Washington state has banned noncompetition agreements effective about a year from now, and businesses need to start preparing.

On March 23, Washington House Bill 1155 became law, forbidding and invalidating noncompetition covenants in the state effective June 30, 2027.

Business owners should start thinking now about what they need to do in light of the law. In addition to complying with it, business owners should consider preparing new employment contracts and possible changes to how they do business.

The law defines a noncompetition covenant as any agreement preventing an employee or independent contractor from engaging in a lawful profession, trade or business.

The definition excludes agreements entered into as part of a transaction to buy or sell 1% or more of a business. Exceptions also include franchise-related transactions, confidentiality agreements, agreements regarding use of trade secrets or inventions, and repayment of educational expenses.

The law expressly states that it must be interpreted broadly in favor of eliminating noncompetition covenants, with exceptions interpreted narrowly.

Unlike noncompetition covenants, the law does not ban nonsolicitation agreements, but it limits them to a duration of 18 months and to customers with whom the employee has a direct relationship.

The time limitation applies both to the solicitation of a former employer’s customers and also to solicitation of employees.

Additionally, nonsolicitation agreements cannot prohibit a former employee from accepting business from, or transacting business with, a customer. This means that customers are free to do business with whomever they choose, regardless of the existence of a nonsolicition agreement.

By Oct. 1, 2027, employers will need to notify current and former employees and independent contractors that their noncompetition agreements are void and unenforceable.

Employers should also consider notifying employees and contractors who have nonsolicitation agreements exceeding 18 months or that restrict the acceptance of business from former customers, although the law is not 100% clear on this point.

If employers get it wrong, they are subject to paying a minimum of $5,000 to the aggrieved party, plus attorney fees and costs of litigation. The law does not provide for payment of an employer’s attorney fees and costs, even if they prevail in a lawsuit brought by a current or former employee.

It may be wise to include a reminder about the enforceability of confidentiality agreements, prohibitions on use of trade secrets, and allowable nonsolicitation agreements at the same time as the notice stating that any noncompetition covenant is void and unenforceable.

Beyond preparing to give the legally required notice, what can employers do to prepare for a world without noncompetition covenants?

A start is entering into new contracts with existing employees and contractors that provide maximum protection within the bounds of the law. Such agreements might emphasize confidentiality and trade secret protections and include appropriate nonsolicitation covenants that make clear that employees and contractors cannot inappropriately leverage their personal relationships with customers or desirable employees.

In addition to meeting the express requirements of the new law, employers will likely need to provide “consideration” – a payment or valuable benefit – to ensure that the new contracts are valid and binding. Absent consideration beyond the promise of continued employment, a new agreement may be unenforceable.

Employers should also consider practical changes in how they do business. For example, many trade secret protections require employers to make efforts to keep information claimed as trade secrets (customer lists, methods of doing business, etc.) confidential.

Many don’t make sufficient efforts to invoke trade secret protections. Now may be the time to change. Employers might also consider structuring their businesses so that multiple employees or representatives have direct relationships with each customer. This can support broader application of nonsolicitation agreements and reduce the risk that customers will leave to follow a single key employee.

For key employees, it may be worth considering whether granting an ownership interest of 1% or more in the business is warranted. Done correctly, it may be the best way to protect a business because it will allow the business owner to maintain and enforce a noncompetition covenant with the employee who is also an owner of the business. Appropriate documentation addressing voting and control, tax considerations, buy/sell provisions, and various other terms is essential.

Perhaps most importantly, now is the time to consult with counsel. The law doesn't go into effect for a year but it will be here before we know it. This issue is best addressed while you still have time to carefully evaluate options and implement necessary changes in an orderly fashion.

Shea Meehan is an attorney and the director of planning at Cornerstone Wealth Strategies, headquartered in Kennewick and servicing clients nationwide.