Changes to WA’s Non-Compete Law Require Employers to Take Action

Since 2020, with the adoption of Washington state's non-compete statute (Chapter 49.62 of the Revised Code of Washington ("RCW 49.62")), Washington has imposed significant restrictions on employer use of non-compete agreements with employees and independent contractors, permitting such agreements only subject to certain statutory and common-law requirements, including without limitation, a minimum annual earnings threshold (the 2024 limits are $120,559.99 for employees and $301,399.98 for independent contractors), and a Washington forum for any disputes.

Now, Senate Bill 5935 ("SB 5935") - which takes effect on June 6, 2024 - amends the non-compete statute to further restrict the use of non-compete provisions and expand the types of agreements that may be considered non-competes. As a result, employers will need to take quick action to review their employment agreements and hiring processes to ensure compliance with the new law.

However, as discussed in our Covington Alert, on April 23, 2024 the Federal Trade Commission issued a final rule purporting to ban the use of non-competes with most U.S. workers. The FTC Rule - should it become effective - would supersede inconsistent state laws. The earliest the FTC Rule would take effect is late August 2024, and pending legal challenges may result in court orders that could delay or stay enforcement of the FTC Rule. Accordingly, employers with workers in Washington State should take steps to comply with SB 5935 before it takes effect on June 6, 2024. Employers should also consider consulting with employment and executive compensation counsel for assistance with navigating the evolving non-compete landscape.

Here is an overview of the key changes under SB 5935:

1. Covenants that restrict the acceptance or transaction of business with a customer will be considered non-competes. Prior to this latest amendment, the statute defined a non-compete covenant as "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." SB 5935 expands this definition to include any "agreement that directly or indirectly prohibits the acceptance or transaction of business with a customer." Employers should take note that such provisions, which often appear in customer non-solicitation clauses (discussed more below), will now be considered non-competes.

• Non-solicitation covenants that apply to former or prospective customers are now considered non-competes. Although "non-transaction of business" and "no acceptance of business" provisions are now non-competes under RCW 49.62, the statute continues to exclude non-solicitation covenants (customer and service provider) from the definition of non-compete. However, SB 5935 does narrow this exclusion by limiting customer non-solicitation covenants to only those that prohibit solicitation of "current" customers of the employer, and thus non-solicitation covenants that apply to former or prospective customers will be considered non-competes.

• Sale of business exception limited to individuals with at least 1% stake. The new law narrows the exception pertaining to sale of business non-competes. Sale of business non-competes will be excluded only if the individual signing the covenant "purchases, sells, acquires, or disposes of an interest representing one percent or more of the business." Previously, the statute broadly excluded sale of business non-competes from the definition of "noncompetition covenant."

• Disclosure timeline has changed. SB 5935 requires that employers disclose the terms of a non-compete covenant in writing to a prospective hire before the individual's "initial oral or written" acceptance of the offer of employment.

• Non-competes must be governed by Washington law. The existing statute requires Washington choice of forum for any non-compete statute. The new law now also specifies that any provision in a non-compete covenant entered into with a Washington service provider that requires the application of choice of law principles or the substantive law of any jurisdiction other than Washington, will be void and unenforceable.

• Third parties have a cause of action. The existing statute gives a private right of action to parties to a non-compete agreement. SB 5935 removes the requirement that an individual bringing a claim must be a party to the agreement. This means that third parties, such as aggrieved employers prevented from hiring an employee, can now bring a cause of action.

• Employers could have exposure with respect to non-compete agreements entered into before January 1, 2020, if they "explicitly leverage" the agreement. RCW 49.62 was originally enacted in 2019, and it had retroactive application to non-compete covenants entered into before January 1, 2020, but only if the employer sought to enforce the agreement. As amended, Washington's non-compete statute will apply to pre-2020 agreements if a party is "explicitly leverag[ing]" the non-compete covenant.

Steps to Get Ready

In light of the challenges to the FTC's non-compete rule and because SB 5935 will go into effect before the effective date of FTC rule, employers with employees or contractors in Washington should update their forms and processes before June 6, 2024 to comply with the new requirements of SB 5935. Employers should consider taking the following actions:

• Review employment agreements and templates to determine whether they contain restrictive covenants that are impacted by the new law, with a particular focus on provisions that (i) include "non-transaction of business" or "no acceptance of business" covenants, or (ii) customer non-solicitation covenants that apply to former or prospective customers. Ensure that any such provisions are consistent with the new requirements, and make any revisions as needed.

• Review hiring processes to ensure the terms of the non-compete are disclosed in writing before the acceptance of a job offer, including oral acceptance. In particular, employers should consider steps that may need to be taken if offers are made orally.

• Before enforcing or threatening to enforce a non-compete covenant entered into before January 2020, employers should consider consulting with counsel. While SB 5935 specifies that it applies retroactively if a party is "explicitly leverag[ing]" a non-compete covenant, the law does not provide further guidance on what this means.

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