Employees based in Washington, D.C. must be free to work where they want after they leave their job unless they earn more than $150,000 a year under a D.C. law that takes effect October 1.
It’s the latest law in a trend in which states or other jurisdictions try to curb employers’ use of non-compete agreements, which used to apply mainly to executives but in recent years has been expanded to cover regular wage workers.
“It’s definitely a big reaction to low-wage employee non-competes,” said Margaret Scheele, an attorney with on-demand legal services firm Outside GC. “For years employers have been putting policies in place where they would have employees sign these agreements without really trying to make a distinction between who really needs and doesn’t need to have a non-compete.”
The growth in non-competes has become a problem for fast-food and other non-management workers who can find it hard to change jobs even though they don’t have access to confidential information or do the kind of work that enables them to steal clients or customers away, which are the typical reasons for these types of agreements.
“These employees are just trying to work and they need to be able to have the flexibility to go to other jobs to stay in their geographic area, but employers as a standard practice were having all employees sign these agreements,” she said.
One of the most restrictive laws on non-competes was enacted in Colorado just a few months ago, in June. Other states that have them include California, Maine, Maryland, Massachusetts, New Hampshire, North Dakota, Oklahoma, Rhode Island and Virginia, and more states are expected to follow suit.
“Courts have tried to address these agreements by placing requirements on non-competes and requiring them to have some reasonable restrictions, but those efforts really didn’t get at the issue,” she said. “So states started stepping in.”
Separately, the Biden administration has started to crack down on non-competes for wage workers and independent contractors from an anti-competitiveness standpoint. In its efforts, it’s going after employers suspected of using non-competes as a way to keep wages down.
The D.C. law applies to where the employee is based, so it can affect non-D.C.-based employers to the extent they have D.C. based employees working for them, defined as those who work at least 50% of their time for the company in D.C.
Enforcement can get complicated if new employees move to a state, such as Colorado, that has both a non-compete and a choice-of-law restriction. Under Colorado’s law, employers can’t choose which law they comply with; they must comply with the Colorado law, even if they’re based in D.C.
“If your employee is remote and he moves from D.C. to Colorado, you’re going to have to look at the Colorado law and say, ‘What are the restrictions there?’” Scheele said. “You may try to write an agreement where you put a choice-of-law agreement in there and say, ‘OK, D.C. law is going to apply,’ but Colorado is a good example of a state that’s clamping down on that.”
If the employer has remote workers scattered around the country, the employer needs to do a state-by-state assessment of non-compete restrictions and determine if they have choice-of-law restrictions as well and then figure out compliance from there.
“Employers are really going to have to step back and say, ‘OK, we can’t just have people signing these agreements as a matter of course,” said Scheele. “We need to look at what we’re doing as we’re onboarding people and make sure we’re not being over-broad in who we’re asking to sign these agreements. We need a more thoughtful approach.’”
The D.C. law only applies to employees brought on starting October 1, so if you have existing people earning $150,000 or less subject to a non-compete, you can keep that agreement in place, but there are some notice requirements you have to meet.
For employees above $150,000 that are hired after October 1, you have to meet separate notice requirements for them, including giving them 14 days to think about whether they want the job knowing it comes with a non-compete. There’s also a non-retaliation provision which prohibits you taking measures against them if they choose not to take the job because of the non-compete.
The D.C. law includes up to $1,500 in penalties for every non-compete violation and up to $2,500 for every retaliation violation.