Washington State Non-Compete Developments

By Amy Kangas Alexander and Mathew L. Harrington | Related Practice: Employment

In addition to sweeping proposed FTC regulations banning non-competes, which we describe in a separate article linked here, the Washington legislature has continued with its own increased scrutiny of restrictive covenants. In March 2024, the Governor signed Substitute Senate Bill 5935, which will further limit how employers can use restrictive covenants for Washington workers. The law goes into effect June 6, 2024.

The amendments largely clarify areas of uncertainty in Washington’s non-compete law that have dogged employers, employees, and employment law practitioners since that state law took effect in 2020. Taking steps to comply with these laws will also further the goal of inuring employment agreements from potential challenges under the FTC rules, as the restrictions overlap in many respects.

As a reminder, in 2020, Washington limited the use of non-competes in the following ways:

• Required advance notice of non-competes before acceptance of employment.
• Required independent consideration for a non-compete entered during employment.
• Imposed an income threshold for employees (currently $120,560) and independent contractors (currently $301,400) that increases over time.
• Limited enforceability of a non-compete if an employee is laid off.
• Enacted a presumption that a non-compete longer than 18 months is unenforceable.
• Provided for potential award of damages and attorney fees if a restrictive covenant violates the law or is even partially overruled by a judge.
• Stated Washington law must be applied to Washington-based employees.

Prospective Customers Solicitation and Non-Handling provisions are not safe harbors

RCW 49.62 draws a line between non-solicitation provisions, which are not subject to the Chapter’s requirements, and non-competition provisions, which are subject to the Chapter’s requirements. One type of restriction, often called “non-handling” or “no-business” lived in the grey area between a non-competition and non-solicitation provision. Non-handling provisions prohibit an employee from accepting, transacting, or otherwise engaging in business from an employer’s customers following employment. The 2024 amendments to RCW 49.62 establish that non-handling provisions, or any restriction that “includes an agreement that directly or indirectly prohibits the acceptance or transaction of business with a customer,” is a non-compete and, therefore subject to the requirements of the Washington non-compete statute.

Amended RCW 49.62 also establishes that restrictions on soliciting prospective (not current) customers will likely be considered a non-compete and subject to the requirements of the Washington non-compete statute.

A non-solicitation provision that includes non-handling and prospective customer solicitation will be more difficult to enforce. An employer seeking to enforce a restriction on a former employee would need to draft a narrow non-solicitation provision. These modifications could allow an employer to layer different kinds of restrictions which would withstand judicial scrutiny and also improve the chances of enforceability of a non-solicit if the FTC’s proposed rules go into effect.

Stock option enforcement is slashed

Competition restrictions pursuant to the sale of a business have always been exempt from the requirements of RCW 49.62. But it was unclear what “acquiring or disposing of an ownership interest” meant, and some companies sought to invoke this exception by tying employee non-competition restrictions to equity or stock option agreements.

Amended RCW 49.62.010 clarifies that a grant of ownership will bolster a non-compete in Washington only if the person signing the non-competition covenant sells, acquires, or disposes of one percent or more of the business. This materiality requirement means that most non-competition covenants tied to equity or stock option plans must still comply with the minimum income threshold, duration, notice, and other requirements of RCW 49.62.

Non-parties to a non-compete have rights

Significantly, Amended RCW 49.62.080 removes the requirement that only an aggrieved employee may sue under the Chapter. Washington courts may see claims from aggrieved employers who cannot hire due to a prospective employee’s non-compete, aggrieved third parties with limited mobility under a “no-hire” provision, or aggrieved customers who cannot follow an individual to a new business under a “non-handling” provision.

Post-hoc modification may be an option

Many employers continue to have overbroad restrictive covenants, and manage the risk of overbroad non-competes by not attempting to enforce those elements, or informing an exiting employee that the employer will not enforce the overbroad non-compete as written. Amended RCW 49.62 clarifies that this practice may continue to be effective. An individual may not bring an action under the Chapter unless a covenant is being “explicitly leveraged.”

Pre-employment notice requirements more stringent

Amended RCW 49.62.020 clarifies that, for a non-compete to be valid, a prospective employer must disclose the terms of a non-compete in writing to a prospective employee before the employee accepts an offer of employment.

What employers can do now

• Review post-employment strategies to ensure a layered approach that is consistent with Washington law and the employer’s actual needs.
• Review employment agreement templates. Consider amending non-solicit restrictions to remove elements that prohibit doing business with certain customers or soliciting prospective customers.
• Consider proactively informing departing employees who do not meet the income or notice requirements of RCW 49.62 that the company will not enforce non-handling or solicitation of prospective customer restrictions. This notice can include reminders (as appropriate) that confidential information restrictions and trade secret obligations continue to apply to customer information.
• Review hiring processes to ensure that job candidates are informed of the requirement to sign restrictive covenants before or at the time a job offer is extended verbally or in writing.
• Consult your legal counsel to confirm your approach and be ready for court rulings.

This document is intended to provide you with general information regarding the amendments to Washington's non-compete law. The contents of this document are not intended to provide specific legal advice. Please contact a member of the Stokes Lawrence Employment Group with questions or assistance with compliance regarding non-competes.