District of Columbia Limits Ban on Non-Competes to Employees Making Less Than $150,000 Annually

District of Columbia Mayor Muriel Bowser signed new legislation amending a broad non-compete ban passed in 2021 that had not yet taken effect. While the prior law banned almost all non-competes, the amended law narrows the ban to workers who make less than $150,000. The amended law, referred to as the "Non-Compete Clarification Amendment Act of 2022" (the "Non-Compete Act of 2022"), will take effect Oct. 1, 2022. The law will not be applied retroactively, meaning that it will not nullify non-compete agreements entered into before Oct. 1, 2022.

Non-Compete Agreements Allowed for Certain Highly Compensated Employees

Unlike the prior law, which prohibited almost all employee non-compete agreements regardless of an individual's earnings, under the Non-Compete Act of 2022 employers can require employees who earn at least $150,000 per year (with some exceptions explained below) to sign non-compete agreements. However, the salary threshold for "medical specialists" (defined as licensed physicians who have completed a medical residency) is $250,000 or more per year.

"Compensation" is defined to include bonuses, commissions, overtime premiums, vested stock, and other payments provided on a regular or irregular basis. Fringe benefits will not be counted unless they are paid in cash or cash equivalents.

Beginning on Jan. 1, 2024, these salary thresholds will increase in proportion to any annual average increase in the D.C. Area Consumer Price Index, published by the Department of Labor.

Exception for Broadcast Employees

Except for salespersons, individuals who work in radio, television, satellite, cable or other broadcasting (such as anchor, disc jockey, editor, producer, program host, reporter or writer) cannot be required to sign non-compete agreements, regardless of how much they are paid.

Other Requirements: Temporal and Geographic Limits, Written Notice

The length of a permissible non-compete provision cannot exceed one year (two years for medical specialist) and must include a geographic limit. The agreements must also specify what roles, industries, or competing entities the individual cannot work in or for.

Employees must be given a copy of the non-compete agreement at least 14 days before the start of employment, or at least 14 days before the date the employee is required to sign the agreement. Employees must also be given written notice, in specific language set forth in the statute, advising them of the new law and its requirements and informing employees that they may contact the District of Columbia Department of Employment Services (DOES) for further information.

What Else Has Changed?

The non-compete Act of 2022 makes several other changes to the prior law, including the following:

• Definition of Employee

  The amended law will no longer apply to anyone who performs any services in D.C. Rather, the ban will apply only to employees who spend (or are expected to spend) more than half of their time working in D.C. or (for employers who are based in D.C.) employees who "regularly" spend a "substantial amount" of time working in D.C. and not more than half of their time working for the employer outside of D.C.
  
  Babysitters who work in a residence and partners in a partnership are not considered "employees" under the amended law.

• Definition of "Non-Compete Provision"

  The amended law defines a " non-compete provision" as "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 word "simultaneously" has been removed so that, as explained below, employers may now prohibit "moonlighting" or simultaneously working for another employer under some circumstances.
  
  The definition still includes an employer's policies, such as those in employee handbooks, not only written agreements.

• Some Prohibition on Moonlighting Allowed

  The prior law would have made it unlawful for an employer to prohibit employees from "moonlighting" by simultaneously working for another company.
  
  Under the amendment, employers may prohibit moonlighting but only where the employer reasonably believes that the work for another company would result in the disclosure or use of confidential information, affect the employer's ability to comply with any applicable laws or (for those working in higher education) create a "conflict of commitment" that would affect the ability of the employee "to perform employment duties for the institution because the activities risk interfering with the employee's primary duties for the institution."
  
  In addition, when prohibiting moonlighting is allowed, current employees must be given notice of the prohibition by October 31, 2022, or any time the employer's policy on the issue changes, and new employees must be given notice within 30 days of accepting employment.

• Non-Compete Provisions Allowed in Long-Term Incentive Plans

  The amended law allows employer to include non-compete provisions in long-term incentive agreements, which include 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." Although the law does not provide guidance regarding the effect of this amendment, it appears that D.C. employers will be able to include forfeiture provisions in the aforementioned compensation plans that are triggered by a violation of a permissible non-compete provision.

What Remains the Same?

• Definition of Employer

  The definition of "employer" has not changed and remains "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 and federal governments are not covered employers.

• Sale of Business

  A non-compete agreement entered into as part of the sale of a business is still allowed so that a buyer may prohibit the seller from competing with the buyer.

• Non-Disclosure Agreements Allowed

  Employers may still prohibit employees from disclosing, using, selling, or accessing the employer's confidential and proprietary information during or after employment.
  
  The amended law includes some new definitions in this regard, defining "confidential employer information" as "information owned or possessed by the employer which is not available to the general public and which the employer has taken reasonable steps to ensure is protected from improper disclosure," and "proprietary employer information" as "information unique to an employer that is compiled, created, or solicited by the employer, including customer lists, client lists, and trade secrets," as that term is defined in Section 2(4) of the D.C. Uniform Trade Secrets Act.

• Non-Solicitation Agreements Allowed

  The Non-Compete Act of 2022, like the prior law, does not prohibit non-solicitation agreements.

• No Retaliation

  Employers are still prohibited from retaliating against or threatening to retaliate against an individual for:
  
  • refusing to agree to a non-compete provision;
  • allegedly failing to comply with a non-compete provision or workplace policy made unlawful by the law;
  • asking, informing, or complaining to an employer (including the employee's employer), a coworker, the employee's lawyer or agent, or a governmental entity about the existence, applicability, or validity of a non-compete provision or a workplace policy that the employee reasonably believes is prohibited by the law; or
  • requesting information from an employer that the law requires an employer to provide.

• Penalties

  The penalties for violations of the non-compete Act of 2022 remain the same: $350 to $1,000 for each violation of the law's non-compete or notice provisions and $1,000 or more for any instances of retaliation.

Next Steps

Employers should review their restrictive covenant agreements and moonlighting policies to ensure that they are compliant with the non-compete Act of 2022 in advance of the October 1, 2022 effective date. Alternatively, if an employer wants to require current employees or those hired before Oct. 1, 2022, who earn less than $150,000 (or $250,000 for medical specialist) to sign non-compete agreements, those agreements must be signed before October 1, 2022, to be enforceable.

DWT attorneys will monitor and report on the status of the non-compete Act of 2022 as it awaits Congressional review. DWT attorneys will also provide advice and counsel to help employers determine whether existing policies must be revised.