Kevin M. Passerini and Daniel L. Morgan
Late in December 2020, the District of Columbia Council passed legislation titled, “Ban on Non-Compete Agreements Amendment Act of 2020” (the “Act”), barring the use of non-compete agreements and workplace policies that restrict D.C. employees from competing with their employers after, and even during, employment. This week, the Mayor signed the law. Barring an unlikely intervention by Congress (which has authority to review legislation passed by the D.C. Council), the law will take effect after the 30-day Congressional review period.
This Act follows a recent, growing trend to limit the use of non-competes, but it goes further than other recent legislative efforts: it applies to employees at all income levels and even bars the use of “during-employment” non-competes and workplace policies such as those aimed at preventing disloyalty and abuse of company resources. Several key areas warrant emphasis.
Ban Applies to Employees Performing Work in D.C. for Employers that Operate in D.C.
The Act applies to “employees,” defined as 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 of Columbia].” The term “employer” is defined as “an individual, partnership, general contractor, subcontractor, association, corporation, or business trust operating in the District, or any person or group of persons acting directly or indirectly in the interest of an employer operating in the District in relation to an employee, including a prospective employer.”
The Act gives no indication as to what level of “work” or “perform[ance]” in D.C. triggers the law’s protections, and how that may be impacted by remote working (temporary, during the pandemic, or permanent). Perhaps more problematic, it is unclear what the phrase “operating in the District” means. Does it require an employer to have a physical worksite in D.C. to fall within the Act? Would the fact that an out-of-state company has an employee performing work remotely from her home in D.C., or has an out-of-state employee who travels into D.C. regularly to call on or service customers located in D.C., constitute “operating in the District”?
In addition, by focusing on the place where work is performed, as opposed to the domicile of the worker, the Act would have the effect of banning the use of non-competes with Virginia and Maryland residents who commute into D.C. for work, even though those states’ laws would, depending upon the residents’ income, permit non-competes.
Finally, the Act fails to indicate expressly whether it applies to independent contractors, as does other recent non-compete legislation, such as in Washington State and Massachusetts. And the Act’s definition of “employee” is imprecise, leaving ambiguity as to whether an independent contractor could fall within the scope of the Act.
No Income Threshold
The Act applies to employees at all income levels, which stands in stark contrast to other states that have attempted to tackle the unbridled use of non-competes with lower-wage workers. Maryland enacted legislation in 2019, for instance, that prohibits non-competes for those employees earning less than approximately $32,000 annually. And there are bans in other jurisdictions that span the lower-income spectrum, with Washington State’s ban, effective January 1, 2020, setting a far higher income threshold of approximately $100,000—hardly a low wage, but a wage threshold nonetheless—and Virginia’s threshold hovering around $52,000.
Curiously, the Act does have an exception for licensed, post-residency physicians who earn at least $250,000 annually—a threshold likely surpassed by many (or most) D.C. physicians. From a policy perspective, physicians should, if anything, be subject to greater mobility given patient choice. Perhaps the Council fears a flight of physicians were the ban to apply to them. But, by contrast, the Act precludes imposing a non-compete on a CEO earning millions of dollars.
Bans Restrictions on Competition During Employment
One of the most troubling aspects of the Act is that it expressly bars employers from restricting competition during employment through routine during-employment non-compete provisions and even through a “workplace policy” restricting competition—defined to include “the rules and restrictions, whether written or as a matter of practice, implemented by an employer to govern the conduct of the employer’s employees.” The breadth of that aspect of the ban could be read as impacting common types of workplace policies addressing conflicts of interest, divided loyalties, IT policies, and limitations on use of company resources.
The motivation of the Council may have been noble in attempting to bar employers from prohibiting moonlighting—perhaps helpful to lower-wage workers juggling multiple jobs. But the Act is not limited to an income threshold and applies to all categories of employees, including scientists, salespeople, executives, and others commonly subject to express restrictions on competition during employment. Indeed, the Act’s ban of restrictions on competition during employment raises serious questions as to whether a company with officers and senior employees working in D.C can still insist they conform to longstanding fiduciary principles and the duty of loyalty typically owed by employees during employment, and whether a company can continue to have policies requiring employees’ dedication of their full time and attention to performance of work on behalf of the company during working hours and when using company resources. Employers are now faced with the real prospect of a D.C. employee using company resources (other than confidential, trade secret information) during business hours to do work for another entity—even to compete with or undermine the employer—and doing so with impunity.
The Act also bars retaliation in various forms against employees and prospects who refuse to sign a non-compete that is unenforceable under the Act and against those who complain about an employer’s policies and practices with respect to restrictions on competition.
No Express Impact on Non-Solicit Provisions & No Impact on Confidentiality Provisions
The Act defines “non-compete provision” as “a provision of a written agreement between an employer and an employee that prohibits the employee from being simultaneously or subsequently employed by another person, performing work or providing services for pay for another person, or operating the employee’s own business.” While that definition appears not to encompass provisions that merely restrict employees from soliciting employees or customers, clients, or other business partners, it fails to include express language noting that it does not apply to non-solicit provisions. That uncertainty does not exist with some other recent non-compete legislation, such as in Massachusetts, which makes clear that non-solicit provisions remain viable, or in Virginia, which has expressly reigned in non-solicit provisions to an extent.
The Act is express, however, with respect to confidentiality provisions and the protection of trade secrets, which remain unaffected by the legislation.
No Impact on Non-Compete Provisions in Connection with Sale of Business
The Act expressly permits non-compete restrictions agreed to in connection with the sale of a business, subject to their reasonableness as to subject matter and temporal and geographic scope.
No Apparent Retroactivity
The Act applies to restrictions imposed after its effective date. As a result, in the case of current agreements with a term that ends after that date without automatic renewal, employers will likely need a follow-on agreement that complies with the Act. On the other hand, employers with existing restrictive covenant agreements with at-will employees may want to rely upon those existing agreements to the extent they remain applicable, rather than on putting new agreements in place for promotions or other role changes that occur after the Act’s effective date.
Mandatory Notice of Legislation to D.C. Employees
The Act requires notice to employees of the ban within the sooner of 90 days of its effective date and seven days of hiring an employee, and also within 14 days of a request from an employee.
With the effective date of the Act looming, employers with D.C. employees must carefully consider whether and how to react to and comply with the Act’s broad reach. Remember, it relates to contracting practices and workplace policies and practices addressing competition both during employment and after employment, and it also provides mandatory notice obligations.
Please let us or other members of our team know if you have any questions regarding the Act and strategies to comply with it.