D.C.'s new non-compete restrictions take effect October 1, 2022

Background 

As we previously reported, D.C. enacted a statute in January 2021 that would have banned not only nearly all employee non-compete agreements, but also workplace policies that restrict employees' work for other employers during employment. Due to concerns raised by the District's business and higher education communities, the law was placed on hold before it became applicable. 

After receiving input from stakeholders, on July 12, 2022, the D.C. Council passed the Amended Act, which still prohibits many non-compete provisions but scales back the 2021 ban in important respects. Mayor Muriel Bowser signed the Amended Act on July 27. If there are no objections from Congress during the mandatory 30-day congressional review period, the Amended Act will become applicable October 1. Notably, the new law is not retroactive, and therefore does not affect the enforceability of pre-existing non-compete agreements with employees. 

Key provisions

Covered employers and employees

The Amended Act applies to all employers and prospective employers "operating in the District in relation to" an employee or prospective employee (other than D.C. and the federal government). This means the law applies to employers in D.C., but also employers based outside of D.C. that employ, or seek to employ, employees in the District.

The Amended Act defines "employee" to mean any individual who "performs work for pay in the District for an employer," or who has received an offer of such employment. Employees are covered by the Amended Act if they (i) spend more than half of their working time for the employer in D.C., or (ii) are based in D.C. and spend a substantial amount of their working time for the employer in D.C. and no more than half of such time in another jurisdiction. This is narrower than the 2021 ban, which could be read to apply to employees performing any amount of work for an employer in D.C.

The Amended Act does not apply to "partner[s] in a partnership." 

Non-compete provisions prohibited for all but "highly compensated" employees

The Amended Act prohibits non-compete provisions—meaning agreements or policies that restrict employees' ability to work for other employees for pay, or for themselves, during or after employment. But it creates an exception for non-compete agreements with "highly compensated" employees when certain substantive and procedural requirements are met. 

"Highly compensated" employees are those who earn at least US$150,000 a year, except that the threshold is US$250,000 for "medical specialists" (licensed physicians who have completed medical residencies), and "broadcast employees" (as defined in the statute) do not qualify for the exception at any income level. The thresholds will be adjusted annually for inflation starting in 2024. Compensation that counts toward the thresholds includes base pay, overtime, bonus and incentive pay, commissions, and vested stock, but not non-cash fringe benefits.

To be valid and enforceable, non-compete agreements for highly compensated employees must:

• Last no longer than 365 days post-termination (730 days for medical specialists);
• Specify the geographic scope of the limitation;
• Specify the functional scope of the competitive restriction (including the "services, roles, industry, or competing entities the employee is restricted from performing work in or on behalf of"); and    
• Be given to the employee at least 14 days before the start of employment, or, in the case of a current employee, 14 days before the agreement must be signed. 

The Amended Act does not require that duration, geography, and functional scope terms in a highly compensated employee non-compete agreement be reasonable. However, the statute expressly provides that it does not alter common-law rights, remedies, or prohibitions; thus, common-law reasonableness requirements likely remain in effect. 

In addition, when asking a highly compensated employee (or prospective employee) to enter into a non-compete agreement, employers must give the employee the following disclosure:

The District of Columbia 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" 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 Act of 2020, contact the District of Columbia Department of Employment Services (DOES).

Non-compete provisions signed by employees who are not "highly compensated" are void and unenforceable. Furthermore, it is unlawful under the Amended Act for an employer even to "require or request" that an employee who is not "highly compensated" enter into an agreement or comply with a workplace policy that contains such a non-compete provision. As a result, employers should not include prohibited non-compete provisions in D.C. agreements or workplace policies, even if there is no intent to enforce the restrictions.

Other permissible provisions 

The Amended Act clarifies that the following provisions in employee agreements and workplace policies are not considered "non-compete provisions" and are not prohibited by the Amended Act: 

• Confidentiality provisions restricting the employee from "disclosing, using, selling or accessing" the employer's confidential or proprietary information.
• Anti-moonlighting provisions that prohibit employees from working for someone other than the employer during employment, where the employer reasonably believes such work would: 
  • "Result in disclosure or use of the employer's" confidential or proprietary information; 
  • "Conflict with the employer's, industry's, or professions established rules regarding conflicts of interest"; 
  • "Constitute a conflict of commitment if the employee is employed by a higher education institution"; or
  • "Impair the employer's ability to comply with District and federal laws or regulations; a contract; or a grant agreement." 
• Non-compete provisions in long-term incentive plans, defined to include performance-driven incentives such as bonuses, equity compensation, and stock options "typically earned over more than a year." This exception appears to permit an employer to, for example, make payment of such "long-term incentives" conditional on the employee not competing with the employer.
• "Sale of business" non-compete provisions in which the seller agrees at the time of sale not to compete against the buyer's business.

Employers whose workplace policies include any of the above provisions must provide such policies to employees in writing:

• Within 30 days of an employee's (or prospective employee's) acceptance of employment with the employer;
• Within 30 days after October 1, 2022; and
• Any time such policies change.

The Amended Act does not address non-solicitation provisions (which prevent employees from soliciting the employer's other employees, customers, or vendors during or after employment); however, the Amended Act's legislative history suggests the law does not prohibit them.  

Retaliation

The Amended Act prohibits retaliation against employees who engage in various types of protected activity, including, for example, 

• Refusing to agree to, or failing to comply with, a prohibited non-compete restriction;
• Asking for a copy of a non-compete agreement the employee has already executed; and
• Complaining about an agreement or policy that the employee reasonably believes violates the Amended Act.

Remedies

Employees who believe the Amended Act has been violated can file an administrative complaint or sue the employer in court. Administrative penalties start at US$350 per violation, and not less than US$1,000 per violation in the case of retaliation claims. Employees may also recover monetary relief ranging from US$250 to US$2,500 per employee, depending on the nature of the violation, and more for subsequent violations.

Takeaways for employers 

Employers should take the following steps to comply with the Amended Act.

• Because the Amended Act is not retroactive, employers need not amend non-compete agreements executed prior to October 1, 2022. However, non-compete agreement templates that will be used on or after October 1 should be updated to comply with the new law.
• Employers who wish to implement non-compete agreements that may be prohibited under the Amended Act (e.g., agreements with employees below the statutory income thresholds) should do so before October 1.
• Employers should review workplace policies such as codes of conduct to ensure compliance with the Amended Act. Employers with anti-moonlighting policies should consider adopting robust conflict of interest and confidentiality policies to support the restriction, if such policies are not already in place.
• Starting October 1, employers should begin providing the required disclosure to highly compensated employees asked to sign non-compete agreements. 
• Employers should also provide workplace policies containing the permissible provisions listed above at the required times—that is, to all employees by October 31; within 30 days of a new employee accepting an employment offer; and whenever there is a change in policy. This could be accomplished by including these policies in an employee handbook that is distributed to employees (and redistributed upon updates).
• Employers should consider using other measures besides non-competes to protect their business. These could include strong confidentiality, trade secret, and intellectual property assignment provisions; non-solicitation provisions; data security and privacy policies; rigorous employee offboarding procedures; and employee training on confidentiality protections. 

 
For more information regarding the Amended Act, non-competition agreements, or other workplace issues, please contact one of the authors of this article or the Hogan Lovells lawyer with whom you work.

Authored by George Ingham, Amy Folsom Kett, and Shannon Finnegan.