Many employers require employees to sign non-compete agreements that prohibit them from starting new employment with a competitive business, starting their own competing business, or even providing similar services for a finite period of time, within a specific geographic area, or that subject them to other similar conditions once their employment ends. Studies have shown that non-compete agreements are harmful for workers, preventing mobility, weakening wage growth (by restricting an employee’s ability to leave for a higher paying job), and limits the starting of businesses. Non-compete agreements have become increasingly common in recent decades, with between 30-60 million American private-sector workers subject to these restrictive covenants.
The District of Columbia (DC) recently joined a growing number of jurisdictions that are limiting employers from requiring employees to enter into these types of agreements as a condition of their employment. Initially, the DC City Council passed a broad ban on noncompete agreements in December 2020, which essentially was a complete ban on the practice. This would have brought DC in line with states like California that have banned non-competes for years. The law really never took effect due to a lack of funding for enforcing the measure. In the interim, the DC Council was lobbied by various groups seeking broad carveouts from the ban. As a result, in March 2022, the Council voted to amend and weaken the prior ban on non-competes. The Non-Compete Clarification Amendment Act of 2022 will go into effect on October 1, 2022.
Overview of the Amendments
Covered Employees: The DC Non-Compete Clarification Amendment Act of 2022 has some significant changes from the original version. As written, it only bans non-competes for employees earning less than $150,000 in total compensation (or less than $250,000 for medical professionals), which includes hourly wages, salary, bonuses, or cash incentives like commissions, overtime premiums, vested stocks, and other payments provided on a regular basis. The “highly compensated” employee limitation does not apply to broadcast employees, for whom all non-competes are still banned, no matter their compensation.
By imposing an income threshold, the Amendment brings DC more in line with some other states that have restricted non-competes, including Colorado and Washington. For those “highly compensated” employees earning more than $150,000, non-competes will be valid if limited to 1 year in duration (2 years for medical specialists) and provided to the employee at least 14 days before starting employment. The non-compete also must detail exactly what roles, industries, or competing entities the individual cannot work in or for, and specifically describe the geographic scope of the restriction. For insight, the median salary in DC is approximately $104,000 per year, which means 50% of employees earn more than $104,000. This likely will result in a sizeable percentage (over 1/3) of DC’s workers being considered “highly compensated” under the Amendment.
Although substantially narrowed from its original form, the Amendment will still protect more employees than DC’s neighbors in the Washington metropolitan area. Virginia only bans non-competes for “low-wage employees” earning approximately $67,080 or less annually, while Maryland’s is even narrower, applying to employees who earn equal to or less than $15 per hour or $31,200 annually. The Amendment also applies to any worker (i) who spends at least 50% of time working inside DC; or (ii) if the employer is based in DC, and the employee spends a “substantial amount” of time working in DC, and not more than 50% of time working for the employer in another jurisdiction (as well as new hires expected to satisfy either of those requirements.
Scope of Prohibited Non-Competes: Additionally, the Amendment included additional restrictions that narrowed the scope of what constitutes a prohibited “non-compete provision” by both modifying the term’s definition and by expressly excluding other restrictive covenants from the definition. Specifically, the Amendment changed the definition of “non-compete provision” to “a provision in a written agreement or a workplace policy that prohibits an employee from performing work for another for pay or from operating the employee’s own business.” The definition of non-competes does not include provisions that: (1) prohibit employees from disclosing, using, selling, or accessing their employer’s confidential or proprietary information; or (2) restrict an employee for working for a person other than the employer during their employment (anti-moonlighting) because the employer reasonably believes that could result in the disclosure or use of confidential information or create a conflict of interest. Further, the amendments permit non-compete provisions in long-term incentive plans, such as bonuses and stock options, in addition to anti-moonlighting restrictions for employees to not work in industries that conflict with their current employer.
Anti-Retaliation: The Amendment continues to prohibit employers from retaliating against employees for refusing to agree to a noncompete that is prohibited by the Act, refusing to comply with a noncompete that is prohibited by the Act, requesting notice or complaining about a non-compete agreement reasonably believed to be prohibited by the Act.
Enforcement: DC’s Mayor and Attorney General are authorized to enforce the amended ban and may impose administrative fines in the range of $350 to $1,000 per violation for the first offence and $3,000 for a subsequent offense. Employees also may file an administrative complaint with the Mayor’s office or a civil action in court within 365 days from the date they left employment.
The Upshot: Despite the DC City Council’s good intentions, the initial law was much stronger for worker rights than the amended version, after much successful lobbying by business interests. The amended law scales back many of the broad restrictions on non-compete agreements and carves out loopholes for employers to take advantage. Almost every worker in DC would have been covered under the prior non-compete ban, but now that is no longer the case. Employers will likely find go arounds to include non-compete agreements for non-highly-compensated workers in addition to highly-compensated ones.
If you have questions about the enforceability of your non-compete agreement, Outten & Golden can provide advice and guidance.