In 2019, Washington enacted a new statute limiting which employees1 can be covered by a post-employment noncompetition covenant, placing specific restrictions on such covenants. That statute explicitly excluded nonsolicitation covenants from coverage under the statute but defined nonsolicitation covenants ambiguously.
Effective June 6, 2024, the legislature has made changes to the statute that will expand the statutory requirements to more restrictive covenants.
Under RCW 49.62, a primary requirement to enforce a noncompetition covenant is that at the time of enforcement or the employee’s termination (whichever occurs first), the employee’s annual taxable earnings must meet a set threshold. For 2024, that threshold is $120,559.99. The threshold changes each year for inflation.
Another key requirement to enforce a noncompetition covenant is that the terms of the covenant must be communicated in writing to the prospective employee no later than the time the employee accepts the job offer. If given later, additional consideration is required.
With the new legislation (SB 5935), more restrictive covenants than before will be determined to be “noncompetition” covenants subject to all the statutory requirements in order to be enforceable.
Construed in the Employee’s Favor and in Favor of Coverage by the Statute
As a preliminary matter, the legislature amended the statute to instruct that any exceptions to the statute’s coverage must be narrowly construed, and that as a whole the statute should be liberally construed to protect employees and facilitate workforce mobility (from one employer to another). The practical result of this instruction is that any ambiguities as to whether (or to what extent) a restrictive covenant is enforceable will be construed against the employer.
More Traditional Nonsolicitation Covenants Will Now Have to Meet the Requirements of the Statute
A substantial change resulting from the new legislation is that more restrictions traditionally considered “nonsolicitation” covenants excluded from the requirements of the statute will now be considered “noncompetition” covenants covered by the statute.
For example, while companies can still prohibit former employees from soliciting business from a customer without meeting all the statutory requirements, any prohibition on accepting business from or transacting business with customers will be considered a noncompetition covenant and subject to all the requirements of the statute.
Additionally, a restriction on soliciting customers can now only apply to current customers, and not prospective or former customers, in order to be excluded from the requirements of the statute. The new bill does not provide any guidance on what constitutes a current customer.
Noncompetition Covenants Tied to the Sale or Purchase of a Business
From the beginning, the statutory requirements for an enforceable noncompetition covenant did not apply to agreements entered into as part of the sale or purchase of a business. This provision remains in the statute, but the new bill amends it to clarify that the interest being bought or sold must represent at least 1 percent of the business for the exclusion from the statutory requirements to apply.
Provided by the Time the Employee Accepts the Job Offer
While the statute has always required that the terms of the noncompetition covenant be provided to the individual no later than at the time of accepting the offer of employment, the new bill clarifies that it must be before, or at the time of, the “initial oral or written” acceptance of the offer. In situations where there is negotiation of terms of employment back and forth, it may be difficult to determine whether the noncompetition covenant terms were provided by the time of the initial acceptance—particularly if the initial acceptance was oral. If the terms were not provided on time, additional consideration is needed to make the agreement enforceable.
Washington Law Must Apply
In the original statute, to be enforceable, a noncompetition covenant had to provide all the protections of the Washington statute to Washington employees—but it did not say explicitly that Washington law applied. Now the statute will explicitly require that Washington law apply to any such noncompetition covenant with a Washington-based employee.
Can Sue to Recover Damages Even If Not a Party to the Noncompetition Covenant
The original statute provided that any party to an agreement containing a noncompetition covenant could bring an action challenging the restrictions and seek modifications, and/or the greater of actual damages, or $5,000 statutory damages, plus attorney fees and costs.
Under the new legislation, there is now no requirement that the person or entity bringing suit be a party to the agreement, provided that they can demonstrate they are “aggrieved” by the noncompetition covenant. As a practical matter, this means that the employee’s new employer may also sue to challenge or modify the noncompete covenant and recover their damages and attorney fees.
Key Takeaways
Employers should review their restrictive covenants to ensure compliance with the new requirements, and if necessary, revise those restrictions before June 6, 2024.
Employers should also review and possibly revise their confidentiality agreements, as those can provide some protections for which the employers previously relied on nonsolicitation or other provisions. For example, while employers can no longer include prospective clients in nonsolicitation covenants, the employer may be able to prevent former employees from using confidential information the employer developed about prospective customers—such as prohibiting a former employee from taking or using prospective customer lists and contact information.
Finally, employers should either provide a copy of the actual agreement containing restrictive covenants with a job offer or include the text of the restrictive covenants in the job offer itself, to ensure that it is communicated before the applicant’s initial acceptance of a job offer. In a situation where there may be lengthy negotiations of terms, the noncompetition covenants should be provided earlier rather than later in the process. Because oral acceptance of a job offer is sufficient, and oral conversations will be difficult to prove, employers are well-advised to include the restrictive covenants in any offer even if it is merely a preliminary or conditional offer.
1 Note, the statute also pertains to noncompetition covenants on independent contractors, but those are not covered in this post.
The legal issues impacting workplaces are ever changing (Employment Law in Motion!), and since publication, new or additional information not referenced in this blog post may be available.
This article is provided for informational purposes only—it does not constitute legal advice and does not create an attorney-client relationship between the firm and the reader. Readers should consult legal counsel before taking action relating to the subject matter of this article.
