Non-compete agreements banned in the District of Columbia

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Employers have become increasingly emboldened to stick it to their employees. Employees with little negotiating leverage or without legal counsel have been saddled with some egregious restrictions. Courts over the years have thrown out the most unreasonable restrictions, creating various tests whether to enforce the agreement. But the employee would need the resources to fight back in court. Not many could and would do so.

Some state legislatures have responded by hitting back at employers. The latest jurisdiction to hit back hard is the District of Columbia, which passed the Ban on Non-Compete Agreements Amendment Act of 2020. (DC Ban). The breadth of the DC Ban is much wider in scope than bans in other states. The DC Ban will apply when it is included in an approved budget and financial plan, which may be in the Fall of 2021.

Non-competes pit employer against employee

The major concern on non-competes in other states has been employers’ weaponizing the employment relationship especially for low level employees. Sure, we have a good job for you and you are may be desperate to have a job, but after you leave this job, you can’t work for any competing business for five years. Most courts would likely not enforce the non-compete, but just the existence of the non-compete agreement stands like the sword of Damocles hanging over your head.

Courts will generally enforce reasonable confidentiality or non-disclosure provisions to protect the legitimate interests of the employer. Similarly, courts will enforce reasonable non-solicitation agreements prohibiting an employee from soliciting the customers or other employees of the company.

But what about the legitimate interests of the employer

These kinds of restrictions, so long as they are tailored in terms of time and geographical scope, make sense. The employer doesn’t want to hire some employee who is going to try to steal the company’s customers. California is an outlier. California courts have even extended the ban on non-competes to include customer non-solicitation covenants in some circumstances.

Non-competes have attracted the attention of state legislatures because they don’t seem to protect the company’s interests, but rather seek simply to disadvantage the employee—especially lower wage workers. These kinds of non-competes are not good for the economy because the workers may have gained important skills and experience in a certain industry and now you are telling the worker that he or she has to seek gainful employment in a different industry.

States step in to protect employees

Based on this imbalance in negotiating power, states have begun to step in. Some states have limited the use of non-competes. Usually these limits are based on the wages that employees earns. The limitation on non-competes is targeted at low-wage employees.

And other states have banned the use of non-competes. In this latter category are states over the entire political spectrum. If you talk to employers, they usually are aware of the ban of non-competes in California; but fewer are aware of the non-compete ban in Oklahoma and North Dakota.

Under the California formulation in the Business and Professions Code, non-competes are void: “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kin is to that extent void.” The exceptions are generally for the sale of a business or a business partner withdrawing from a partnership or limited liability company.

California courts have set aside agreements applying the law of another jurisdiction to an employment agreement for a California-based employee. This rule is now embodied in the California Labor Code under which an employer shall not require an employee who “primarily resides and works in California,” as a condition of employment, to agree to a provision that would “deprive the employee of the substantive protections of California law with respect to a controversy arising in California.” There is an exception if your employee is “in fact” represented by legal counsel.

DC ban on non-compete agreements is extensive

Not to be outdone, the District of Columbia’s ban will exceed the California ban. Under the formulation of the District, no employer “operating in the District of Columbia” “may request or require any employee working in the District of Columbia to agree to a non-compete policy or agreement.” This formulation may make it very difficult for employers to choose the law of a different jurisdiction to get around the ban.

The DC Ban defines a non-compete as any provision 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.” The DC Ban calls into question “anti-moonlighting” policies by prohibiting agreements that restrict an employee’s ability to be “simultaneously” employed in another job.  Under the DC Ban, you may not be able to prohibit your D.C. employees from working for someone else while they are working for your company or from starting their own business while working for your company.

The DC Ban prohibits employers from retaliating or threatening to retaliate against an employee from even asking, informing or complaining about the existence of a non-compete provision. The DC Ban also has strict notice requirements. The Mayor may issue “rules requiring employers to keep, preserve and retain records related to compliance” with the DC Ban. And finally, the DC Ban creates both administrative and civil penalties to address non-compliance.

The DC Ban does not include the purchase of a business. It does not include confidential information. It does not directly address non-solicitation of company employees or customers.
The DC Ban allows employers to enforce otherwise lawful restrictions on the disclosure of confidential information and trade secrets. The DC Ban is silent on the continued legality of non-solicitation provisions. It is also silent on an employee’s fiduciaries duties of loyalty to employers, conflict of interest rules, and other policies to prevent unfair competition by employees.

Related article: Fiduciary Duties 101: Managers Owe Fiduciary Duties

Neighboring states may be more attractive to employers

The neighboring states of Virginia and Maryland are much gentler in the limitation on non-competes. Virginia prohibits employers from enforcing a non-compete with a low-wage worker. And the restriction applies “following the termination” of the worker’s employment.

The relatively recent Maryland statute is even more concise and also applies to low-wage workers earning less than $15/hour or $31,200 annually.

National trend against non-compete agreements

The trend throughout the country is to limit non-compete agreements. If you have employees who reside or work in states that have banned non-competes, then you have precious few alternatives except to eliminate non-competes from your employment agreements with those protected employees. In the District of Columbia, that means eliminating non-compete provisions not only from your agreements with low-wage employees, but also agreements with even executive level employees.

You need to make sure that your other policies on non-solicitation and confidentiality are tightly drawn to protect your interests. This area is quickly evolving throughout the country, and both employers and employees are advised to consult with a small business lawyer to navigate these rules when negotiating an employment or separation agreement.