Washington, D.C. City Council Passes Near-Total Ban on Non-Compete Agreements, Which (Absent Contrary Action) Is Likely to Go into Effect Early This Year

On December 15, 2020, the D.C. City Council, in a 12-0 vote (with one recusal), passed Bill 23-494, the Ban on Non-Compete Agreements Amendment Act of 2020 (“the Act”). The Act, if made law, will represent one of the broadest prohibitions on non-competes in the country.

The Act prohibits “employers” (defined to include individuals and non-governmental businesses operating in the District of Columbia, including prospective employers) from requiring or requesting that an employee sign an employment agreement that includes a non-compete provision and renders any non-compete provision contained in an employment contract after the Act’s applicability date unenforceable and void as a matter of law. “Non-compete provision” is defined broadly to include any provision in a written employment contract that prohibits an employee from “being simultaneously or subsequently employed by another person, performing work or providing services for pay for another person, or operating the employee’s own business.”

Note the phrase “simultaneously or subsequently employed.” Under this language, employers are apparently barred not only from including in employment contracts post-employment restrictions on competition for departing employees, but also from prohibiting current employees from “moonlighting,” i.e., holding simultaneous outside employment (even with competitors) during the period of employment. The Act goes further in allowing for employee “side hustles,” banning employer workplace policies that seek to prohibit employees from holding outside employment, performing work or services for pay, or operating their own businesses.

The Act is broad not only in what it prohibits, but who it covers. Only four groups are exempted from the Act’s definition of “employee”: (1) volunteers participating in educational, charitable, religious, or nonprofit activities without payment or expectation for gain; (2) certain religious leaders; (3) “casual babysitters,” hired to work in a home; and (4) “medical specialists” (licensed physicians engaged primarily in delivering medical services who have completed a medical residency program and whose total annual compensation is at least $250,000).

All other individuals working for employers in the District and prospective employees likely to be hired to work in the District are covered, irrespective of wage thresholds, making the District’s Act broader than those enacted in recent years by its neighbors to the north and south. For its part, Maryland bans non-competes in employment contracts for employees earning less than $15 per hour or $31,200 per year. Virginia bans them for employees whose average weekly earnings in the prior 52 weeks are less than the Commonwealth’s average weekly wage (currently $1,233 per week or $64,116 annually). Wage thresholds were included in prior drafts of D.C.’s Act, but left on the cutting room floor, a fact D.C. Mayor Muriel Bowser noted in a December 1 letter to the Council’s Chairman urging the Council to withdraw the Act and “continue conversations with all of the stakeholders” to find an appropriate wage threshold. Mayor Bowser expressed concerns that the Act as written might have “unintended consequences,” impacting the City’s “regional competitiveness.” The Mayor also noted that, together with other measures recently advanced by the Council, the Act could create “further uncertainty for the business community at a time when businesses are struggling to survive” due to the COVID-19 pandemic.

The Mayor has taken no action on the Act to date. Because the Act passed the Council unanimously, the Council surely has the votes it would need to overturn any veto the Mayor might make. Following either mayoral approval or the Council overturning a mayoral veto, the Act will be subject to the 30-day Congressional review period set forth by the Home Rule Act (the 1973 federal law that gives Congress review power and the authority to block laws passed by the D.C. City Council). Given the current political environment and the approaching transition to a new Presidential administration, it appears unlikely that Congress will take the time to pass a joint resolution disapproving of the Act or secure Presidential approval of such a resolution. Employers should expect, absent serious discussions otherwise, that the Act will become law in 2021.

Beyond being aware of the anticipated prohibitions and preparing to modify future-looking employment contracts and workplace policies accordingly, what else should employers know as they prepare for the Act to become law? A few of the Act’s particulars are worth highlighting:

(1) The ban does not apply to otherwise lawful confidentiality agreements that protect employers’ confidential, proprietary, and sensitive information, client and customer lists, and trade secrets from disclosure by employees. Such agreements may continue to be included in D.C. employment contracts or as separate writings.

(2) The ban also does not apply to otherwise lawful provisions in or executed at the same time as a contract for the sale of a business. Buyers are still able to insist that the seller agree, as a condition of sale, not to compete with the business they sold.

(3) Non-compete agreements and employment contracts pre-dating the Act’s effective date are grandfathered in and likely remain enforceable. The Act’s terms limit its effect to provisions “entered into on or after the applicability date of this title.” Enforceability thus turns on the date of signing. Agreements signed before the Act becomes law likely remain enforceable. Agreements signed after (assuming no changes are made to the Act’s wording) will be deemed void as a matter of law.

(4) The Act contains notice requirements for employers. Employers must give notice of the Act (using certain specified language) to all current employees within 90 days of the Act becoming law and within 7 days of hiring a new employee.

(5) The Act prohibits retaliation and threats of retaliation based on any employee’s refusal to sign a non-compete, alleged failure to comply with a policy or provision made unlawful by the Act, and inquiry into the existence, applicability, or validity of a provision or policy the employee reasonably believes is prohibited by the Act to his or her employer, coworker, employer’s counsel, or government entity.

(6) The Act contains enforcement mechanisms and penalties for violation. Violations of the Act may subject employers to an administrative penalty of $350 to $1,000 per violation. The Act also creates a right of action: An aggrieved employee may file a civil action in a court of competent jurisdiction for damages as follows: