The Ban on Non-Compete Agreements Amendment Act of 2020 (the “Act”) passed by the D.C. Council over the summer will take effect on October 1, 2022, imposing new substantive and procedural restrictions on D.C. employers’ use of noncompetes, new compensation thresholds below which such noncompetes are now banned, and creating new administrative and civil enforcement measures, including administrative penalties for noncompliance.
The New Law in a Nutshell
The Act defines “noncompete provision” as “a provision in 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.” Consequently, the law covers both agreements containing noncompetes and workplace policies restricting employee’s competitive or outside activities, subject to several exceptions summarized below.
Most notably, the Act imposes two new income thresholds for “noncompete provisions” with “highly compensated employees”—those who earn at least $150,000—and “medical specialists”—licensed physicians earning at least $250,000. Both thresholds are subject to adjustments in accordance with increases in the Consumer Price Index beginning in 2024, and any “noncompete provisions” with employees below those levels are effectively banned by the Act.
The Act clarifies that wages, salary, bonuses or other cash incentives, commissions, overtime premiums, vested stock and restricted stock units, and other payments provided on a regular or irregular basis may all be included in determining who qualifies as a “highly compensated employee.” The Act excludes the value of noncash fringe benefits, but because it does not define “fringe benefits,” there is uncertainty as to what noncash benefits may constitute “other payments provided on a regular or irregular basis.”
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Earlier this year, Washington, D.C.’s mayor signed legislation, the “Ban on Non-Compete Agreements Amendment Act of 2020” (the “Act”), which imposes sweeping limitations on during-employment and post-employment non-compete agreements for employees in the District of Columbia. We previously reported on this legislation.
Although the Act stated that it was to take effect following its publication in the District of Columbia Register, it also included the following provision: “This act shall apply upon the date of inclusion of its fiscal effect in an approved budget and financial plan.”
In other words, notwithstanding the Act’s definition of an earlier effective date, the Act was not slated to go into effect until the date it was included in D.C.’s 2022 budget—referred to as the “applicability date”—which most expected to occur by October 1, 2021. Shortly after passage, there were rumblings that Council members were considering amendments to the law—ranging from, among other things, a delay in the applicability date to exemptions for bona fide conflict of interest policies to income thresholds for the ban on non-competes, as opposed to an outright ban.
On August 10, 2021, the D.C. Council approved a budget—signed by D.C.’s mayor on August 23, 2021—that delays the applicability date of the Act until April 1, 2022. This postponement is significant because the Act’s limitations on non-competes is not retroactive, which provides employers with more time to continue to enter into non-compete agreements that satisfy the existing standards for determining the enforceability of non-compete restrictions rather than the far more limiting standards included in the Act.
Time will tell whether any substantive amendments materialize and modify the Act’s limitations prior to April 1, 2022.
California employers know well that they cannot restrict their former employees from competing after the employment relationship ends. With limited exceptions, California law invalidates every contract under which a person is prevented from engaging in his or her profession, trade, or business.
California Business and Professions Code section 16600 codifies California’s longstanding public policy favoring open and uninhibited competition in the employment context. California’s public policy declaration can be summed up as follows: “The interests of the employee in his own mobility and betterment are deemed paramount to the competitive business interests of the employers….” Diodes, Inc. v. Franzen, 260 Cal. App. 2d 244, 255 (1968). Continue reading ““In Term” Covenants Not to Compete Void or Valid?”