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DC Walks Back its Near Total Non-Compete Ban

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Attorney Harrison Oldham

 

 

In early 2021, the District of Columbia (“DC”) provoked an uproar from the local business community when it enacted one of the country’s broadest bans on non-compete agreements. In response, the DC Council passed the “Non-Compete Clarification Amendment Act of 2022” (the “Amendment”). The Amendment became enforceable on October 1, 2022, so now is an excellent time to review the underlying non-compete ban and the Amendment.

 

Background

 

In January 2021, the DC City Council approved the original non-compete ban, appropriately named the Ban on Non-Compete Agreements Amendment Act of 2020.

 

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. In response, the DC business community did its best to make its concerns known. Fortunately, the recently enacted Amendment eliminates the complete ban on non-competes and clears the way for the continued use of non-competes with highly compensated employees. Below, we will briefly review some of the Amendment’s key elements.

 

Covered Employees

 

The Amendment significantly narrows the employees affected by the original ban. Specifically, the Amendment allows non-compete agreements with “highly compensated employees “(as defined by the law).

 

A “highly compensated employee” is someone (other than a broadcast employee) who is expected to earn more than the “minimum qualifying annual compensation” of $150,000 or, if the employee is a medical specialist, $250,000. These amounts will begin to change on January 1, 2024, in response to increases in the Consumer Price Index for All Urban Consumers in the Washington Metropolitan Statistical Area.

 

Additionally, employees are only covered if they spend at least 50% of their work time for their employer working in DC. The Amendment’s changes mean that employees with an office in Virginia who spend most of their working time from their home office in DC will be covered. On the other hand, employees with an office in DC who spend most of their working time from their home office in Virginia will be excluded from the scope of the Amendment.

 

Definition of “Non-Compete Provision”

 

The Amendment’s definition of “non-compete provision” has also been narrowed from the original ban. For example, the Amendment excludes non-compete provisions related to the sale of a business. Additionally, the Amendment does not affect non-compete agreements entered into before October 1, 2022.

 

However, while the original ban prohibited any restrictions on outside employment or moonlighting, the Amendment allows employers to restrict an employee’s outside employment activities in certain circumstances. Specifically, the law allows an employer to prohibit an employee from moonlighting for if the employer reasonably believes the employee’s outside activities will:

 

  1. Result in the employee’s disclosure or use of confidential information.
  2. Conflict with the employer’s, industry’s, or profession’s established rules regarding conflicts of interest.
  3. Constitute a conflict of commitment.
  4. Impair the employer’s ability to comply with DC or federal laws, regulations, a contract, or a grant agreement.

 

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 specific requirements set out in the new law. The agreement must:

 

  1. Specify the “functional scope” of the limitation (identifying what “services, roles, industry, or competing entities” are off-limits).
  2. Specify the restriction’s geographic scope.
  3. Contain a restriction shorter than 365 days from the employee’s date of separation (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 particular timing and notice requirements set out in the law. An employer must present the non-compete provision to the employee in writing at least 14 days before the person commences employment, or, if already employed, at least 14 days before the employee must sign the agreement. Further, an employer must provide the employee with a specific notice regarding the Amendment.

 

Anti-Retaliation and Enforcement

 

Finally, the Amendment includes a prohibition against retaliation similar to the restriction in the original ban. Specifically, the Amendment prohibits an employer from retaliating against a highly compensated employee who has executed a non-compete agreement, for:

 

  1. Asking for a copy of a proposed or executed non-compete agreement.
  2. Asking for information that the Amendment requires be provided to the employee.
  3. Asking about or objecting to a proposed non-compete provision or agreement because the employee reasonably believes the provisions do not conform to the requirements of the law.

 

The new law also provides record inspection rights for the mayor and the DC Office of Attorney General. Much like 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.

 

Key Takeaways

 

While the revisions contained in the Amendment are an improvement over the original ban, the law will continue to pose significant challenges to employers. For example, the Amendment could seriously impact certain employers that will now be required to assess how frequently their employees work in DC. Additionally, any employer with DC-based employees should take the time to analyze its existing compensation structures to determine which employees are “highly compensated.” For non-highly compensated employees, employers should review their employment agreements and remove any non-compliant policies and provisions.

 


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About Harrison Oldham

Harrison grew up in Mansfield, Texas. He attended Texas A&M University for his bachelor’s degree, where he met his wonderful wife, Kelsey. After graduating magna cum laude from Texas A&M, he attended SMU Dedman School of Law, graduating with honors in 2012. Today, Harrison and his wife live in Dallas, Texas with their son, Teddy.

Since graduating from SMU Law, Harrison has worked exclusively in the field of business law. He has spent time in private practice and in-house, working with clients of every size; from single person startups to Fortune 250 companies. Today his practice focuses on serving the diverse needs of businesses and individuals throughout Texas. You can learn more about Harrison by visiting his website, at: http://lonestarbusinesslaw.com/.

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