Since we last reported on the delay of the District of Columbia’s Ban on Non-Compete Agreements Act of 2020 (the “Act”), the D.C. Council passed the Non-Compete Clarification Amendment Act of 2022 (the “Amendment”), effective October 1, 2022, which significantly rolled back some of the more prohibitive features of the original 2020 version of the Act.
A New Definition of Coverage
While the coverage of the Act was previously undefined, the Amendment defines a “covered employee” to mean an individual who works for an employer that operates in D.C. and (i) spends more than 50% of his/her work time working in D.C., or, (ii) whose “employment is based in” D.C., regularly spends a “substantial amount” of his/her work time in D.C., and does not spend more than 50% of their work time in another jurisdiction. Employees who have not begun working, but are reasonably anticipated to meet these parameters, are also covered.
New Categories of “Excluded” Employees
As in previous versions, an employer may restrict, either by agreement or workplace policy, the disclosure of the employer’s confidential or proprietary information such as trade secrets, customer lists, client lists, or other non-public information.
However, the Amendment now excludes from the definition of a “covered employee” what it calls “highly compensated employees.” A “highly compensated employee” is one who earned more than $150,000 in compensation in the preceding twelve months, or is reasonably expected to earn that amount in the next twelve months. Significantly, the $150,000 compensation threshold includes all forms of hourly wages and salary, as well as bonuses, cash incentives, commissions, overtime premiums, vested stock, and “other payments.” Beginning in 2024, the minimum annual compensation amount will be tied to the Consumer Price Index, so that number stands to be higher in the future. While the Amendment’s minimum compensation cut-off is much higher than nearby states like Maryland and Virginia (approximately $31,000 and $68,000, respectively), the broad definition of compensation means that a large proportion of professional workers in the District will be excluded from the ban.
Smaller carve-outs in the Amendment permit non-compete agreements when an employer reasonably believes that an employee’s acceptance of money from a source other than the employer will: (i) result in the employee’s disclosure or use of confidential or proprietary employer information; (ii) conflict with the employer’s, the industry’s, or the profession’s conflict of interest rules; (iii) constitute a conflict of commitment for an employee at a higher education institution; or, (iv) impair the employer’s ability to comply with D.C. or federal laws or regulations, a contract, or a grant agreement.
Finally, the Amendment permits non-compete restrictions in connection with a long-term incentive such as a bonus, equity, stock options, restricted and unrestricted stock shares, stock appreciation rights, or other performance driven incentives typically earned over more than one year. Therefore, employers who have employee incentive plans may still include non-compete provisions in employee participation agreements.
New Non-Compete Provision Requirements
The law puts additional limits on what can be included in the actual agreement. With some minor exceptions, a non-compete period may not extend beyond 365 days from the date of separation. The non-compete provision must specify the roles, services, industries, or competing entities from which the employee is restricted from performing work. The provision must also include the geographical limitation of the restriction.
The Amendment also introduces new notice periods prior to execution of a non-compete provision or implementation of a workplace policy. An employer must provide a written copy of a non-compete provision fourteen days before employment begins, or, for a current employee, fourteen days before execution of the agreement. Whenever a non-compete provision is proposed to an employee, an employer must also include a revamped statutorily prescribed disclaimer explaining the nature of the Act.
For a workplace policy that prohibits competition—including restrictions on the disclosure of confidential business information—a written copy must be provided to an employee within 30 days after acceptance of employment or when the workplace policy changes. If a business already has such a policy, then it must be reissued to all employees to whom it applies within 30 days of October 1, 2022.
Since the D.C. Council has not proposed any additional amendments, the law will become effective on October 1, 2022.
In the near-term, employers should review current workplace policies for compliance with the Amendment and be prepared to reissue the workplace policy by the end of October. Onboarding procedures should be updated to compensate for the new notice periods in the Amendment. It is also a good time for employers to take a fresh look at which employees will be subject to the Act’s ban, and which employees will meet the definition of “highly compensated employees,” and thus be eligible for non-compete provisions.