Are Non-competes Hurting Seattle’s Tech Industry?

This was the question posed more broadly in Fortune’s recent article “Are noncompete agreements hurting tech innovation?”

Washington joins Massachusetts and Rhode Island in considering new legislation that would severely limit or void many non-compete agreements. Known in Washington as House Bill 1926, the law would principally require that “every contract by which a person is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” If enacted, Washington would join other leading states like California that severely limit non-compete agreements in employee contracts.

Supporters of the bill point to the enormous success of the tech industry in Silicon Valley where similar bans exist. However, critics say non-competes are necessary to protect the employer’s investment in training, education, and exposure to confidential company information.

For the casual reader, non-competes agreements in Washington are often thought of in three parts: (1) agreements to not work for a competitor/customer; (2) agreements to not solicit customers; and (3) agreements to not solicit employees. The three are colloquially thought of as one agreement. However, Washington courts view each of these provisions differently with the burden on the employer to show that the agreement is reasonable.[1]

The debate surrounding non-compete agreements have increased due to recent reports of non-compete clauses showing up in low-wage manual labor contracts. The New York Times reported in 2014 of non-compete agreements showing up in Jimmy John’s employee contracts. The company’s actions have prompted congressional attention to ban non-competes for certain worker categories or workers earning below a monetary threshold. This is a notable contrast to non-competes widespread use for high-wage earners such as executives, engineers, scientists and high-commission sales employees.

[1] Sheppard v. Blackstock Lumber Co. 85 Wn.2d 929, 933, 540 P.2d 1373 (1975).

The “Real” Price of Nails and Blueberries for Workers

Last Sunday, The New York Times uncovered how consumers can unknowingly play a part in wage theft of exploited workers. Reporter Sarah Maslin Nir was having her nails done one day and asked the salon worker what her schedule is like. The manicurists stated that she works 24 hours a day, with naps, 6 days a week and not paid minimum wage. Maslin’s research uncovered that the price of nails in New York City was far less than the national average and began to connect the dots between exploited immigrants and the real price of a manicure.

Federal Law requires that employees be paid minimum wage[1] for all hours worked.[2] However, sometimes employers pay employees using more elaborate forms such as a “piece rate” or a “salary”. This can lead to issues for employees where the “piece rate” falls below the state or federal minimum wage. For example, overtime is calculated at time-and-a-half the “regular rate”. The regular rate must include all compensation, other than overtime compensation. See: Hisle v. Todd Pac. Shipyards, 151 Wn.2d 853, 862-63, 93 P.3d 108 (2004). This is then divided by the total hours worked during the workweek, so that the pay can be expressed as an hourly rate on which the 50% overtime premium can be calculated. Alternatively, employees can be paid a “salary”, but when divided by the number of hours the employee works and the per hour rate falls below the minimum wage, an illegal practice occurs.

The New York Times' article highlights how the price of many consumer goods or services do not reflect the real price of the good or service. For example, the Washington Supreme Court is likely to issue their ruling on if or how fruit pickers in Eastern Washington should be paid for rest breaks. Washington’s law requires a 10 minute rest break for each four hours worked under WAC 296-126-092(4), however Sakuma Farms employees paid per basket or bushel complain of never receiving pay for their rest. A new ruling that mandates this pay may have a financial impact to farmers and consumers alike, where the price of blueberries rises to the real price.

[1] The 2015 Federal Minimum Wage is $7.25.

[2] “Work” is not defined by the Washington Minimum Wage Act or the Fair Labor Standards Act, and is defined through case law as that which is pursued predominantly for the employer’s benefit, even though it confers a benefit on the employee. See, e.g.: Tennessee Coal, Iron & Railroad Co. v. Muscoda Local 123, 321 U.S. 590, 598, 64 S. Ct. 698 (1944) (defining work as “physical or mental exertion (whether burdensome or not) controlled or required by the employer and pursued necessarily and primarily for the benefit of the employer and his business”).

Recent Gender Discrimination Verdict Highlights Risks To Employment Attorneys

The recent verdict in the Ellen Pao trial (against her employer for gender discrimination) highlights the risks employment lawyers face in trial. Pao sought nearly $16 million in lost wages and millions more in punitive damages. Had a verdict been returned in her favor, her attorney, Alan Exelrod, could have also petitioned the court for attorneys’ fees, estimated to be in the millions.

While attorneys’ fees are widely available in successful employment claims, they are often criticized by employers for encouraging litigation, in spite of the strong public policy that support attorneys’ fees.

While Pao’s case was in the millions, many times the recovery of wages for low-wage workers can be small. Without attorneys’ fees, employment attorneys working on a contingency fee basis alone would otherwise be dissuaded from pursuing a low-damages trial.

However, sometimes the smallest recovery can be the most important to employees. In my own practice, a recovery of $500 against an employer who wrongfully withheld $500 can make all the difference to an employee’s ability to pay rent, a cell phone, gas, food, etc. A small recovery may also represent the end of an illegal wage practice.  Imagine an employer who requires employees to work “off the clock.” or denies rest-breaks or meal periods.  In total, these damages may not amount to millions, but pursuing recovery of these small claims ensures workers are paid correctly under the law.

These attorney fee statutes for wage cases are designed to permit employees to recover full wages where legal fees would greatly exceed the underlying claim.[1] The purpose of the fee award is to “ensure effective access to the judicial process by providing attorneys’ fees for prevailing plaintiffs with wage and hour grievances”.[2]

[1] See, e.g.: Brandt v. Impero, 1 Wn. App. 678, 682, 463 P.2d 197 (Div. I, 1969).

[2] Fegley v. Higgins, 19 F.3d 1126, 1134-35 (6th Cir. 1994).

3 Common Myths of Wagetheft in Washington

Last November, I had the privilege of speaking alongside Federal and State Department of Labor and union leaders on the issue of wagetheft in Tacoma. I was asked to speak about my own experiences as a private attorney who represents low-wage workers recover unpaid wages and/or payment for denial of rest breaks.

What became clear during the discussion and the public’s Q&A afterward, is at least three common myths surrounding wagetheft still exist.

Myth: “I am afraid to complain to my boss because I will be fired.”
Answer: An employer is prohibited from discharging or discriminating against an employee for complaining to the employer or the government that his or her RCW 49.46 rights have been violated, for filing or about to file proceedings “under or related to RCW 49.46, or for giving testimony or being asked to testify in proceedings “under or related to” RCW 49.46.[1] The Federal Labor Standards Act also prohibits retaliation for exercising wages rights.[2]

Myth: “I can’t afford a private attorney to pursue my unpaid wages claim.”
Answer: A worker owed wages has several options. He or she may make a complaint at the Department of Labor and Industries (State/Federal), complain to their union (if applicable) or hire a private attorney. Most private attorneys, like myself are paid by the employer only in the event they recover wages for the worker. The strong Washington worker laws allow for an employee to hire a private attorney on a contingency basis.

Myth: “I am not a US Citizen, am I still entitled to wage law protection?"
Answer: The law surrounding undocumented workers is constantly changing. Washington State has made a leading effort to protect the rights of undocumented workers by preventing worker status from entering the courtroom.[3] Second, the Rules of Professional Conduct prohibit an attorney from making assertion or inquiry “about a third person’s immigration status when the lawyer’s purpose is to intimidate, coerce, or obstruct that person from participating in a civil matter.” Even the Washington State AG’s Office will not inquire as to immigration status of anyone complaining of wage theft.

[1] RCW 49.46.100(2)

[2] See: Lambert v. Ackerly, 180 F.3d 997, 1002-05 (9th Cir. 1999) (en banc decision holding that FLSA prohibits retaliation based on informal complaints to employer); Valerio v. Putnam Assoc., 173 F.3d. 35, 45 (1st Cir. 1999).

[3] In Salas v. Hi-Tech Erectors, 168 Wn.2d 664, 230 P.3d 583, the Washington State Supreme Court held it was an abuse of discretion under ER 403 to allow a jury to learn of the Plaintiff’s immigration status in awarding lost future income. The Court wrote:

Non-compete Agreements Popping Up in Uncommon Industries

If you think non-competes are just for executives and scientists, you should add the guy who makes your sandwich at Jimmy John’s. The Huffington Post recently reported that Jimmy Johns is one of a number of low-wage-field companies requiring non-compete clauses with workers. The New York Times and The Seattle Times similarly reported on the increased use of non-compete clauses for such positions as hair stylists, event planners, and camp counselors.

Generally, non-compete agreements are specific provisions in the employee’s contract that restrict an employee from working for a competitor after his or her employment ends. Non-competes are usually limited in scope, duration, and geography (i.e. Doctor may not practice anesthesiology for 1-year within a 5 mile radius upon leaving employment).[1] The agreements can have a significant impact on an employee seeking part-time work during or full-time work after his employment ends.

In Washington, non-compete agreements must be “reasonable and lawful.”[2] Generally, two factors are used to determine whether a non-compete is reasonable: the geographic scope of the restraint and the time period for which an employee is restrained.[3] Washington Courts recognize the competing interests of an employee’s desire and right to work after leaving employment and an employer’s interest in protecting an established client base and investment in employee training.

However, the growing trend in low-wage workers being subject to non-competes has garnered increased criticism as examples of employers using unfair leverage over low-wage workers; low wage workers who routinely lack the bargaining power or benefit of a lawyer in drafting a more reasonable agreement.

For further reading, see San Diego Law Professor Orly Lobel’s book on the rise of non-competes in “Talent Wants to Be Free: Why We Should Learn to Love Leaks, Raids, and Free Riding.”

[1] See also Emerick v. Cardiac Study Ctr., Inc., P.S., 170 Wash. App. 248, 258, 286 P.3d 689, 694, as amended (Aug. 8, 2012), review denied sub nom. Emerick v. Cardiac Study Ctr., Inc., 175 Wash. 2d 1028, 291 P.3d 254 (2012) (Washington courts have not yet held that restrictive covenants between physicians are unenforceable).

[2] See Wood v. May, 73 Wn.2d 307, 313, 438 P.2d 587 (1968)

[3] See, e.g. Alexander & Alexander, Inc. v. Wohlman, 19 Wn. App. 670, 688, 578 P.2d 530 (1978) (100-mile restriction to apply only to customers of employer’s Seattle office);