Thursday, July 23, 2020

Time To Review and Revisit Non-Competition Agreements?

Author: Elizabeth Duff Mendoza 


The uptick in new state laws prohibiting non-competition agreements with low-wage (and in some cases, not-so-low-wage) workers has remained steady throughout 2020. Most recently, Virginia, Rhode Island and Washington have joined a growing contingent of states prohibiting non-competition agreements with workers who do not meet certain earnings thresholds. For many employers, the earnings thresholds may be higher than expected and the penalties for violations of the new laws may be harsher than expected. This post is intended to provide a brief summary of certain new earnings thresholds and potential penalties that employers should be aware in Virginia, Rhode Island and Washington.  

 

Virginia

 

Effective July 1, 2020, Virginia began prohibiting employers from entering into, enforcing or threatening to enforce non-competition agreements with low-wage workers. With certain exceptions, Virginia’s new law defines a “low-wage employee” as “an employee whose average weekly earnings...are less than the average weekly wage of the Commonwealth.” According to the most recent data from the Virginia Employment Commission, the average weekly wage is currently $1,204, amounting to approximately $62,600 per year. Notably, the Virginia Employment Commission updates Virginia’s average weekly wage on a quarterly basis. Employers who violate Virginia’s new law may incur a $10,000 civil penalty for each violation, plus certain other damages (liquidated damages and lost compensation), as well as attorneys’ fees and legal costs and fees.

 

Rhode Island

 

As of January 15, 2020, Rhode Island enacted the Rhode Island Noncompetition Agreement Act, which renders unenforceable non-competition agreements with the following classes of workers: 1) non-exempt employees; 2) undergraduate or graduate students who are interns or short-term employees; 3) employees who are 18 years old or younger; and 4) low-wage employees. “Low-wage employee” is defined as “an employee whose average annual earnings…are not more than two hundred fifty percent (250%) of the federal poverty level for individuals as established by the United States Department of Health and Human Services federal poverty guidelines.” Currently, the earnings threshold for low-wage employees falls at $31,900 per year.  

 

Washington

 

Effective January 1, 2020, Washington enacted a new law placing significant restrictions on the enforceability of non-competition agreements. Among other restrictions, the Washington law renders void and unenforceable any non-competition agreement with an employee whose earnings from the party seeking enforcement do not exceed $100,000 per year. Likewise, non-competition agreements with independent contractors are void and unenforceable unless the independent contractor’s earnings from the party seeking enforcement exceed $250,000 per year. The threshold earnings levels will be updated annually by the Washington Department of Labor to account for inflation. An employer’s violation of the law may result in award of the employee or independent contractor’s actual damages or a penalty of $5,000, plus legal costs and attorneys’ fees. Notably, this law is retroactive in nature, so even Washington non-competition agreements entered into before the effective date of the law will be subject to the new law’s requirements.

 

What Next?

 

Rhode Island, Virginia and Washington join an increasing number of states prohibiting non-competition agreements with individuals classified as low-wage workers according to various state-specific calculations. Employers should ensure their restrictive covenant agreements comply with any applicable new state laws and may also consider utilizing less-restrictive covenants, such as non-solicitation covenants and confidentiality / non-disclosure covenants, to protect business interests.

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