United States: How to Protect Your Talent From the Competition: New Challenges Imposed by Washington’s Law Regulating Noncompete and Nonsolicitation Covenants

Published on Apr 9, 2024

Businesses operating in Washington state that require their employees or contractors to comply with noncompete or customer nonsolicitation covenants should review their agreements to avoid claims and penalties when significant changes to state law become effective on June 6, 2024. This is because Washington’s Legislature recently amended the state’s 2019 law to further limit restrictive covenants for the purpose of “facilitating workforce mobility.”

Businesses seeking to hire in Washington’s competitive job market may find this welcome news. But because this law applies retroactively, businesses imposing restrictive covenants will find it increasingly difficult to enforce existing agreements. Coupled with the law’s automatic annual adjustments to the earnings threshold, garden leave for layoffs, and monetary penalties, businesses may want to consider alternative ways to protect their trade secrets and proprietary information. Read on for our top ten takeaways about this new state law.

New definitions. When Washington’s law became effective on January 1, 2020, it imposed earnings thresholds, durational limits, and garden leave requirements on “noncompetition covenants,” but it created an exception for “nonsolicitation agreements.” See Lane Powell's previous Legal Update. The 2024 amendments change both definitions.

(a) “Noncompetition covenant” definition is expanded. The 2019 law defined noncompetition covenants to cover agreements that “prohibited or restrained [an employee or contractor] from engaging in a lawful profession, trade, or business of any kind.” Under the new definition, a "noncompetition covenant" now also includes “an agreement that directly or indirectly prohibits the acceptance or transaction of business with a customer.” These “no acceptance of business” covenants were commonly used by businesses to protect their customer base from competition without having to prove that their former employee engaged in solicitation. That option no longer exists under the new law.

(b) Customer nonsolicitation agreement is narrowed to current customers only. The 2019 law defined a customer nonsolicitation agreement to mean an agreement that prohibits solicitation “of any customer of the employer to cease or reduce the extent to which it is doing business with the employer.” Now, the carve-out for a "nonsolicitation agreement" applies only to "current" customers of the business. The 2024 amendments do not define who is considered a “current" customer, nor do they explain when a current customer becomes a former customer.
Prior exceptions were retained. The 2019 law contains other exceptions to the definition of “noncompetition covenant” that remain in place and were not amended. Those exceptions include: (a) a confidentiality agreement; (b) a covenant prohibiting the use or disclosure of trade secrets or inventions; and (c) a covenant entered into by a franchisee when the franchise sale complies with RCW 19.100.020(1).
At least 1% ownership interest is needed to meet the ownership interest exception. Since 2020, the “noncompetition covenant” definition has contained an exception for ownership interests, thereby creating a significant exception to the law when businesses are sold or purchased. The 2024 amendments now limit this exception to “a covenant entered into by a person purchasing or selling the goodwill of a business or otherwise acquiring or disposing of an ownership interest, but only if the person signing the covenant purchases, sells, acquires, or disposes of an interest representing one percent or more of the business.”
The law can be enforced by non-parties. The 2024 amendments remove prior language requiring that a person be a party to a noncompete covenant to bring an action for relief under the law. This expands the protections of the law and gives legal standing to affected persons, even if they are not a party to the contract.
“Explicitly leveraging” a pre-2020 noncompete results in scrutiny of the agreement under the statute. When the law became effective on January 1, 2020, it applied retroactively to existing agreements, but contained an exception preventing claims where the business did not enforce the noncompetition covenant. This gave businesses some flexibility to determine whether to enforce a non-compliant pre-2020 agreement at the time an employee departed, but it created some uncertainty. Under the 2024 amendments, a claim can be brought when the business either enforces or “explicitly leverage[s]” the existing agreement.
Pre-hire disclosure is clarified. The 2019 law made a noncompetition covenant void and unenforceable unless the terms of the covenant were disclosed in writing to the prospective worker no later than “the time of the acceptance of the offer of employment.” However, the 2024 amendments require any noncompetition agreement to be disclosed to the applicant before "initial oral or written" acceptance of the job offer. Businesses who utilize noncompete agreements should avoid oral job offers to avoid the possibility that the applicant will immediately accept the job before the noncompete covenant is disclosed, effectively requiring new or additional consideration.
Noncompetes are void if they allow or require application of law other than Washington law. When the law was enacted in 2019, the Washington Legislature made it clear that a noncompetition covenant signed by a Washington-based employee or independent contractor is void and unenforceable “to the extent it deprives the employee or independent contractor of the protections or benefits of this chapter.” The 2024 amendments clarify this restriction to make it more difficult to apply the law of other states. Now, a noncompete covenant is void if “[i]t allows or requires the application of choice of law principles or the substantive law of any jurisdiction other than Washington state.”
Traditional contract principles are further displaced. Washington's noncompete statute expressed a clear intention to displace "conflicting tort, restitutionary, contract, and other laws of this state pertaining to liability for competition by employees or independent contractors with their employers or principals." The 2024 amendments add the displacement of contract principles related to discharge by assent or alteration.
Statute’s protections must be liberally construed and exceptions narrowly construed. If it was not already obvious from the language of RCW 49.62.110, the 2024 amendments make it clear that the law’s protections should be liberally construed, while its exceptions will be narrowly construed.
Automatic increases to earnings thresholds. The 2019 law contained earnings thresholds that automatically increase each year. The 2024 earnings thresholds are $120,559.99 for employees as reflected on box one of the employee's Form W-2 from the prior year, or $301,399.98 for independent contractors as reported on Form 1099-MISC. Businesses cannot enforce noncompetition covenants when the worker did not meet the applicable threshold. The law’s technical definition can easily trip up businesses.

What Should Businesses Do Now?

Businesses that impose noncompete or customer nonsolicitation covenants on workers should consider taking the following steps:

Review restrictive covenants signed by workers to ensure that the covenants remain enforceable under prior law and the amendments to avoid penalties;
Remember to disclose restrictive covenants to the applicant when making the job offer and avoid oral offers;
If you use noncompete agreements, be sure to disclose the terms of the noncompete to the applicant before, or at the time of, the job offer;
Because Washington’s noncompete law does not currently regulate the use of confidentiality, nondisclosure, or trade secret agreements, businesses should consider whether their interests can be adequately protected without the need for other restrictive covenants;
Remember that the Federal Trade Commission has proposed a rule that would severely limit the use of noncompete agreements and similar restrictive covenants and, if adopted, would likely provide even greater protection to workers; and
Pay attention to the ever-increasing earnings thresholds and consider releasing workers from unenforceable agreements when they depart.

Lane Powell’s team of labor and employment attorneys is here to help your organization comply with state and local laws, and develop and implement the strategy that supports your business and your employees. For more information, contact Katheryn Bradley or Sean Jackson, or visit our firm’s Labor, Employment & Benefits page. Keep up-to-date by subscribing to Lane Powell’s Legal Updates.