DC Walks Back Certain Aspects of its Pending Ban on Non-Compete Agreements

DC employers may be aware of the District of Columbia’s impending ban on non-compete agreements, which originally was scheduled to become effective on October 1, 2021 and which was set to become one of the most explicit bans on non-compete agreements in the nation.

"upset,At,You,For,Breaching,The,Non-compete?,Of,Course,Not."The initial iteration of the law, titled the “District of Columbia Ban on Non-Compete Agreements Amendment Act of 2020 (the “Act”), prohibited employers from requiring employees who perform work in Washington D.C. (or a prospective employee whom the employer reasonably anticipated would perform work in Washington, DC), from signing any agreement that included a non-compete provision.  The Act also made it unlawful for employers to have any workplace policy prohibiting employees from (i) being employed by another person; (ii) performing work or providing services for pay for another person; or (iii) operating their own business.  In other words, the Act rendered virtually all non-compete provisions unenforceable and forbade employers from instituting workplace policies, such as anti-moonlighting rules, that limit employees’ ability to work for other people or start their own business.

However, along with the effective date of the Act being delayed several times (first to April 1, 2022 and now to October 1, 2022), the D.C. Council recently passed the Non-Compete Clarification Amendment Act of 2022 (the “Clarification Amendment Act”), which tempers certain aspects of the law.

First, the Clarification Amendment Act explains thatthe Act only applies to employees and prospective employees if (i) they spend or are reasonably anticipated to spend more than 50% of their time working for their employer in DC; or (ii) their employer is based in D.C. and they regularly spend a “substantial amount” of work time in D.C. and not more than 50% of their time working in another jurisdiction for that employer.  Given the reality that many DC employers now have employees who spend the majority of their time teleworking from Maryland or Virginia, this will limit the number of employees to whom the Act applies and thus is an extremely welcome revision for DC employers.

Second, the Clarification Amendment Act now permits employers to require their “highly compensated employees” to enter into non-compete agreements, so long as certain conditions are met.  Notably, a “highly compensated employee” is an employee whose total compensation is or is reasonably expected to be more than $150,000 per year, including bonuses, commissions, overtime premiums, vested stock, and other payments provided on a regular or irregular basis.  Thus, many employees will now fall under this exception and as a result can be required to enter into non-compete agreements, assuming that the following conditions are met.

Specifically, for a non-compete agreement with a highly compensated employee to be valid and enforceable, an employer must provide a written agreement to the employee at least 14 days before the start of employment or the execution of the agreement.  In addition, that agreement must:

  • Specify the functional scope of the restriction, including what services, roles, industry, or competing entities the employee is restricted from performing work in or on behalf of;
  • Describe the geographical limitations of the work restriction;
  • Limit the duration of the restriction to no longer than 365 calendar days from the date of separation (730 calendar days for medical specialists); and
  • Include a notice with the non-compete provision stating that

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 Amendment Act of 2020, contact the District of Columbia Department of Employment Services (DOES).”

Assuming the above requirements are met, the Clarification Amendment Act now allows D.C. employers to enter non-compete agreements with almost any employee who earns a total amount of $150,000 or more annually.  While these requirements may be more burdensome than DC employers were used to prior to the Act, it is extremely welcome news for DC employers that this exception has now become a part of the law, as opposed to a total ban.

Notably, the Clarification Amendment Act contains certain exceptions for specific occupations, including (i) permitting employers to require their medical specialists who earn more than $250,000 per year to enter into non-compete agreements; and (ii) prohibiting employers from requiring employees who work for a television, radio, cable, satellite, or other broadcasting station or network (other than sales representatives) to enter into non-compete agreements, regardless of their total compensation.  Thus, it is still essential that DC employers consult with legal counsel prior to requiring that certain employees enter into non-compete agreements.

Third, as opposed to a total ban on anti-moonlighting provisions, the Clarification Amendment Act now permits such provisions if the employer reasonably believes the outside employment could:

  • result in the disclosure or use of the employer’s proprietary information;
  • cause a conflict of interest;
  • constitute a “conflict of commitment” for an employee of a higher education institution; or
  • impair the employer’s ability to comply with federal or District laws or another contract.

Thus, employers now longer need to completely scrap their anti-moonlighting provisions.  Importantly, however, an employer with workplace policies that include one or more of the above-referenced exceptions to the anti-moonlighting provisions must provide its employees with a written copy of its anti-moonlighting provisions either by Oct. 31, 2022 or within 30 days of the employee’s acceptance of employment, as well as any time it changes its anti-moonlighting policy.

Fourth, in a final welcome change for DC employers, they may now prohibit employees from using or disclosing their confidential or proprietary information either during or after employment.  Specifically, the Clarification Act states that the term “non-compete provision” does not include an otherwise lawful provision that prohibits or restricts an employee from disclosing, using, selling, or accessing the employer’s confidential or proprietary employer information (information unique to an employer that is compiled, created, or solicited by the employer, including customer lists, client lists, and trade secrets).  Thus, contrary to the fears of many DC employers expressed prior to the Clarification Act, there is no doubt that even after October 1, 2022, they may require their employees to enter into confidentiality agreements without running afoul of the law.  Similarly, although not explicitly referenced, it seems safe to assume that the Act would not affect employers’ efforts to reasonably restrict former employees from soliciting clients, customers or other employees.

At this point, it is extremely unlikely that the Act will be pushed back any further or that its substance will be changed any more. Indeed, despite these welcome changes, DC employers who use non-compete agreements will still need to make many changes prior to the effective date of the Act.  Accordingly, DC employers with non-compete agreements should be taking steps to make sure they are ready for these changes by October 1, 2022.

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