By: Shelly Mittal
What Does Washington’s New Non-Compete Law Have in Store for the Tech Industry?
The rivalry between Amazon and Google is often on display. One area where we recently saw this rivalry spread its tentacles was in attracting talent. When Google hired Amazon’s marketing executive Brian Hall in April of this year, Amazon decided to enforce a non-competition agreement against him. This caused quite a splash in the industry.
Enforcing non-competition agreements against former employees is not a new trend in the tech industry. Amazon, itself, has brought a series of lawsuits to enforce such agreements including one against Philip Moyer, a former Amazon Web Services sales executive, who took a job with Google Cloud last year.
Non-competition agreements (often called non-competes) are essentially contracts/clauses in employment agreements that prohibit employees from joining competitors or starting a competing firm for a specified amount of time and in a specified geographic region to protect trade secrets, client lists, and other intangible assets. They have always been particularly controversial in the tech industry, which faces challenges in structuring non-competes that balance attracting talent and protecting sensitive information with preventing unfair competition by former employees.
Many states have developed common law, through court decisions, that govern non-competes, while others have enacted statutes. Washington courts, too, formulated the reasonableness standard, wherein non-competes were enforced if they were reasonable in scope, geographic reach, and duration, as determined on a case-by-case basis. On the other hand, non-competes are unenforceable in states like California, the heart of the global tech industry. Opponents of non-competes credit this approach to the growth of Silicon Valley, which required a liberal flow of employees from big tech companies to startups. Washington passed a new law this year which restricts non-competes (w.e.f. Jan 1, 2020). While the new law does not go so far as to ban non-competes, it does impose new restrictions. Under the new law, non-competes will only be enforceable if (a) the employer discloses the terms of the covenant in writing when making an offer or earlier; (b) the employee earns more than $100,000 a year; and (c) the non-compete is enforceable for a period not longer than 18 months.
So how does the salary threshold affect tech employees?
As reported by the 2019 Hired report, tech salaries have been on the rise in Seattle, with the average pay jumping from $125,000 in 2015 to $138,000 in 2018. The report suggests a 10% jump from 2015 to 2018. Based on the average salary and the suspected jump, it is safe to say that most of Washington’s tech employees fall above the $100,000 salary threshold in Washington’s new non-compete law. This means two things for the Washington tech industry: first, the salary threshold does not exempt most Washington tech employees from being bound by non-competes; and second, since employers can enforce non-competes against their employees, they will be less likely to use premium constraints like bonuses or stock compensation to restrict employee mobility. So, while cafeteria workers and receptionists (non-tech employees) at big tech companies will be free to leave and start their own ventures, those with tech expertise will, most often, have to wait.
The low salary threshold may also make things more difficult for startups. Because Washington’s new salary threshold is low in comparison to a regular tech salary, startups may struggle to recruit great talent from larger tech companies, which will be able to effectively restrict their employees through non-competes.In other words, Washington’s new non-compete statute is an imperfect law for startups: its salary threshold can potentially free some tech employees to take new jobs or go out on their own, but by and large, it can help big tech companies to restrict employees.
So is it all bad?
Although a higher salary threshold would have been a better choice for the tech industry, the predictability that the new law provides by defining the ‘reasonable’ standard and taking discretion away from the courts can help Washington’s tech industry continue to grow. It can reduce both un-assessable risks and potential litigation costs for both employers and employees. Less focus and expenditure on these concerns will likely result in a more profitable employment market and could foster industry growth. Therefore, although the new law does not eliminate the enforceability of non-competes for techies in Washington, the present low rate of enforcement combined with the certainty that the new law brings is a welcome positive change.