Washington law creates new noncompete considerations for employers

Washington Governor Jay Inslee has signed Senate Bill 5935 (SB 5935) into law, amending Chapter 49.62 of the Revised Code of Washington (RCW). 

Among other changes, the new law expands the definition of a “noncompetition covenant,” clarifies notice requirements, and closes potential loopholes around choice of law provisions, creating additional considerations for employers that wish to enter into noncompetition agreements with their Washington-based employees.

The law goes into effect on June 6, 2024. In this alert, we look at key details and implications.

Definition of a noncompetition covenant

SB 5935 includes additional parameters to the definition of a noncompetition covenant, which may void employers’ current restrictive covenants with employees. Specifically, the new law states that noncompetition covenants expressly include agreements that directly or indirectly prohibit the acceptance or transaction of business with a customer. This means that any employment agreement that has a broad non-acceptance or doing business covenant may be treated as a noncompetition covenant as of June 6, 2024. 

Additionally, SB 5935 narrows the definition of “nonsolicitation covenant.” SB 5935 clarifies that the carveout of a nonsolicitation covenant from the definition of a noncompetition covenant only applies to current customers of the employer. The previous definition of a nonsolicitation covenant made no distinction between current and past customers. 

Finally, SB 5935 clarifies that the sale of business exception in RCW 49.62.010 applies to persons disposing or acquiring an ownership interest, but only if that person signing the covenant “purchases, sells, acquires, or disposes of an interest representing one percent or more of the business.” This addition may be intended to clarify that a modest amount of equity to rank and file employees will not serve to circumvent Washington’s noncompetition requirements. The original iteration of the bill proposed a 25-percent interest, but it was eventually reduced to 1 percent. 

Notice provision timeline 

SB 5935 clarifies that employers must disclose noncompetition covenants to prospective employees no later than the time of the initial acceptance of the offer of employment, regardless of whether the initial offer is oral or written. With the addition of the word “oral” to this requirement, employers who call prospective employees before sending a written offer of employment may consider informing the prospective employee of the noncompetition covenant immediately. 

Choice of law 

SB 5935 clarifies Washington’s choice of venue requirements. Previously, RCW 49.62.050 stated that a provision in a noncompetition covenant signed by an employee or independent contractor who was Washington-based was void and unenforceable if it required the worker to adjudicate outside of the state or if it deprived the worker of the protections or benefits of the chapter. SB 5935 adds explicit language that a noncompetition covenant will also be void if it allows the application of choice of law principles or the substantive law of any jurisdiction other than Washington state. 

Standing

SB 5935 removes a provision from RCW 49.62 that required the aggrieved person to be a party to the noncompete agreement. This means that third parties may have standing to bring a claim under this law.

Retroactivity 

SB 5935 adds that a cause of action under RCW 49.62 may not be brought arising from a noncompetition covenant before January 1, 2020, if the covenant is not being enforced or explicitly leveraged. Previously, the language stated that a cause of action could only be brought if a covenant entered into prior to January 1, 2020 was being enforced. The addition of the “explicitly leveraged” language will prohibit employers from threatening employees with enforcement, even if the employer was not planning to enforce the covenant.  

It is an open question whether the new additions to RCW 49.62 apply retroactively from January 1, 2020 to the present, or whether they will only apply to agreements entered into on or after June 6, 2024. 

Takeaways for employers 

To prepare for the change to the statute, employers are encouraged to: 

• Review current employment agreements, including nonsolicitation clauses, to examine whether the restrictive covenant clauses contained in the agreements fall under Washington’s definition of a “noncompetition covenant” 
  
  
• Review the employment offer process and ensure that managers/supervisors who are tasked with reaching out to prospective employees with an oral offer of employment are trained on the notice requirements for noncompetition covenants
  
  
• Ensure that noncompetition agreements that do not comply with RCW 49.62 and that were entered into before January 1, 2020 are not being explicitly or implicitly leveraged against employees
  
  
• Speak with employment counsel if (or before) additional questions arise

As a reminder, penalties for violation of RCW 49.62 include the greater of the employee’s actual damages or a statutory penalty of $5,000, whichever is greater, plus attorneys’ fees, expenses, and costs. The penalty provision applies if a court or arbitrator reforms, rewrites, modifies, or only partially enforces the noncompetition covenant. 

If you have questions about developments related to restrictive covenants and the best approach for your business, please contact any of the authors or your DLA Piper relationship attorney. 

For more information about noncompete restrictions, see our prior alerts, “What US employers should know about noncompetes in 2024“ and “Noncompetes around the world: Top issues and strategies for global employers.”