Washington DC’s Near-Total Ban on Non-Compete Agreements – What Employers Need to KnowFebruary 15, 2021
Employers operating in Washington DC will soon be prohibited from asking or requiring DC employees to agree to non-competition provisions.
Passed unanimously by the Council of the District of Columbia on December 15, 2020, the Ban on Non-Compete Agreements Amendment Act of 2020 is expected to take effect later this year and is prospective only, meaning it will not affect existing non-compete agreements.
However, employers should be aware that some current practices may be invalidated to the extent they contradict the Act and the bill may prohibit renewal of non-compete agreements following the effective date.
The DC law is in line with a trend toward curtailing the use of non-compete agreements nationally. Other states have recently enacted less stringent limitations, including Virginia (2020) and Maryland (2019), that generally focused on lower-income employees. The DC Act, however, stands out for its breadth and scope.
When does the ban take effect?
DC Mayor Muriel Bowser signed the bill on January 11, 2021, after which it was sent to Congress for review. Congress had 30 days to pass a joint resolution disapproving it (and get that resolution signed by President Biden). Since Congress did not take action within that time, the ban becomes applicable after a budget and financial plan that includes its fiscal impact is approved.
Who is affected?
The bill broadly defines “employer” as any individual or company operating in the District and is not limited to employers that are physically located or incorporated there. Its definition of “employee” is equally broad, including any individual who “performs work in [the District of Columbia] on behalf of an employer and any prospective employee who an employer reasonably anticipates will perform work on behalf of the employer in the District.” Neither definition specifies a threshold amount of time spent in the District or percentage of overall work performed there. Remote work, a particular concern at the moment, is also not addressed.
What does the non-compete ban include?
The bill generally prohibits employers from requiring or requesting that their employees agree not to (1) be employed by another person; (2) perform work or provide services for pay for another person; or (3) operate their own business – what most people think of as a standard non-compete agreement. However, there are some key points that employers should know. First, the ban is not limited to post-employment agreements. Instead, the bill prohibits such provisions while the employee is still employed. Second, the ban is not limited to contractual agreements or provisions. Rather, it applies to any rules and policies – written or unwritten – implemented by an employer to govern employee conduct.
A key exception: Agreements connected to sale or merger
The Act permits non-competes signed in the context of an agreement between the buyer and seller, generally related to a merger, acquisition or sale. This retains a key element for most employers considering M&A following the effectiveness of the Act, given the critical nature of ensuring that recent competitors do not immediately re-enter the marketplace following a transaction.
What about other restrictive covenants like non-solicitation or confidentiality agreements?
The bill does not prohibit agreements that restrict an employee from disclosing an employer’s confidential or proprietary information such as client lists or trade secrets. However, it does not include a similar carve-out for non-solicitation provisions or agreements. A court interpreting the bill broadly could extend it to cover some non-solicitation agreements and it remains to be seen how courts will interpret the non-compete ban if it become law.
Are there other requirements besides the non-compete ban?
The bill imposes both notice and non-retaliation obligations on covered employers. Should the bill become effective, employers are required to inform employees that they cannot be asked or required to agree to non-compete provisions or policies.
The specific notification language employers must use is set forth in the bill and must be provided within:
- 90 calendar days after the bill takes effect;
- 7 calendar days after a new employee is hired; and
- 14 calendar days after an employer receives a written request from an employee.
Additionally, employers are prohibited from retaliating against employees for
- refusing to agree to a non-compete provision;
- failing to comply with a provision or policy banned by the bill;
- requesting the notice referenced above; or
- discussing (including complaining about) a non-compete provision or policy to certain individuals, including coworkers.
It is easy to see how these requirements may raise stumbling blocks for employers wanting to address, for example, a disloyal employee moonlighting for a competitor due to the broad ban on retaliation against employees for performing work for another person. Should the bill become law, it will be up to the courts to both interpret its language and reconcile the non-compete ban with established law in DC.
What is the enforcement procedure?
Employees may seek redress either through an administrative process or the court system. The bill empowers the Mayor’s office to issue administrative fines of $350-$1,000 per violation. It makes the employer directly liable to any affected employee in an amount of $350-$3,000.
How can I prepare?
Employers can take advantage of this period to prepare because the ban will not become effective until its fiscal impacts have been included in an approved budget. This will likely be later this year when DC’s 2022 budget and financial plan is approved.
Since the ban is not retroactive, employers should consider entering into any desired non-competition agreements before the law takes effect. Keep in mind, however, that a non-compete entered into by an existing employee without some consideration – e.g. a salary increase – would likely be deemed void and unenforceable even in the absence of the ban. Similarly, employers should review their non-solicitation agreements and internal conflict of interest policies to ensure that the employer is protected as much as possible.
Employers should also take this time to evaluate all employment notices and policies and make any necessary changes, and assess the potential enforcement challenges posed by the bill’s non-retaliation provisions.