Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
The District of Columbia prompted widespread outcry from the business community when it enacted one of the broadest bans on non-compete agreements in the country in early 2021. At least in part spurred by that outcry, this past summer the D.C. Council passed the “Non-Compete Clarification Amendment Act of 2022.” Certain of the restrictions imposed by the original “Ban on Non-Compete Agreements Amendment Act of 2020” had been delayed by DC emergency action, but the new Amendment Act passed this summer is enforceable on October 1, 2022, so it is now time for employers to be certain to comply. Fortunately, the Amendment Act eliminates the complete ban on non-competes and paves the way for continued use of non-competes with highly compensated employees. Notably, however, the new law continues to go beyond regulating non-competes, and includes notice and other requirements with which employers must comply.
By way of history, in January 2021, the Government of the District of Columbia approved the original non-compete ban. That law prohibited the use and enforcement of all non-compete agreements, except for certain highly paid physicians, and even banned employers from having anti-moonlighting policies, which prohibit employees from holding outside employment. The D.C. business community voiced its serious concerns.
The D.C. Council took notice, and on July 27, 2022, Mayor Bowser signed the Non-Compete Clarification Amendment Act of 2022. The law had previously passed the Council by a 12-1 vote on July 19, 2022. Congress has had 30 days to review the law, as required for legislation in the District of Columbia, so that it will become enforceable on October 1, 2022.
Scope of Covered Employees
Of importance, the scope of employees affected by the new rule is significantly narrower than the scope of employees affected by the original ban: in particular, the new law allows non-compete agreements with “highly compensated employees.” The Amendment Act prohibits non-competition agreements only with employees: (1) who are not “highly compensated” (as defined by the law); and (2) who spend more than 50% of their work time for the employer working in the District or whose employment is based in the District and the employee regularly spends a substantial amount of their work time for the employer in the District and not more than 50% of their work time in another jurisdiction.
This means that employees whose office is based in Virginia, Maryland, or elsewhere, but who continue to work fully or more often than not from their home (or another physical location) in the District, will come under the scope of this law. Conversely, employees whose office is based in the District but who continue to work fully or partially from their home outside the District (more than 50% of their work time) may not be subject to these restrictions on non-competes. Therefore, as employers continue to explore returning to the office, or entirely new work arrangements, coverage of employees may change.
A “highly compensated employee” is someone, other than a broadcast employee, who is reasonably expected to earn or has earned in the preceding 12 months more than the “minimum qualifying annual compensation” of $150,000 or, if the employee is a medical specialist, $250,000. These amounts are set to change beginning January 1, 2024, based on increases in the Consumer Price Index for All Urban Consumers in the Washington Metropolitan Statistical Area.
Definition of “Non-Compete Provision”
The new law’s definition of “non-compete provision” has also been narrowed from the original ban. The new law specifically excludes provisions in sale-of-business agreements, as the original ban did. Non-compete agreements entered into before the new restrictions go into effect – now on October 1, 2022 – are not affected by the law.
However, while the original ban prohibited any restrictions on outside employment, or moonlighting, the new law allows employers to restrict an employee’s outside employment activities in certain circumstances. Specifically, the law allows an employer to prohibit an employee from performing work for payment for another, if the employer:
reasonably believes the employee’s acceptance of money or a thing of value under such circumstances will: (i) result in the employee’s disclosure or use of confidential employer information or proprietary employer information; (ii) conflict with the employer’s, industry’s, or profession’s established rules regarding conflicts of interest; (iii) constitute a conflict of commitment if the employee is employed by a higher education institution; or (iv) impair the employer’s ability to comply with District or federal laws or regulations, a contract, or a grant agreement.
Additionally, while the law is somewhat unclear on this point, it appears that employers can also include non-competition restrictions in agreements that provide a “long-term incentive,” defined as “bonuses, equity compensation, stock options, restricted and unrestricted stock share 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.”
Agreements with Highly Compensated Employees
In order to enter an enforceable non-compete with a highly compensated employee (as defined above), employers must comply with certain requirements set out in the new law. The agreement must: (i) specify the “functional scope” of the limitation (identifying what “services, roles, industry, or competing entities” are off-limits), (ii) specify the restriction’s geographic scope, and (iii) not impose a restriction in excess of a 365 days from the date of the employee’s separation from employment (unless the employee is a medical specialist, in which case the maximum term is 730 days).
An enforceable non-compete restriction with a highly compensated employee also needs to meet certain timing and notice requirements set out in the law. An employer must present the non-compete provision to the highly compensated employee in writing at least 14 days before the person commences employment, or, if the person is already employed, at least 14 days before the employee must sign the agreement. Further, an employer must provide the following notice whenever it proposes a non-compete provision to a highly compensated employee:
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 Amendments Act of 2020, contact the District of Columbia Department of Employment Services (DOES).
Other Required Notices to Employees
The new law contains additional notice requirements as well, which are different from the notice obligations contained in the original ban. The new law requires an employer “with a workplace policy that includes one or more of the exceptions to the definition of non-compete provision” (which would seem to be focused on anti-moonlighting provisions) to provide a written copy of the provision to an employee (1) within 30 days of the employee’s acceptance of employment; (2) within 30 days of October 1, 2022; and (3) any time the policy changes. This seems to be a significant improvement from the original ban, which required an employer to provide all employees with a specifically worded notice regarding DC’s prohibition against non-competes, within strict time limits set forth in that original law. Notably, this provision can be read to apply to other policies, such as those addressing confidentiality and conflict of interests.
Anti-Retaliation and Enforcement
The new law contains an anti-retaliation provision similar to that contained in the original ban. Specifically, the law prohibits an employer from retaliating or threatening to retaliate against a highly compensated employee who has executed a non-compete agreement, for: (i) asking for a copy of a proposed or executed non-compete provision or agreement; (ii) asking for information required to be provided to the employee including the functional scope, geographical limits, and temporal limits of the restriction; or (iii) asking about or objecting to a proposed non-compete provision or agreement because the employee reasonably believes the provisions do not confirm to the requirements of the law, or the employee reasonably believes the employer has failed to provide the non-compete to them in accordance with the time frame required by the law, if the question or objection is put to an employer (note this is not limited to the employee’s employer), a co-worker, the employee’s lawyer or agent, or a governmental entity.
For “covered employees,” or those employees who cannot be required to enter into non-competes, the law prohibits employers from retaliating or threatening to retaliate against a covered employee for: (i) refusing to agree to a non-compete provision or agreement that is prohibited by the law; (ii) failing to comply with a non-compete provision or agreement that is prohibited by the law; or (iii) asking, informing, or complaining about the existence, applicability, or validity of a provision of a workplace policy or agreement that the employee reasonably believes is prohibited by the law, or requesting a copy of such a provision, if the request, statement, or complaint is made to an employer (again, not limited to the employee’s employer), a co-worker, the covered employee’s lawyer or agent, or a government entity.1
The new law also provides record inspection rights for the mayor and the DC Office of Attorney General. As in the original ban, DC can still impose administrative penalties against an employer that violates the law, and employees continue to have the option to claim a violation of the law by filing an administrative complaint or a civil action in court.
While the revisions contained in the new law are important and welcome, the law will continue to pose significant challenges to employers, including assessing how frequently their employees are working in the District, how much their employees are earning as they progress in their careers, and whether any outside employment performed by the employee meets the criteria specified in the law.
Moreover, now that the new law is coming into effect, as a preliminary matter employers should consider requesting information from employees about their outside employment activities, to determine if they can/should be prohibited pursuant to the new law’s definitions. In addition, employers with DC employees should 1) review and update their non-compete agreements and offer letters; 2) review and revise as appropriate workplace policies containing anti-moonlighting/outside employment restrictions or other policies that come under the definition of exceptions to the non-compete law, 3) review and revise confidentiality obligations in employment agreements and employment policies to be sure they adequately protect the company’s important confidential/proprietary information, 4) confirm that the company has sufficiently robust policies prohibiting conflicts of interest but at the same time being cognizant of the law’s restrictions on prohibiting simultaneous employment, and 5) review and revise (or include, as appropriate) non-solicitation provisions in employment agreements as they relate to the company’s customers and clients, again to be sure to take all possible steps – in the absence of having non-competition agreements – to adequately protect the company’s legitimate business interests.
1 The law also prohibits retaliating or threatening to retaliate against covered employees who ask for information related to non-compete provisions for highly compensated employees. It is unclear whether this provision, which does not seem to appropriately apply to covered employees, was intended to be included in the retaliation protections of the law.