Category: Miscellaneous

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Under Washington State laws, when are employee noncompetition covenants void and unenforceable? Here’s my point of view.

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NONCOMPETITION COVENANTS (WA STATE)

Generally, a noncompetition covenant is “[a] promise , usu. in a sale-of-business, partnership, or employment contract, not to engage in the same type of business for a stated time in the same market as the buyer, partner, or employer.” Black’s Law Dictionary 392 (8th ed. 2004) (emphasis added). In Washington State, a “‘[n]oncompetition 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.” RCW 49.62.010(4)*.

The Washington State Legislature has found both 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.” RCW 49.62.005* (hyperlink added). Washington’s noncompetition covenants law (hereinafter, “law”), RCW 49.62*, took effect on January 1, 2020 and establishes when such noncompetition covenants are void and unenforceable. See RCW 49.62.900*.

WHEN VOID AND UNENFORCEABLE

In Washington State, a noncompetition covenant is considered void and unenforceable against an employee unless certain conditions are met. The relevant law follows:

RCW 49.62.020*

(1) A noncompetition covenant is void and unenforceable against an employee:

(a)(i) Unless the employer discloses the terms of the covenant in writing to the prospective employee no later than the time of the acceptance of the offer of employment and, if the agreement becomes enforceable only at a later date due to changes in the employee’s compensation, the employer specifically discloses that the agreement may be enforceable against the employee in the future; or

(ii) If the covenant is entered into after the commencement of employment, unless the employer provides independent consideration for the covenant;

(b) Unless the employee’s earnings from the party seeking enforcement, when annualized, exceed one hundred thousand dollars per year. This dollar amount must be adjusted annually in accordance with RCW 49.62.040*;

(c) If the employee is terminated as the result of a layoff, unless enforcement of the noncompetition covenant includes compensation equivalent to the employee’s base salary at the time of termination for the period of enforcement minus compensation earned through subsequent employment during the period of enforcement.

(2) A court or arbitrator must presume that any noncompetition covenant with a duration exceeding eighteen months after termination of employment is unreasonable and unenforceable. A party seeking enforcement may rebut the presumption by proving by clear and convincing evidence that a duration longer than eighteen months is necessary to protect the party’s business or goodwill.

RCW 49.62.020*.

INDEPENDENT CONTRACTORS

The law also protects independent contractors to a certain extent. “A noncompetition covenant is void and unenforceable against an independent contractor unless the independent contractor’s earnings from the party seeking enforcement exceed two hundred fifty thousand dollars per year.” RCW 49.62.030* (emphasis added). “This dollar amount must be adjusted annually in accordance with RCW 49.62.040*.” Id. In addition, “[t]he duration of a noncompetition covenant between a performer and a performance space, or a third party scheduling the performer for a performance space, must not exceed three calendar days.” Id.

UNENFORCEABLE COVENANT PROVISIONS

Lastly, the law determines when noncompetition covenant provisions are unenforceable. “A provision in a noncompetition covenant signed by an employee or independent contractor who is Washington-based is void and unenforceable:

(1) If the covenant requires the employee or independent contractor to adjudicate a noncompetition covenant outside of this state; and

(2) To the extent it deprives the employee or independent contractor of the protections or benefits of this chapter[, RCW 49.62*].”

RCW 49.62.050* (paragraph formatting, emphasis, and hyperlinks added).

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OTHER SECTIONS OF THE LAW

There are additional provisions in the law (e.g., Franchisor Restrictions*, Employees Having an Additional Job*, Remedies*, etc.*) that are beyond the scope of this article. For more information, I encourage the reader to review the entire act* — RCW 49.62*.

DEFINITIONS

For purposes of this article, the following definitions apply:

RCW 49.62.010*

Definitions. The definitions in this section apply throughout this chapter unless the context clearly requires otherwise.

(1) “Earnings” means the compensation reflected on box one of the employee’s United States internal revenue service form W-2 that is paid to an employee over the prior year, or portion thereof for which the employee was employed, annualized and calculated as of the earlier of the date enforcement of the noncompetition covenant is sought or the date of separation from employment. “Earnings” also means payments reported on internal revenue service form 1099-MISC for independent contractors.

(2) “Employee” and “employer” have the same meanings as in RCW 49.17.020*.

(3) “Franchisor” and “franchisee” have the same meanings as in RCW 19.100.010*.

(4) “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)*.

(5) “Nonsolicitation agreement” means an agreement between an employer and employee that prohibits solicitation by an employee, upon termination of employment:

(a) Of any employee of the employer to leave the employer; or

(b) of any customer of the employer to cease or reduce the extent to which it is doing business with the employer.

(6) “Party seeking enforcement” means the named plaintiff or claimant in a proceeding to enforce a noncompetition covenant or the defendant in an action for declaratory relief.

RCW 49.62.010* (paragraph formatting, emphasis, and hyperlinks added).

(*This link refers the visitor to an external website: Washington State Legislature: Revised Code of Washington (RCW).)

(**This link refers the visitor to our external website: Williams Law Group Blog.)

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