A second paradigm shift in D.C.’s noncompete law — no longer a ban, now a wage threshold

January 11, 2021.

Anyone remember that date?

That was the day that Washington, D.C. passed a near ban on employee noncompetes. And, following D.C.’s Home Rule process, the law was enacted as of March 16, 2021, though it was not scheduled to become effective until October 2021, as it needed to be funded.

If you remember, the law would have essentially banned most noncompetes, albeit with some very odd exceptions, including “casual” babysitters and volunteers (as opposed to people who are paid to work — and paid for the noncompete). The law was also set to ban anti-moonlighting provisions, establish certain notice requirements, and impose penalties for noncompliance.

The law was a paradigm shift in D.C.’s noncompete law. It put D.C. (almost) among the ranks of California, North Dakota, and Oklahoma, with their complete bans on employee noncompetes. It stood in stark contrast to the many states that considered — and rejected — noncompete bans over the last decade-plus. Despite many, many proposed bans, literally, not a single state has passed a single one. So when D.C. enacted this law, it was a big deal.

Instructively, the ban was based in part on the popular belief that noncompetes stifle innovation and depress wages. However, there is a lot of disagreement, nuance, and recent uncertainty around those beliefs, though they continue to be accepted as gospel. Worse, the legitimate interests protected by noncompetes (the protection of trade secrets and customer relationships, which are the lifeblood of most companies) and other societal benefits of noncompetes identified in the research were completely ignored.

Not surprisingly, a lot of businesses were unhappy, as were the “D.C. Chamber of Commerce[, . . .] the Federal City Council to the Consortium of Universities of the Washington Metropolitan Area[, . . .] the Washington Nationals” and the broadcast industry. So also surprise, there was a proposed amendment almost immediately.

Following that, the D.C. Council postponed operation of the law until April 1, 2022, allowing additional time to consider the pending amendment.

Well, it turned out that there were more amendments and, as a result, more time was needed. So, as April 1 approached, the law’s effective date was delayed again — this time until October 1, 2022 (where it currently stands).

But, at last (so it seems), as of July 12, 2022, the Council has finally landed on a law that people can live with: essentially a reversal of a total ban and, in its place, a wage threshold, following the lead of eleven states that have already done so and the recommendation of the Obama Administration’s Call to Action on Noncompetes. However, the threshold is substantially higher than that of any of the 11 states that have adopted wage thresholds or similar wage-related requirements.

Note that the amendment still needs approval by D.C.’s mayor and to go through Congress under the Home Rule Act (section 1-206.02(c)). That process will take another month or so. However, it is highly unlikely that the Mayor will veto the amendment or that Congress will disapprove it. Accordingly, it is very likely to amend the law.

So, onto the specifics of the law, assuming it is amended. But if you want to cut to the chase, you can jump straight to “What do you need to know and do now?

Executive Summary

The updated law is set out in the Non-Compete Conflict of Interest Clarification Amendment Act of 2021.

Here’s what you need to know (details are below):

The amended law scales back the original law, and now prohibits noncompetes for anyone other than physicians earning over $250,000 or more, anyone else earning $150,000 or more, casual babysitters (you read that right), partners in a partnership, and government workers. Update: Broadcasters were added as another exempt group. (See here.)

  • Who’s covered: employees who primarily work in D.C. and earn under $150,000 (and physicians earning under $250,000). (The wage threshold holds increase each year — on January 1 — with the Consumer Price Index.)
  • What’s prohibited: noncompetes for employees under the wage threshold and retaliation against employees who object to or complain about noncompetes, or who discuss the law.
  • What’s not prohibited: nondisclosure agreements, noncompetes in connection with the sale of a business, and (maybe) other restrictive covenants.
  • What’s required: providing a copy of any workplace policies that include permitted restrictive covenants and a prescribed notice to persons receiving a noncompete. (The statute contemplates regulations that may require record-keeping to prove compliance.)
  • The consequences of violation the law: potentially hefty fines.

The details are as follows

What does the law do?

The key operative section of the law provides that “no employer may require or request that a covered employee sign an agreement or comply with a workplace policy that includes a non-compete provision.” Any noncompete that violates the prohibition is “void as a matter of law and unenforceable,” though the statute does not seem to invalidate the remainder of the agreement, despite how the prohibition is written.

Who is covered by the statute?

The amendment scales way back who is covered.

Previously, the law provided that it covered essentially any employee who worked or anticipated working in D.C. As I explained at the time, “That definition raise[d] more questions than it answers: What does it mean to perform work in the district? What if an employee is based in Maryland or Virginia, but occasionally has work in the District — is that employee covered? What if an employee works remotely, living in D.C. but directing their services into Maryland or Virginia? I suspect that the intent [was] to cover employees who are both located in D.C. and primarily provide services in the District.”

Well, it seems that the Council listened (presumably to the groups identified above, who likely raised the very same concerns).

The new law provides as follows (emphasis is mine):

(6) “Covered employee” means an employee who is not a highly compensated employee and:

(A) If the employee has commenced work for the employer:

(i) The employee spends more than 50% of his or her work time for the employer working in the District; or

(ii) Whose employment for the employer is based in the District and the employee regularly spends a substantial amount of his or her work time for the employer in the District and not more than 50% of his or her work time for that employer in another jurisdiction; or

(B) If the employee has not yet commenced work for the employer:

(i) The employer reasonably anticipates that the employee will spend more than 50% of his or her work time for the employer working in the District; or

(ii) Whose employment for the employer will be based in the District and the employer reasonably anticipates that the employee will regularly spend a substantial amount of his or her work time for the employer in the District and not more than 50% of his or her work time for that employer in another jurisdiction.

Said slightly more simply, the law will apply only to employees who (1) work at least half of their time physically in D.C.; (2) are based and spend significant time physically working in D.C. and there is no state (or other place) in which they spend more than half of their work time; or (3) are reasonably anticipated by the employer to fall in one of those two categories once they start working.

Importantly, the law expressly excludes certain people from the ban (through the definitions section or otherwise). Specifically, the following people can still be subject to a noncompete in D.C., regardless of anything else in the law (the comments in italic are mine):

  • “Highly compensated employees,” defined essentially as anyone earning over $150,000. This amount increases in proportion to the annual average increase, if any, in the Consumer Price Index for All Urban Consumers in the Washington Metropolitan Statistical Area published by the Bureau of Labor Statistics of the United States Department of Labor for the previous calendar year adjusted to the nearest whole dollar.” This is a new exclusion, and it is significant, although reportedly only about 15 percent of people working in D.C. earn over $150,000.
    • For this exception to be available, the noncompete must (1) specify: “The functional scope of the competitive restriction including what services, roles, industry, or competing entities the employee is restricted from performing work in or on behalf of; . . . [and t]he geographical limitations of the work restriction; and” (2) last no longer than 365 days for anyone other than medical specialists, for whom the term may last up to 730 calendar days.
    • In addition, the employer needs to provide written notice of the noncompete “[a]t least 14 days before the individual commences employment” or, for existing employees, “at least 14 days before the employee must execute the agreement.”
  • “Casual” babysitters “in or about the residence of the employer.” As I asked before, in what world is a noncompete appropriate for a babysitter? 
  • Partners in a partnershipThis is an important exception, though is it all partners? What about limited partners? And, what about members of an LLC? 
  • “Medical specialists,” defined essentially as any practicing doctor (who has completed a residency) who earns at least $250,000. (They are included as a subgroup of highly compensated workers and therefore subject to the same escalation as for other highly compensated employees.) Unlike the pre-amended law, where medical specialists were an exception to ban, the amendment (conceptually) simply sets medical specialists’ wage threshold higher than other employees.
  • Government employees (D.C. and federal). Just as before, though not excluded from the definition of “employee” like the others, government employees are excluded because the District and the federal government are both excluded from the definition of “employer.” My rant (repeated): No surprise. Companies can’t use noncompetes because they’re supposedly bad for employees, but the government (of the people, by the people, for the people) can. (Noncompetes apparently aren’t a problem for an employee when the government imposes them.) Nothing like a good, old-fashioned double standard benefiting the people making the rules. (The ultimate parens patriae!) We will do as you say, not as you do.

Interestingly, the prior exemptions for volunteers and for lay members holding office in a religious organization engaged in religious functions appear to be removed. However, because volunteers by definition are not paid, they obviously fall below the $150,000 exemption threshold. Similarly, lay members holding office in a religious organization are likely paid below that threshold as well.

What’s prohibited?

Again, the amendment fixes some serious problems that existed with the original iteration. When the law becomes effective (assuming the amendment passes), it will apply only to noncompetes or “non-compete provisions” defined as follows:

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.

Note that “workplace policy” is defined to include both written rules and unwritten practices.

Separately, the law (no surprise) prohibits retaliation (including threatened retaliation) against “covered employees” who:

  • refuse to sign a noncompete;
  • fail to comply with a noncompete or unlawful workplace policy;
  • ask, inform, or complain (to the employer, a coworker, a lawyer or agent (whatever that means), or governmental entity) about a noncompete the employee reasonably believes is prohibited; or
  • request a copy of the noncompete.

It also prohibits retaliation against highly compensated employees for similar conduct.

It always surprises me to think that you need to tell someone that they can’t retaliate against someone for following the law.

One important note: The ban of noncompetes is not retroactive. Existing noncompetes will be unaffected (at least directly). But, other aspects of the law are immediate, including, for example, the policy restrictions, which will apply to existing policies and practices.

What’s not prohibited?

Although broad, the definitions expressly exclude the following:

  • Noncompetes in the context of the sale of a business.
  • Nondisclosure agreements/confidentiality agreements, which the statute suggests can be used to protect not just confidential information but “proprietary” information, meaning “information unique to an employer that is compiled, created, or solicited by the employer,” though apparently regardless of whether it is confidential.
  • Anti-moonlighting provisions where the employer reasonably believes that the work will:
    • result in the use or disclosure of confidential or proprietary information;
    • create a conflict of interest;
    • interfere with the employee’s duties to an institution of higher education; or
    • “[i]mpair the employer’s ability to comply with District or federal laws or regulations; a contract; or a grant agreement.”
  • Agreements providing long term incentives, which are defined as “bonuses, equity compensation, stock options, restricted and unrestricted stock shares or units, performance stock shares or units, phantom stock shares, stock appreciation rights and other performance driven incentives for individual or corporate achievements typically earned over more than one year.”

Although the new definition and its exclusions fix some of the more significant issues with the original version of the law, the current definition may prohibit even nonsolicitation, no-service, no-recruit, and no-raid agreements for covered employees. Such an interpretation is supported by the the doctrine of expressio unius est exclusio alterius insofar as the law expressly permits several other types of agreements (i.e., noncompetes in the context of the sale of a business, nondisclosure agreements, noncompetes, anti-moonlighting provisions, and long term incentive agreements), but does not exclude other restrictive covenants.

What else does the law do?

The amendment fundamentally scales back the notice requirements that were initially adopted, making them far less unreasonable than in the original law — but still important to understand and comply with.

Now (assuming the amendment takes effect), the law will require that “[a]n employer with a workplace policy that includes one or more of the exceptions to the definition of ‘non-compete provision’ . . . shall provide a written copy of such provisions to an employee” at the following times:

  • within 30 days after the employee’s acceptance of employment with the employer;
  • within 30 days after October 1, 2022 (i.e., by October 31, 2022); and
  • any time such policy the changes.

In addition, the law requires that “[a] highly compensated employee’s employer shall provide the following notice to the employee whenever a non-compete provision is proposed to the employee”:

The District of Columbia Ban on Non-Compete Agreements Amendment Act of 2020 limits the use of non-compete agreements. It allows employers to request non-compete agreements from “highly compensated employees” under certain conditions. [Name of employer] has determined that you are a highly compensated employee. For more information about the Ban on Non-Compete Agreements Amendment Act of 2020, contact the District of Columbia Department of Employment Services (DOES).

While not directly required, the law anticipates that regulations will be promulgated requiring employers to maintain records of compliance with the law. If that happens, any such records will need to be “open and made available for inspection or transcription by the Mayor, the Mayor’s authorized representative, or the Office of the Attorney General upon demand at any reasonable time.”

In a nod to labor unions, the law expressly does not affect collective bargaining agreements. Of course, workers that are part of collective bargaining agreements are generally unaffected by noncompete laws given that — with limited exceptions, such as some athletes — collective bargaining agreements rarely include noncompetes.

What are the consequences of violating the new law (when it becomes law)? 

While the law includes some minimum due process procedures, the Mayor can essentially assess an “administrative penalty of no less than $350 and no more than $1,000 for each violation of this title; except, that the penalty for each [act of retaliation] assessed against an employer shall be for not less than $1,000.”

And, beyond that, the law includes a complicated “relief and penalties” scheme, with fines up to $3,000 per employee per incident for subsequent violations.

What do you need to know and do now? 

Whether the law becomes effective on October 1, 2022 with the amendment or without it, there are affirmative steps to be taking now to be ready:

  • Check your agreements.

Because you cannot even ask a D.C. covered employee to sign an agreement that includes a noncompete, any agreements that employees sign that include noncompetes that would be applicable to D.C. employees must be updated to remove the noncompete. That means that you also should not have a reference to a noncompete in your offer letters for those people.

And remember that it’s not yet clear if the ban includes other restrictive covenants. So, have a plan about how to handle that. For example, there are alternatives to noncompetes that are not prohibitions on competition, but rather disincentives to compete. There are several variations, some of which, in some states, are treated like noncompetes; but, in others, they’re not. And, there are some that have not been tested. Many of these are discussed in President Biden’s Proposed Ban of (Most) Noncompetes: Protection Strategies and Steps to Take Now.

  • Check your policies.

If you have policies that would violate the act they need to be eliminated before the law takes effect.

  • Change your practices.

Many companies have unwritten practices. Those are covered by this law. Accordingly, if you have practices that would violate the law, they need to change before the law takes effect. That means that employers need to make sure, for example, that supervisors are not discouraging employees from moonlighting (unless the moonlighting fits an exception), including by telling the employee that it’s okay to moonlight, but saying it with a nod and wink, suggesting that it is not really permissible.

  • Be prepared to provide a copy of your policy to every employee in D.C. — not just covered employees.

You will need to provide a copy of any policy that includes permitted exceptions to the new law to any new employee within 30 days after their acceptance of the offer of employment and anytime there is a change. How will you provide the notice? Will it be sufficient to include it with the offer? Probably not — as that is not “after acceptance.” Will a posting with other workplace notices be sufficient? Will you need to provide something in writing to address unwritten policies? You will need a plan.

  • Be prepared to provide a copy of the statutory language to every highly compensated employee.

The notice must accompany the noncompete.

* * *

This is a law that you need to stay ahead of, whether amended or not (and especially if not amended). We’ll keep you posted, but it is almost certainly coming your way soon.

Next stop:  Congress.

Stay tuned!

 

*Thank you to Erika Hahn for continuing to track the convoluted course of this law. Photo credit: David Mark.