On July 12, 2022, the D.C. City Council voted to enact the Non-Compete Clarification Amendment Act of 2022, sending it to the Mayor’s desk for her signature. The Act will substantially amend D.C.’s ban on non-compete agreements, first passed by the City Council in early 2021 but delayed significantly since it was first enacted.
By way of background, in January 2021, D.C. passed a comprehensive, sweeping ban on non-compete agreements that was poised to be one of the most restrictive bans on non-compete agreements in the country. For more information, on the 2021 act, please see out prior alert, D.C.’s New Ban on Non-Compete Agreements Creates Untenable Situation for Employers. The 2021 act had a narrow exception for medical specialists, but otherwise banned nearly all simultaneous and post-employment non-compete agreements or workplace policies. While the ban did not prohibit provisions that protect trade secrets or an employer’s confidential information, it did not provide employers with any other protections in circumstances in which an employee works for a competitor or whose simultaneous employment otherwise might result in a conflict of interest.
After soliciting additional testimony and input from stakeholders, including in the business community, D.C. is poised to enact a substantial amendment to the ban on non-compete agreements, which will clarify and narrow the scope of the 2021 act.
Why is the amendment important?
The amendment addresses concerns voiced by employers in testimony and during working group sessions. The most meaningful changes impact: (i) employers’ ability to manage simultaneous employment situations; (ii) which employees are covered by the ban; and (iii) what types of post-employment non-compete agreement provisions are permissible despite the ban. The amendment also includes additional notice obligations for employers, to account for these changes.
What limitations are employers prohibited from placing on employees during their employment?
Previously, the District’s ban on non-compete agreements applied to nearly all restrictions or workplace policies that would limit an employee’s ability to hold simultaneous employment, with limited (unclear) carve outs for the protection of trade secrets or confidential information. The amendment, now, explicitly exempts the following types of workplace policies or other agreements from the definition of “non-compete agreement”:
- Restrictions on an employee’s ability to perform work for another person or entity while employed that would or could result in the disclosure of confidential or proprietary information;
- Restrictions on an employee’s ability to perform work for another person or entity while employed that would or could result in a conflict of interest;
- Restrictions on an employee’s ability to perform work for another person or entity while employed that would or could result in a conflict of commitment;
- Restrictions on an employee’s ability to perform work for another person or entity while employed that would or could impair the employer’s ability to comply with applicable laws or contractual obligations; or
- Agreements that provide a “long term incentive,” which includes plans to provide a combination of cash or equity compensation as incentives for “individual or corporate achievement.”
Which employees are covered by the ban?
The ban clarifies which employees are covered by the ban on both simultaneous and post-employment non-compete provisions. Pursuant to the amendment, the definition of “covered employee” will conform with other District laws, like D.C.’s Universal Paid Leave law. A “covered employee” is an employee who spends more than 50% of their time working in the District and not more than 50% of their time working in another jurisdiction.
This clarification is particularly important for employers with remote workers.
What types of post-employment non-compete agreements are now permitted?
In addition to the exception in the original act for medical specialists, the amendment now provides that employers may require “highly-compensated employees” to enter into a non-compete agreement, provided the non-compete agreement does not exceed 365 days from the date the employee separates from the employer (730 days for medical specialists). Highly-compensated employees are defined as employees earning more than $150,000 (or $250,000 for medical specialists) annually. While highly-compensated employees may be subject to a non-compete in order to protect sensitive information, the ban requires that any agreement specify the scope and geographic limitation. Employers must provide a copy of the proposed non-compete agreement to the employee at least 14 days before the start of employment or prior to the date when the employer wishes that the employee execute the agreement.
Councilwoman Pinto explained the basis for these thresholds as follows: “[e]mployees earning over $150,000 in total compensation are often exposed to employer trade secrets and other proprietary confidential information that drives strategic advantages for a business.”
What other requirements does the ban impose on employers?
The amendment also establishes and clarifies employer notice obligations. In addition to the notice provisions already enacted (listed below), employers with a workplace policy that includes “one or more of the exceptions to the definition of a ‘non-compete provision’” must provide a written copy of the provisions to the employee (1) within 30 days after acceptance of employment; (2) by October 31, 2022; and (3) any time the policy changes. In addition, employers with a “highly compensated employee” must provide notice to that employee, which includes the specific statutory language.
The amendment does not change other provisions on the initial ban, including the anti-retaliation provisions and penalties.
The prior notice requirements already included in the 2021 act include the following: (1) notice to all employees within 90 days after the law becomes applicable; (2) to each new hire within 7 days of his or her start date; and (3) to an employee who requests information about the ban, within 14 days of the employee’s request.
When will the ban become effective?
D.C. already has delayed the application of its ban on non-compete agreements to October 1, 2022. The amendment itself will become effective following signature from the Mayor and a 30-day congressional review period, which likely will expire in mid-to-late November. Notably, the provisions in both the initial act and the amendment are not retroactive. Employers may continue to require employees to sign non-compete agreements until October 1, 2022, and that act will not invalidate non-compete agreement which were executed prior to its effectiveness.
While the amendment lessens the impact of the ban on employers—as Councilwoman Pinto put it—this ban “gives the District the most expansive prohibitions compared to nearly a dozen states that have enacted laws to limit the use of non-competes.”
All employers in the District of Columbia metropolitan area should monitor developments relating to the new legislation and implementation of the Act.
For further information, please contact:
Kris D. Meade, Partner, Crowell & Moring
kmeade@crowell.com
