the former employer. Courts have also been willing to enforce more generalized restrictions, including a restriction on a tire salesman from soliciting business within a 30-mile radius of his former employer.

Even where a geographic restriction has been deemed unreasonable, Washington courts may still be willing to revise the scope of the restriction to make it a reasonable one. For instance, a 100-mile restriction was revised so as to be restricted to the greater Seattle area only.

Again, as with time restrictions, it must be remembered that while geographical scope can be an important consideration, the ultimate question of whether a non-compete is reasonable can only be decided after consideration of all relevant factors in a specific case.

Can Non-Competes Be Reasonable And Yet Not Be Enforced?

Assuming the restrictions are reasonable, non-competes will usually be enforced when an employee chooses to leave or is fired. But that is not the case when an employee is fired in breach of the employment contract.

For example, if the contract states that the employee can only be fired for cause (i.e., for a specific reason, like failing a drug test) but the employee is fired without cause, then that would amount to a breach of the employment contract. When that happens, Washington courts are unlikely to enforce the non-compete.

Note: While a non-compete may be unenforceable, that doesn’t give the former employee permission to disclose confidential information or trade secrets to a competitor. This information will likely remain protected by non-disclosure agreements and/or non-solicitation agreements.

This makes good sense. It would hardly be fair for the employer to fire an employee in breach of the employment agreement, but still insist on enforcing the non-compete against the employee. In that case, the employer is the bad actor and shouldn’t be rewarded by retaining the right to prevent the employee from getting another job in the same industry.

In addition, under Washington’s new non-compete law, employers who lay off an employee must—in order for the non-compete to be enforceable—provide compensation equivalent to the laid-off employee’s base salary at the time of the termination for the period of enforcement (less compensation earned through other employment during the period of enforcement). This is commonly referred to as “garden leave” compensation.

Lawyers And Broadcasters Are Treated Differently

If you’re not a lawyer or a broadcaster, or if you don’t plan on hiring lawyers or broadcasters, feel free to skip this section and jump to the next one.

In Washington, the laws concerning non-competes are slightly different for lawyers and broadcasters.

Under Washington Rule of Professional Conduct 5.6, Washington lawyers cannot offer or make an employment agreement that restricts the right of a lawyer to practice law after the employment relationship ends, except an agreement that concerns retirement benefits. Washington lawyers also cannot offer or make an agreement in which a restriction on the lawyer’s right to practice is part of the settlement of a client controversy.

Under RCW 49.44.190, employee non-competes entered after 2005, between broadcasting industry employers and their employees are void and unenforceable where the employer terminates the employee without just cause or because of an involuntary layoff.

Can An Independent Contractor Be Subject To A Non-Compete?

Non-competes are almost never used with independent contractors in Washington—and for good reason. A Washington business that required its contractors to enter non-competes would put itself at serious risk of being audited and penalized for employee misclassification by both federal and state agencies. That’s because non-competes give companies considerable control over their workers, and a high level of control is indicative of an employer-employee relationship. Most businesses recognize this and avoid using non-competes with independent contractors.

But even when independent contractors are forced to sign a non-compete, it will only be enforceable under the new non-compete law if the contractor was being paid more than $250,000 per year. Non-competes signed by contractors making less than this income threshold will be nullified.

How Are Non-Competes Enforced?

We end with enforcement. When a former employee violates a non-compete agreement, the employer may bring a lawsuit against the former employee and can seek a range of remedies, including an injunction to prevent the former employee from continuing to violate the agreement.

The employer may also seek to recover monetary damages for the harm it’s suffered as a result of the former employee’s impermissible actions. In some instances, especially if the former employee worked at a low-level, the amount of damages are low enough that it doesn’t make financial sense for the business to pursue damages, in which case it may be satisfied with an injunction that prevents the behavior from continuing. But in cases where high-level employees decamp to a competitor, especially in a rapidly developing industry where companies are racing to capture market share, there may be millions of reasons to pursue monetary damages.

Takeaways

While the new non-compete law in Washington has created more clarity surrounding non-competes, uncertainty remains with whether non-competes will be enforced in Washington in certain circumstances which implications for both employers and employees.

For employers, it’s worth consulting with an attorney before inserting a non-compete into an employment agreement. Even with the new law, it’s not easy for the average business to make an informed analysis of whether the non-compete clause will be enforceable as drafted or as implemented. Resist the temptation to find a generic sample clause and drop it into the employment agreement. Using a non-compete template is playing with fire.

For employees, especially aspiring entrepreneurs, it’s important to understand how a non-compete clause could restrict your ability to start your own company, in which case you may want to consider negotiating the terms of the non-compete or rejecting the offer altogether. If you’ve already signed and are looking for how to get out of the non-compete, talk to a Washington attorney about your options.