After more than two years of delay and amendment, the District of Columbia’s Ban on Non-Compete Agreements Amendment Act of 2020, which was introduced in the pre-pandemic days of 2020, will finally take legal effect on October 1, 2022. Efforts to amend the 2020 act culminated in the Non-Compete Clarification Amendment Act of 2022 (D.C. Act 24-526), which Mayor Muriel Bowser signed into law on July 27, 2022.
The 2020 act categorically prohibited employers from requiring any employee, regardless of salary or status, to sign an agreement with a non-compete provision. It made such agreements void and went so far as to ban common employer policies that prevent active employees from working simultaneously for a competitor or competing against the employer on their own. The 2020 act’s “effective date” occurred in March 2021, but its “applicability date” (the date that gives laws legal effect in the District of Columbia) was extended multiple times while the business community and the Council of the District of Columbia worked through a series of corrective amendments.
The final legislation generally insulates employees earning less than $150,000 a year from being required to sign non-compete agreements. Although Washington, D.C. employers may not be celebrating, they should be breathing a sigh of relief overall. D.C. Act 24-526 eliminates the most troublesome aspects of the 2020 act and more reasonably protects employers’ legitimate business concerns. The final legislation does so primarily by applying the ban on non-competes to a more clearly defined universe of “covered employees,” narrowing the definition of a “non-compete provision,” permitting non-compete agreements for “highly compensated employees,” setting minimum notice requirements, and limiting the duration and terms of non-compete agreements for workers who qualify as highly compensated employees. The final legislation also includes anti-retaliation provisions and penalty provisions that were included in the 2020 act.
This article highlights how the law will apply and the next steps that employers may want to consider taking between now and October 1, 2022. All references to “the final legislation” refer to the Ban on Non-Compete Agreements Amendment Act of 2020, as amended by the Non-Compete Clarification Amendment Act of 2022.
Employers Subject to the Ban on Non-Compete Provisions
The final legislation defines “employer” to include “an 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 District of Columbia government and the federal government are excluded from this definition.
Employees Subject to the Ban on Non-Compete Provisions
The final legislation provides that, “[b]eginning October 1, 2022, no employer may require or request that a covered employee sign an agreement or comply with a workplace policy that includes a non-compete provision.” The term “covered employee” is defined differently for existing employees and prospective employees and expressly excludes “highly compensated employees.”
An employee who has commenced work for an employer is covered if he or she “(1) spend[s] more than 50% of his or her work time for the employer working in the District”; or (2) the employee’s employment “is based in the District and the employee regularly spends a substantial amount of his or her work time for the employer in the District and not more than 50% of his or her work time for that employer in another jurisdiction.”
If the employee has not yet commenced work for the employer, he or she is covered if “(1) [t]he employer reasonably anticipates that the employee will spend more than 50% of his or her work time for the employer working in the District”; or (2) his or her employment for the employer “will be based in the District and the employer reasonably anticipates that the employee will regularly spend a substantial amount of his or her work time for the employer in the District and not more than 50% of his or her work time for the employer in another jurisdiction.”
Exclusion for Highly Compensated Employees
“Highly compensated employees” are excluded from the definition of “covered employees” and therefore are not covered by the ban. This group consists of employees (other than “broadcast employees”) who are reasonably expected to earn at least $150,000 in a consecutive twelve-month period or whose compensation earned from the employer in the consecutive twelve-month period preceding the date on which the proposed term of non-competition is to begin is at least $150,000. For a “medical specialist,” the compensation threshold for “highly compensated employee” status is $250,000. Beginning on January 1, 2024, and each calendar year thereafter, the dollar threshold for highly compensated employee status will be adjusted based on increases in the Consumer Price Index.
In calculating whether an employee’s compensation exempts the employee from being a “covered employee,” and instead, places the individual in the “highly compensated employee” category, the threshold amount includes “all monetary remuneration an employer may pay or promise an employee”—excluding “fringe benefits other than those paid to the employee in cash or cash equivalents.” Covered compensation specifically includes hourly wages, salary, bonuses or cash incentives, commissions, overtime premiums, vested stock (including restricted stock units) and “[o]ther payments provided on a regular or irregular basis.”
Permitted Agreements and Policies
The core definition of a “non-compete provision” is the same as it was in the 2020 act—“a provision in a written agreement or a workplace policy that prohibits an employee from performing work for another for pay or from operating the employee’s own business.” The final legislation narrows its reach by adding three new exclusions to the definition—one for restrictions on confidential or proprietary information, a second for restrictions during active employment, and a third for agreements containing grants of stock or other long-term incentives. In all, there are four categories of agreements or policies that are excluded from the ban on non-compete provisions. They are as follows:
- Agreements to sell a business. An otherwise lawful provision “[c]ontained within or executed contemporaneously with an agreement between the seller of a business and one or more buyers of that business wherein the seller agrees not to compete with the buyer’s business.”
- Confidential employer information and proprietary employer information. An otherwise lawful provision that “prohibits or restricts an employee from … [d]isclosing, using, selling, or accessing the employer’s confidential employer information or proprietary employer information.” The term “confidential employer information” refers to “information owned or possessed by the employer that is not available to the general public and that the employer has taken reasonable steps to ensure is protected from improper disclosure.” The term “proprietary employer information” refers to “information unique to an employer that is compiled, created, or solicited by the employer, including customer lists, client lists, and trade secrets” as defined by the District of Columbia’s Uniform Trade Secrets Act of 1988.
- Prohibitions during active employment with the employer. An otherwise lawful provision that prohibits or restricts an employee from “[a]ccepting money or a thing of value for performing work for a person other than the employer, during the employee’s employment with the employer, because the employer reasonably believes the employee’s acceptance of money or a thing of value under such circumstances will”:
- “[r]esult in the employee’s disclosure or use of confidential employer information or proprietary employer information”;
- “[c]onflict with the employer’s, industry’s, or profession’s established rules regarding conflicts of interest”;
- “[c]onstitute a conflict of commitment if the employee is employed by a higher education institution”; or
- “[i]mpair the employer’s ability to comply with District or federal laws or regulations; a contract; or a grant agreement.”
- Long-term incentive agreements. An otherwise lawful provision that provides “bonuses, equity compensation, stock options, restricted and unrestricted stock shares or units, performance stock shares or units, phantom stock shares, stock appreciation rights and other performance driven incentives for individual or corporate achievements typically earned over more than one year.”
Requirements for Non-Compete Agreements With Highly Compensated Employees
The final legislation sets forth minimum substantive and procedural requirements that must be followed as prerequisites for a non-compete provision in an agreement with a highly compensated employee to be enforceable.
The agreement itself must specify three things: (1) “[t]he functional scope of the competitive restriction, including what services, roles, industry, or competing entities the employee is restricted from performing work in or on behalf of”; (2) “[t]he geographical limitations of the work restriction”; and (3) a term of noncompetition that is not greater than “365 calendar days from the date the employee separates from employment with the employer,” or, in the case of a medical specialist, a term of noncompetition not greater than “730 calendar days from the date the employee separates from employment with the employer.”
In addition, as a procedural step, the employer must provide the non-compete provision to the covered employee in writing “[a]t least 14 days before the individual commences employment”; or, in the case of a current employee, “at least 14 days before the employee must execute the agreement.” When the employer proposes the agreement to the employee, it also must provide the employee with a statutory notice that states as follows:
The District’s Ban on Non-Compete Agreements Amendment Act of 2020 limits the use of non-compete agreements. It allows employers to request non-compete agreements from highly compensated employees, as that term is defined in the Ban on Non-Compete Agreements Amendment Act of 2020, under certain conditions. [Name of employer] has determined that you are a highly compensated employee. For more information about the Ban on Non-Compete Agreements Amendment Act of 2020, contact the District of Columbia Department of Employment Services (DOES).
Notices of Workplace Policies
The final legislation imposes specific notice requirements on an employer that maintain a workplace policy that restricts an employee’s use or disclosure of the employer’s confidential employer information or proprietary employer information or prohibits an active employee from working for a person other than the employer while employed by the employer. The employer must provide a written copy of the policy provisions to the employee within thirty days after the employee accepts employment, within thirty days after October 1, 2022, and any time there is a change in the policy.
Special Categories of Employees
The final legislation contains unique provisions for two special categories of employees: “medical specialists” and “broadcast employees.”
Using the same definition that was contained in the 2020 act, the final legislation identifies “medical specialists” as a specific category of “highly compensated employee.” Employers may require or request that medical specialists agree to non-compete provisions, just the same as other highly compensated employees, with two exceptions. First, the minimum annual compensation for a medical specialist must be at least $250,000, whereas the minimum for all other highly compensated employees is $150,000. Second, the maximum duration of a non-compete obligation for a medical specialist is two years post-employment, whereas the maximum duration for other highly compensated employees is one year.
The final legislation largely continues a preexisting ban on the use of post-employment non-competes in the broadcast industry. It does so by repealing the Broadcast Industry Contracting Freedom Act of 2002 and then prohibiting non-compete agreements with employees who meet the definition of “broadcast employees.” Under the final legislation, a “[b]roadcast employee” is “an on- or off-air creator (such as an anchor, disc jockey, editor, producer, program host, reporter, or writer)” employed by an entity that provides broadcasting services, such as news, weather, traffic, sports, or entertainment programming, including a television station or network, radio station or network, or cable station or network, or an entity that provides “[s]atellite-based services similar to a broadcast station or network.” Under the final legislation, broadcast employees are covered by the ban on non-compete provisions, but they are excluded from the definition of “highly compensated employees.” The result is that they cannot be required to sign a non-compete agreement no matter how high their annual compensation is. Employers in the broadcast industry may want to note that executives, managers, and others who do not work in on-air or off-air talent positions are not considered “broadcast employees” and therefore may be subject to non-compete agreements as long as their annual compensation meets the criteria for highly compensated employees.
Agreements Entered Into Before October 1, 2022
The final legislation does not affect the validity or enforceability of any agreements entered into prior to October 1, 2022.
Preparing for October 1, 2022
The good news is that the final legislation does not require the alteration or amendment of agreements that were entered into on or before September 30, 2022. Also, employers’ long-term incentive agreements are excluded from the final legislation, as well as agreements used to limit competition by the seller of a business in business sale transactions. Nonetheless, there are several steps that employers may want to take to prepare for the ban on non-competes when it becomes legally effective on October 1, 2022, including the following:
- Identifying employees (a) whose work activities involve work in the District of Columbia to determine if they are subject to the ban on non-competes and (b) who may be requested or required to sign an agreement containing a non-compete provision
- Identifying employees who meet the criteria for highly compensated employees
- Establishing a process to ensure that the company (a) does not request or require any non-highly compensated employee to sign an agreement containing a non-compete provision and (b) adheres to the fourteen-day notice provisions of the final legislation
- For any new agreements to be signed on or after October 1, 2022, and for any renewals or extensions of existing agreements signed before that date, ensuring that the contents of the agreement satisfy the new requirements set forth in the final legislation
- Preparing the required statutory notices for distribution to covered highly compensated employees at the time they are asked to review or sign agreements with non-compete provisions
- Reviewing workplace policies that restrict the use of confidential or proprietary information or that restrict employees from working other jobs while actively employed and revising them, if necessary, to ensure they articulate one or more of the “reasonable beliefs” set forth in the exceptions to the definition of “non-compete provision.” While not required to be placed in a workplace policy, an employer may want to ensure it has support for any reasonable belief articulated, if such is challenged.
- Educating managerial staff on the requirements set forth in the new law, including ensuring that managers are not enforcing unwritten workplace policies that may be deemed as violating the ban on the non-compete law
- Providing copies of the workplace policies described in #6 to all employees on or before October 30, 2022, and any time these policies are changed
- Updating the onboarding process for new hires so that employees receive the workplace policies described in #6 at the time of hire (or within thirty days of accepting employment) and adjusting the process to ensure that any agreements containing non-compete provisions are provided at least fourteen days before an individual commences employment, or for those current employees who receive promotions that place them in the “highly compensated employee” category, ensuring that they receive any agreement containing non-competes at least fourteen days before they are expected to sign the agreement
- On or after January 1, 2024, monitoring changes in the District’s compensation level required for qualification as a highly compensated employee