A new D.C. law that takes effect on October 1, 2022, will significantly limit the ability of employers to tie their District of Columbia-based employees to noncompetition agreements.
What happened?
In July 2022, the Council of the District of Columbia passed the Non-Compete Clarification Amendment Act of 2022 (2022 Act), which, as the name suggests, amended D.C.’s prior attempt to regulate noncompetes, the Ban on Non-Compete Agreements Amendment Act of 2020 (2020 Act). The 2020 Act would have imposed perhaps the broadest ban on noncompete agreements in the country—banning even agreements that prohibit work for a competitor during employment—but following outcry from the business community, the 2020 Act’s effective date was delayed while the Council considered amendments.
The 2022 Act is more business friendly than the earlier version but still imposes substantial restrictions on noncompetition agreements.
What is prohibited?
The biggest prohibition is the 2022 Act’s outright ban on “noncompete” agreements for D.C.-based employees who make less than $150,000 per year (or less than $250,000 if the employee is a physician). This compensation threshold is far higher than those of neighboring jurisdictions. Maryland prohibits non-competes only for those who make less than $15 per hour/$31,200 per year and Virginia prohibits them only for employees who make less than approximately $67,000 per year.
Noncompete agreements for “broadcast employees” (e.g., anchors, disc jockeys, reporters, etc.) are prohibited, no matter how much they make.
The new law applies only to employees who work in D.C. (even if the employer is headquartered elsewhere). Under the 2022 Act, an employee works in D.C. if they:
- Spend (or are anticipated to spend) more than 50% of their work time for the employer working in D.C.
- Are based in D.C. and regularly spend a substantial amount of their work time for the employer in D.C. and not more than 50% of their work time for the employer in another jurisdiction.
The law defines a “non-compete” as “a provision in a written agreement or workplace policy that prohibits an employee from performing work for pay or from operating the employee’s own business.”
Notably, the definition is not just limited to postemployment competition but extends to an employee working another job even while employed by the employer. It also extends beyond formal agreements to workplace “policies” that contain noncompete restrictions.
Many employers have “no moonlighting” and conflict-of-interest policies or agreements that restrict concurrent employment, and the 2022 Act sweeps those into its scope. Fortunately, in a change from the 2020 Act, the new law contains an exception for policies and agreements that prohibit employees from “performing work for a person other than the employer, during the employee’s employment with the employer, because the employer reasonably believes the employee’s acceptance of money or a thing of value under such circumstances will:
- “Result in the employee’s disclosure or use of confidential employer information or proprietary employer information;
- “Conflict with the employer’s, industry’s[] or profession’s established rules regarding conflicts of interest;
- “Constitute a conflict of commitment if the employee is employed by a higher education institution; or
- “Impair the employer’s ability to comply with District or federal laws or regulations[,] a contract[,] or a grant agreement.”
Under this exception, policies and agreements that prohibit concurrent employment by D.C. employees making less than $150,000 per year should still be allowed, provided they are drafted in a way that makes clear that such employment would be a conflict of interest (for example, if the employment was with a competitor, client or vendor).
What is allowed?
First, the 2022 Act applies only to agreements entered into on or after October 1, 2022, so agreements signed before then are unaffected.
Second, for agreements made on or after October 1, 2022, non-competes are allowed if the employee earns more than $150,000 per year ($250,000 for physicians). In determining whether this threshold is met, all forms of compensation are taken into account, including salary, bonus, commissions, overtime and vested stock (the value of fringe benefits, however, is not included).
For these “highly compensated employees,” a noncompete cannot last longer than one year from the date of termination or two years if the employee is a physician. Further, the agreement must specify:
- “The functional scope of the competitive restrictions, including what services, roles, industry[] or competing entities the employee is restricted from performing work in or on behalf of”
- “The geographic limitations of the work restriction.”
Third, for all employees, regardless of compensation, agreements that prohibit “[d]isclosing, using, selling[] or accessing the employer’s confidential employer information or proprietary employer information” are excluded from the definition of “non-compete” and therefore are permitted.
The statute defines “confidential employer information” as “information owned or possessed by the employer that is not available to the general public and that the employer has taken reasonable steps to ensure is protected from improper disclosure.” “Proprietary employer information” is “information unique to an employer that is compiled, created[] or solicited by the employer, including customer lists, client lists[] and trade secrets,” as the term is defined under the D.C. Uniform Trade Secrets Act.
Fourth, noncompete agreements are permitted in long-term incentive plans, even if the employee makes less than $150,000 per year. The 2022 Act defines these as “bonuses, equity compensation, stock options, restricted and unrestricted shares or units, performance stock shares or units, phantom stock shares, stock appreciate rights, and other performance[-]driven incentives for individual or corporate achievements typically earned over more than one year.” The upshot of this exception is that employers should be allowed to condition receipt of long-term incentive compensation on compliance with a noncompete.
Fifth, the 2022 Act does not apply to noncompete provisions entered into at the same time as the sale of a business where the seller agrees not to compete with the buyer’s business.
Sixth, the law does not apply to “partner[s] in a partnership,” so noncompete agreements contained in partnership agreements are still allowed. (“Casual babysitters” are also excluded from the law.)
And last, the law is silent as to whether customer non-solicitation provisions are barred. These provisions—which typically prohibit post-termination soliciting or selling to customers of the employer—are therefore presumably permissible under the law, regardless of the employee’s level of compensation.
However, one can envision an argument that an agreement prohibiting soliciting or selling to certain customers is a type of agreement “that prohibits an employee from performing work for pay” and is therefore a form of “non-compete” as the 2022 Act defines it. The final answer to this question will likely come from the courts when they inevitably consider challenges to non-solicitation provisions under the 2022 Act.
What are employer notice obligations?
When an employer wants a “highly compensated employee” to sign a noncompete, it must provide the agreement to a new hire at least 14 days before the employee begins work or, if the employee is a current employee, at least 14 days before the employee is to sign the agreement.
In addition, the 2022 Act requires that employers provide the following notice when presenting the agreement:
The District’s 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, as that term is defined in the Ban on Non-Compete Agreements Amendment Act of 2020, 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).
When an employer has a workplace policy that contains a noncompete restriction that is allowed under the law (e.g., a conflict of interest or “no moonlighting” policy prohibiting concurrent work for a competitor), the employer must provide the employee a copy of the policy:
- Within 30 days after the employee’s acceptance of employment with the employer
- On October 31, 2022
- Any time such policy changes
Retaliation prohibited
Under the 2022 Act, employers are prohibited from retaliating or threatening to retaliate against employees who:
- Refuse to sign or comply with a prohibited noncompete
- Ask, inform or complain about a noncompete they reasonably believe to be unlawful
- Request a copy of the agreement or policy
- Request the employer provide the notices required under the law.
Consequences for violation
An employer who violates the 2022 Act is subject to administrative penalties ranging from $350 to $1,000 for each violation.
In addition, employees may sue their employers for violations. Employees may recover penalties ranging from $500 to $3000. Further, the 2022 Act incorporates provisions of DC Wage Payment and Collection law allowing prevailing employees to recover (among other things) attorneys’ fees, backpay, and liquidated damages, so those remedies should be available under the 2022 Act. And of course, a non-compete that does not comply with the 2022 Act is void and unenforceable.
What now?
Ahead of the October 1 effective date, employers with employees in D.C. should review their existing noncompete agreements and workplace policies to ensure they will comply with the new law. Going forward, employers should be prepared to require noncompetes only for those D.C. employees making more than the threshold amount and to comply with the various notice obligations the law imposes. For assistance, please reach out to a member of the Employment and Labor team at Manatt.