Summary

On March 15, 2021, the District of Columbia’s Ban on Non-Compete Agreements Amendment Act of 2020 (the “Act”) is projected to become law.[1] The new law not only bans the use of non-compete provisions in employment contracts and policies, it imposes affirmative duties on employers to inform employees of the law, and levies penalties for statutory violations, among other restrictions.

Under D.C. law, the Act will not “apply,” i.e., become effective and enforceable, until its costs are included in an approved budget and financial plan, which is unlikely to occur until the fall of 2021.[1] Employers therefore have a small window of time to prepare for the changes to come.

This Alert provides a summary of the Act’s key provisions and recommendations for steps employers should take in anticipation of the Act going into effect.

Summary of Key Provisions

The Ban – Under the Act, “[n]o employer operating in the District of Columbia may request or require any employee working in the District of Columbia to agree to a non-compete policy or agreement.” The prohibition applies only to non-competes entered on or after the Act’s applicability date; thus, existing non-competes are exempted. The Act defines “non-compete provision” as including any provision that “prohibits the 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.” By prohibiting agreements that restrict an employee’s ability to be “simultaneously” employed elsewhere, the Act calls into question “anti-moonlighting” policies that are commonly included in employment agreements, handbooks and codes of conduct. Finally, as the Act prohibits employers operating in the District from entering non-competes with employees working in the District – as opposed to simply deeming non-competes void under D.C. law – it is unlikely that D.C. employers can contract around the ban with choice of law provisions, at least with respect to employees working in the District.

Exceptions – The Act’s prohibitions do not apply to agreements with medical specialists, volunteers, babysitters or certain religious organization workers, as the definition of “employee” excludes these four categories of individuals.  Similarly, the definition of “employer” expressly excludes the District of Columbia and United States governments.

Confidential Information Carve Out – The Act does not limit an employer’s ability to protect its confidential information, as the definition of the prohibited “non-compete agreement” excludes any “otherwise lawful provision that restricts the employee form disclosing the employers confidential, proprietary, or sensitive information, client list, customer list, or trade secret.”

Business Sale Carve Out – Similarly, the Act does not ban non-compete provisions included in agreements “between the seller of a business and one or more buyers of that business wherein the seller agrees not to compete with the buyer’s business.” Thus, non-competes in the context of selling a business are unaffected by the new law.

Written Notice Requirements – The Act includes three notice mandates. First, within 90-days of the Act’s applicability date, employers must provide existing employees working in the District written notice stating: “No employer operating in the District of Columbia may request or require any employee working in the District of Columbia to agree to a non-compete policy or agreement, in accordance with the Ban on Non-Compete Agreements Amendment Act of 2020.” Second, employers must provide this written notice to any new employees within seven calendar days of their hiring date. Third, if an employee submits a written request, employers must provide a copy of the written notice to that employee within 14 days of that request.

Records of Compliance – The Act directs the Mayor to issue “rules requiring employers to keep, preserve and retain records related to compliance” with the Act, and employers must make those records “available for inspection or transcription.”  Mayor Muriel Bowser, however, has yet to issue such rules. While the Act is unclear on this point, it is advisable for employers to maintain records of their efforts to comply while waiting for the Mayor to promulgate specific rules.

Enforcement & Penalties – The Act creates both administrative and civil penalties to address non-compliance. On the administrative side, the D.C. Mayor and Attorney General may assess penalties ranging from $350 to $1,000 per violation of the Act’s prohibition on non-competes or its notice provisions. They may also assess fines in excess of $1,000 for any employer retaliation. As to civil remedies, the Act creates a private right of action such that any aggrieved employee may seek to recover $500 to $1,000 per violation from the employer. The statutory penalty increases to a minimum of $3,000 per employee for subsequent violations of the Act. Finally, any employer who attempts to enforce an invalid non-compete agreement faces a minimum penalty of $1,500.

Recommendations

With the Act projected to take effect in the fall of 2021, employers operating in the District should consider taking three critical steps:

First, review all existing policies and agreements. The Act does not affect an employer’s ability to enforce non-compete agreements entered before the Act’s “applicability date,” i.e., the date that the Act’s fiscal effect is included in an approved budget and financial plan.  Although this precise date is presently unknown, it will likely be in September or October 2021, which is historically when D.C. approves its budget and financial plan. After the Act becomes applicable, non-competes in employment contracts, employee handbooks, codes of conduct, offer letters, and other workplace policies will be deemed unlawful. Employers should therefore remove these provisions from all employee materials, other than agreements entered before the Act’s applicability date. Further, as the Act purports to prohibit restrictions on “simultaneous” employment, employers should carefully review and consult counsel concerning any “anti-moonlighting” provisions that may fall within the Act’s ambit. Finally, the Act does not affect covenants to protect confidential information and does not expressly prohibit non-solicitation covenants; employers operating in the District should therefore ensure that their employee agreements and handbooks include appropriate protections for confidential, trade secret and proprietary information and should consider non-solicitation agreements with key employees where appropriate.

Second, prepare to provide and track written notice to employees. Employers will have 90 days from the Act’s applicability date to provide the statutorily required notice to all employees working in the District. Given the relatively short turn around, employers should begin drafting notices and developing a plan for both distribution and retention of compliance records as soon as possible. Once the Mayor issues rules governing record retention requirements, employers should revisit their plan to ensure compliance.

Third, consult counsel and your human resources team. Given the significant change in law and potential liability exposure, employers with employees in the District should consult with counsel concerning how the new law affects their particular operations and how they can use other covenants that are unaffected by the Act to protect their interests.  They should also confer with their human resources department to ensure compliance. As with any shift in the legal landscape, communication is critical.