Simply stated, employers cannot require an employee to sign an agreement prohibiting the employee from working for a competitor while employed or following their employment.
Update: In a follow-up Alert, we discuss the effective date of this law, projected to be October 1, 2021.
On January 11, 2021, Washington, D.C., Mayor Muriel Bowser signed the Ban on Non-Compete Agreements Amendment Act of 2020 (the Act), which takes effect after a 30-day congressional review period, approval and publication in the District of Columbia Register. Although several nearby states, such as Maryland and Virginia, have followed the growing trend of recently enacted laws limiting the use of noncompete agreements, the Act differs in two significant respects: (1) it applies to employees at all income levels and (2) prohibits the use of noncompetes and related workplace policies during employment. As more fully discussed below, this means that employers need to take swift action to address noncompete, nonsolicitation and confidentiality agreements, as well as workplace policies aimed at preventing outside employment and conflicts of interest, as soon as possible.
Covered Employers and Employees
The Act defines “employer” broadly as:
[A]n individual, partnership, general contractor, subcontractor, association, corporation, or business trust operating in the District, or any person or group of persons acting directly or indirectly in the interest of an employer operating in the District in relation to an employee, including a prospective employer.
The only exceptions from coverage are the District of Columbia and federal governments.
“Employee” is defined very broadly as well to include an:
[I]ndividual who performs work in the District on behalf of an employer and any prospective employee who an employer reasonably anticipates will perform work on behalf of the employer in the District…
The Act includes a few exceptions to employee coverage, though, such as:
- Volunteers in educational, charitable, religious or nonprofit organizations;
- Lay members elected or appointed to office within a religious organization and engaged in religious functions;
- Casual babysitters; and
- Certain physician medical specialists earning more than $250,000 annually, subject to specific rules, including notice.
As mentioned above, employers are prohibited from requiring or requesting that an employee sign an agreement that includes a noncompete provision, which is defined as:
[A] provision of a written agreement between an employer and an employee 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.
Simply stated, employers cannot require an employee to sign an agreement prohibiting the employee from working for a competitor while employed or following their employment. The prohibition on noncompetes does not apply retroactively, however, so noncompetes executed prior to the Act’s effective date will remain enforceable if they otherwise satisfy the requirements of prior law.
The Act further specifically prohibits employers from maintaining any workplace policy that prohibits an employee from:
- Being employed by another person;
- Performing work or providing services for pay for another person; or
- Operating the employee’s own business.
However, the Act does not expressly address workplace policies or contract provisions requiring full-time exempt employees to devote all or substantially all of their business time and attention to their current employer, or prohibiting engagement in outside work during normal working hours. Such provisions are near standard in executive employment agreements. Employers will need to tread carefully in crafting compliant restrictions of this type to be consistent with the Act’s prohibitions.
A “workplace policy” is any rule or restriction, “whether written or as a matter of practice, implemented… to govern the conduct of the employer’s employees.” Significantly, the Act is retroactive as applied to these workplace policies so even preexisting policies that violate these prohibitions will now be unenforceable.
Permitted Lawful Provisions
Despite the ban on noncompetes and related policies, the Act expressly permits certain otherwise lawful provisions that:
- Restrict an employee from disclosing their employer’s confidential, proprietary or sensitive information, client list, customer list or trade secrets; or
- Restrict a seller of a business from competing with the buyer’s business, in connection with the sale agreement.
The Act does not expressly address nonsolicitation clauses, so such provisions should arguably remain permissible and enforceable as well.
Written Notice Requirement
The Act further requires employers to provide employees with the following written notice:
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, in accordance with the Ban on Non-Compete Agreements Amendment Act of 2020.
This written notice must be provided:
- To existing employees within 90 days after the Act becomes law;
- To newly hired employees within seven days of their start date; and
- Within 14 days after receipt of an employee’s request for the statement.
Employers should keep records of their compliance with the notice requirement.
Keeping in line with the expansive breadth of this law, the Act also includes broad nonretaliation provisions. Under the Act, “retaliate” means “to take an adverse action, including a threat, verbal warning, written warning, reduction of work hours, suspension, or termination.” More specifically, employers cannot retaliate or threaten to retaliate against employees for:
- Refusing to agree to a noncompete provision;
- Allegedly failing to comply with a noncompete provision or workplace policy made unlawful by the Act;
- Asking, informing, or complaining—to an employer, the employee’s lawyer or agent, a coworker or a governmental entity—about the existence, applicability or validity of a noncompete provision or a workplace policy that the employee reasonably believes is prohibited by the Act; or
- Requesting the written notice from an employer required under the Act.
A noncompete provision that violates the Act is void as a matter of law and unenforceable.
In addition, violations of the Act open employers up to both administrative and civil liability. The mayor of the District of Columbia may impose administrative penalties of $350 to $1,000 for each violation of the Act’s noncompete or notice provisions, and may impose fines in excess of $1,000 for any instances of retaliation. In addition, applicants/employees may file a complaint with the mayor’s office or in court to seek additional relief of at least $500 for each violation and at least $3,000 if the employer is a repeat offender.
What This Means for Employers
District of Columbia employers should:
- Review with legal counsel their standard offer letters, application forms, employment agreements, employee handbooks and other workplace policies, and remove all noncompete-related provisions and other prohibitions on outside employment. Policies likely to be implicated include, but may not be limited to, those addressing moonlighting, conflicts of interest and conduct rules. Employers may also want to consider whether they should provide covered applicants and employees with noncompete agreements before the Act becomes effective.
- Review with legal counsel nonsolicitation and confidentiality agreements to ensure they are enforceable, while also containing the greatest amount of protection possible.
- Prepare for the mandatory notice requirements.
- Review record retention policies for compliance with the Act’s record-keeping requirements.
- Consider training managerial, human resources, and recruiting employees on the specifics of this comprehensive new noncompete law.
For More Information
If you have any questions about this Alert, please contact Carla N. Murphy, any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group, any of the attorneys in our Non-Compete and Trade Secrets Group or the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.