On October 1, 2022, the District of Columbia’s new ban on non-compete agreements (the Ban on Non-Compete Agreements Amendment Act of 2020, as amended by the Non-Compete Clarification Amendment Act of 2022 (the “Act”)) went into effect. The final version of the Act is far less restrictive than originally anticipated and permits non-competes with highly compensated employees, non-competes paired with long-term incentives, and certain anti-moonlighting policies.
- As of October 1, 2022, non-competes are prohibited in the District with limited exceptions.
- Generally, employers can still enter into the following types of non-competes with District employees:
- Non-competes with highly compensated employees that do not exceed one year; provided 14 days’ advance notice is given to the employee.
- Non-competes paired with a long-term incentive.
- Non-competes entered into in connection with the sale of a business.
- The Act permits specified workplace policies like confidentiality or non-disclosure policies, anti-moonlighting policies/outside employment restrictions, and conflict of interest policies. However, the employer must provide the policies to employees before October 31, 2022, within 30 days after acceptance of employment, and any time such policy changes.
- Violations of the Act carry both administrative penalties and civil liability.
- Prohibited non-compete agreements in effect before October 1, 2022, are not subject to the Act and remain in effect. However, employers should consult with legal counsel before amending these agreements.
- Non-solicitations of customers and employees are not explicitly considered non-competes under the Act.
- The Act does not apply to the terms of a valid collective bargaining agreement.
What types of non-competes are prohibited?
Beginning October 1, 2022, employers may not require or request that a “covered employee” sign an agreement or comply with a workplace policy that includes a “non-compete provision.” Prohibited non-competes are void as a matter of law and unenforceable. The employer could also be subject to penalties and civil liability. Further, employers cannot retaliate or threaten to retaliate against a covered employee for refusing to sign a non-compete or for questioning its validity.
A “non-compete provision” is a provision that prohibits an employee from performing work for another for pay or from operating the employee’s own business. Non-solicitation agreements appear to be permitted.
A “covered employee” is generally an employee (or job candidate) that is not a “highly compensated employee” (described below) and either (i) spends “more than 50%” of their work time in the District, or (ii) regularly spends a “substantial amount” of their work time for the employer in the District and “not more than 50%” of their work time for the employer in another jurisdiction and whose employment for the employer is “based” in the District. Employers will need to evaluate the impact of work-from-home policies and requirements to return to the office in assessing whether employees are covered employees.
What workplace policies are permitted?
In general, employers can continue confidentiality or non-disclosure policies, anti-moonlighting policies/outside employment restrictions, conflict of interest policies, and non-competition provisions paired with long-term incentives.
However, employers must notify employees of these policies. A failure to comply with the notice requirements could result in employers paying $250 for each violation to each employee.
- Existing Policies. The deadline for notifying employees of existing workplace policies that comply under the Act was October 31, 2022. Employers who have missed the deadline should consult with legal counsel as to next steps regarding updating their policies and providing notice to employees.
- New Hires. The policies must be provided to a new hire within 30 days of acceptance of employment.
- Updated Policies. Employers must notify employees of any change to the policies, although the Act does not specify when notice must be provided.
Can employers require executives to sign non-competes?
Under the Act, employers may enter into non-compete agreements with “highly compensated employees,” as long as the agreement conforms to the Act’s requirements.
- A “highly compensated employee” is an employee that is reasonably expected to earn compensation greater than or equal to $150,000 (adjusted annually) in a consecutive 12-month period. Compensation includes hourly wages, salary, bonuses or cash incentives, commissions, overtime premiums, vested stock (including restricted stock units), and other payments.
- The employer must provide the terms of the non-compete agreement in writing to the employee at least 14 days before the commencement of employment or at least 14 days before the employee must execute the agreement.
- The agreement must specify the competitive restriction, including the services, roles, industry, or competing entities that are restricted.
- The agreement must describe the geographic scope of the non-compete.
- The duration of the non-compete cannot exceed 365 calendar days.
- The agreement must include the language specified in the Act.
Note that special rules (not discussed here) apply to “medical specialists.”
Can employers require non-highly compensated employees to sign non-competes?
Under the Act, employers may enter into non-compete agreements with covered employees that are paired with a long-term incentive. The Act provides that a long-term incentive includes, a bonus, equity compensation, and other types of performance driven compensation typically earned over more than one year. However, it is unclear whether any non-compete is permitted as long as the agreement also provides for a long-term incentive or if payment of the long-term incentive must be tied to compliance with the non-compete provision. The Act is also silent as to whether there are any limits on the duration of the non-compete.
What happens if an employer violates the Act?
Prohibited non-competition agreements are void and unenforceable. Employers could also be subject to administrative and civil penalties for violations. Administrative penalties range from $350 to $1,000; however, if the violation is for retaliation or a threat of retaliation, the penalty is not less than $1,000. Aggrieved employees may also file for relief with the Mayor or pursue a civil action in court. Employees could recover between $250 up to $2,500 depending on the offense. Repeat violators will be required to pay relief starting at $3,000 per violation.
What steps should employers take?
- Existing Agreements. The Act is not retroactive. Employers do not need to amend any current non-compete agreements with covered employees. However, employers should consult with legal counsel before amending an existing agreement with a non-compete, to evaluate whether the amendment could subject the agreement to the Act.
- Identify Covered Employees. Determine which employees, including remote employees, are covered by the Act.
- New Agreements. Work with legal counsel to revise form agreements to conform to the Act’s requirements. Comply with the notice requirements.
- Work Place Policies. Review and revise current workplace policies to conform to the Act. Work with legal counsel to communicate required notice to covered employees.
- Record Retention. Be on the lookout for recordkeeping requirements that the Mayor will issue.