Jay Inslee, governor of Washington (Photo: Ben Nelms/Bloomberg)

The state of Washington has passed, and the governor is expected to sign, a new law that would limit noncompete clauses in company contracts with employees and independent contractors.

Scheduled to take effect Jan. 1, the new law would prohibit all noncompetition agreements for employees whose W-2 earnings are less than $100,000 annually, and for independent contractors paid less than $250,000 per year. Those amounts would be adjusted annually for inflation.

Suzanne Thomas, partner with K&L Gates in Seattle, told Corporate Counsel on Monday she expects the governor to sign the bill into law this week or next. The main impact, she said, is that general counsel “will need to look at all the kinds of restrictive covenants they have to assure compliance no later than Jan. 1, 2020.”

The law would make it riskier and costlier for employers to try and enforce broad noncompete agreements. If the judge rules that the agreement violates the new law, or has to modify any part of the agreement to make it “reasonable,” then the employer must pay the employee the greater of $5,000 or his or her actual damages, plus the employee's attorney fee, expenses and costs.

For most parties, noncompete agreements that last more than 18 months would be presumed unreasonable. For performers in the entertainment industry, the duration is limited to only three days.

If an employer wants to keep a noncompete agreement in place after an employee is laid off, then the employer must pay the employee their base salary during the period of enforcement minus any earnings the employee receives.

The agreement would be void if it requires that disputes be adjudicated outside Washington.

The legislation stems from a franchise sandwich shop that tried to keep its low-wage employees from working for other sandwich shops. So the law would prohibit anti-moonlighting restrictions for employees who earn less than twice Washington's minimum wage, including moonlighting for a competing company.

It would also forbid franchisers from restricting franchisees from soliciting or hiring employees of the franchiser or another franchisee.

Thomas said employees are increasingly uncomfortable with noncompete agreements that limit their mobility. “If it's a janitor, that makes no sense at all,” she explained. “With higher level employees who might really be able to change the trajectory of a company, that's where noncompete agreements make the most sense.”

Thomas advised, “General counsel should reevaluate those employees that they try to restrict to ensure that it really is a business necessity.”

Bruce Cross, a partner with Perkins Coie in Seattle, blogged that the new law could especially impact startup employers.

“This is a major change for Washington employers,” wrote Cross, who could not immediately be reached for comment. “Due to the compensation thresholds, the new law will significantly reduce the chance for startups to use noncompetition agreements, as those employers tend to pay relatively low W-2 compensation, even for key personnel, and instead compensate through equity.”

Both Cross and Thomas were unsure about the retroactivity of the law. “The retroactivity language is muddled at best,” Thomas said. “It could apply retroactively, but we don't know.”

Update: Gov. Jay Inslee signed the law on May 9.