DC Finally Prunes its Ban on Non-Competes

When initially enacted in January 2021, the District of Columbia’s Ban on Non-Compete Agreements Amendment Act was one of the broadest non-compete prohibitions in the country.  Its effective date, however, was delayed on several occasions amid widespread criticism of its comprehensive scope.  For more information about the original act and its subsequent delay, please see our previous posts on the matter here and here.  The DC Council ultimately passed a scaled back version some 18 months later.

Effective October 1, 2022, the Non-Compete Clarification Amendment Act of 2022 (the “Amended Act”) limits the scope of the initial ban by narrowing of (a) the definition of a “non-compete provision” and (b) applicability to certain highly compensated employees (“HCEs”).

Narrowed Definition of a “Non-Compete Provision”

The Amended Act defines a banned “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.”  At the same time, the Amended Act excludes several types of provisions from that definition, such as:

  • Agreements of a seller of a business not to compete with the buyers;
  • Provisions restricting use or disclosure of confidential, proprietary or trade secret information;
  • Anti-moonlighting where the employer “reasonably believes” that, under the circumstances, simultaneous employment will result in (a) the disclosure of confidential, proprietary or trade secret information, (b) conflict with employer, industry or professional conflict of interest rules; or (c) impaired ability of the employer to comply with law, its business contracts, or grants of certain rights.

When an employer has “a workplace policy that includes one or more of the exceptions to the definition of ‘non-compete provision,’” it must provide a written copy of the provisions to:  (a) applicants within 30 days after the acceptance of employment; (b) employees within 30 days after October 1, 2022; and (c) employees any time the policy changes.  This applies to all covered employees, which is defined as one who:  “[s]pends more than 50% of his or her work time for the employer working in the District;” or “[w]hose employment […] is based in the District and the employee regularly spends a substantial amount of his or her work time for the employer in the District and not more than 50% of his or her work time for that employer in another Jurisdiction.”

Application to “Highly Compensated Employees”

The Amended Act exempts HCEs from the ban on non-compete provisions. HCEs are those whose annual compensation is greater than or equal to $150,000 (subject to annual CPI adjustment).  Most forms of compensation are counted, including wages (i.e., hourly, salary, bonuses, cash incentives, and overtime premiums), vested stock (including restricted stock units), and other payments provided on a regular or irregular basis. Fringe benefits do not count unless paid in cash or cash equivalents.

That being said, to make a non-compete provision enforceable against an HCE, employers must comply with several requirements, such as:

  • The agreement containing the non-compete provision must state the functional scope of the restriction, such as what services, roles, industries or competing entities for which the employee may not perform work, and the geographic limits of the restriction;
  • The restriction cannot be longer than 365 days from the date the HCE’s employment ends;
  • For certain medical specialists, the compensation amount is $250,000 and the restrictive period can be up to 730 calendar days;
  • The non-compete provision must be provided to the HCE in writing at least 14 days before the individual commences employment or, if the individual is already employed, 14 days before the employee must execute the agreement; and
  • When an employer presents an HCE with a non-compete, the agreement must include the following language:

The District’s 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, as that term is defined in the Ban on Non-Compete Agreements Amendment Act of 2020, 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).

Penalties and Enforcement

The Amended Act authorizes various administrative penalties, ranging from $350 to $1,000 per violation.  Retaliation in violation of the Amended Act can result in a minimum penalty of $1,000.  The DC mayor and attorney general are authorized to enforce the Amended Act.  Aggrieved employees may seek relief by filing a complaint with the mayor or in a civil court action.

Employer Action

Employers with covered employees in DC should consult with legal counsel ahead of the law’s October 1, 2022 effective date.  Issues to consider include:  (a) removal or modification of non-compete provisions in policies and in agreements with non-HCEs; (b) who is an HCE and whether policies governing and agreements with them are compliant; and (c) notice requirements.