With all the disruption of COVID-19, some recent developments in Virginia’s employment law may have been overlooked by employers. Among those, Virginia enacted a new law that goes into effect on July 1, 2020 banning covenants not to compete (commonly referred to as non-competition agreements) for certain low-income employees and independent contractors.
This law, Va. Code Ann. § 40.1-28.7:7, prohibits employers from “enter[ing] into, enforc[ing], or threaten[ing] to enforce a covenant not to compete with any low-wage employee.” The term “low-wage employee” is a bit of a misnomer in this law, which defines that term to mean:
- Employees whose average weekly earnings are less than the average weekly wage of the Commonwealth of Virginia computed according to Va. Code Ann. § 65.2-500(B). This section looks to the reported average annual wage as published by the Virginia Employment Commission. As of July 1, 2020, that threshold will be $1,137 per week;
- Interns, students, apprentices, or trainees employed, with or without pay, at a trade or occupation in order to gain experience in either an educational or work capacity; and,
- Independent contractors who are compensated for their services at an hourly rate that is less than the median hourly wage for the Commonwealth for all occupations reported during the prior calendar year by the Bureau of Labor Statistics of the U.S. Department of Labor. Based on the most recently published statistics, that threshold is $20.30 per hour.
The law does exclude from its definition of “low-wage employee” any employee whose income is derived, predominantly or entirely, from sales commissions, incentives, or bonuses paid by the employer.
So, what constitutes a covenant not to compete? Again, there is a bit of a misnomer here because the definition starts to straddle the concept of a covenant not to solicit. Covenants not to compete are defined as a covenant, including a provision in an employment agreement, or an agreement between an employer and the employee that “restrains, prohibits, or otherwise restricts” the employee’s ability to compete with his former employer following the termination of that individual’s employment. Blurring the line with covenants not to solicit, the law continues to require that an employee not be restricted from providing a service to a customer or client of the former employer if the employee does not initiate contact with or solicit the customer or client. This carve out would allow carefully drafted covenants not to solicit to be enforceable in situations where, assuming the covenant complies with other legal requirements, the former employee takes an affirmative action to win business from customers or clients of their former employer.
Additionally, the General Assembly went to the effort of making clear that the law was not intended to limit the application of non-disclosure agreements, which protect an employer’s proprietary and confidential information, including trade secrets. In other words, appropriate confidentiality or non-disclosure agreements are still permitted and will continue to be valuable tools to Virginia employers seeking to protect their confidential and proprietary information.
In addition to civil penalties of $10,000 per violation as determined by the Commissioner of Labor and Industry, employees are authorized to bring civil actions against employers attempting to enforce a non-compete in violation of the law. If successful, that employee may be entitled to recover liquidated damages, lost compensation, damages, and reasonable attorneys’ fees and court costs. Further, injunctive relief preventing the employer from taking further action in violation of the law may be granted.
Finally, this law imposes a new notice obligation on Virginia employers. Every employer is required to post either a copy of this law or a summary that has been approved by the Department of Labor and Industry, which has not yet been published. This posting must be made in the same location where other employee notices required by state or federal law are posted, such as employee break rooms. Failure to meet this notice requirement will be addressed with a written warning for the first violation, followed by a civil penalty not to exceed $250 for the second violation, and a civil penalty not to exceed $1,000 for each subsequent violation.
The law is not retroactive, so it applies only to new covenants not to compete entered into after July 1, 2020, but it may make it more difficult to enforce your existing covenants not to compete against low-wage employees.
If you need help reviewing your employment agreements and your policies related to requesting covenants not to compete with new employees and independent contractors, the team at Protorae Law is here to help. Stay tuned for additional guidance as the Department of Labor and Industry approved summary of this law is made available before July 1.