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 2022.

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:

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 partnership. This 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.