Chaos for Employers: Understanding Non-Compete Agreements in the DMV Area

Chaos for Employers: Understanding Non-Compete Agreements in the DMV Area

Companies often use non-compete agreements to prevent their departing employees from working with competitors after they leave. This makes sense, for who wants to have departing employees, who know their company’s trade secrets and confidential information, put that knowledge to use for a local competitor? While helpful to employers, many times the agreements can unfairly limit job opportunities for employees and suppress wages. As a result, there have been legislative attempts to limit the use and enforceability of non-compete agreements.

Employers in the District of Columbia, Maryland, and Virginia (the “DMV”) need to know how the shifting law impacts their ability to prevent their employees from having their next job be with a competing business. This blog will review the federal government’s recent attempt to ban the use of non-compete agreements, how that ban was overturned, and the current state of the law in the DMV on the use of non-compete agreements.

What is a Non-Compete Agreement?

A non-compete agreement is an agreement that prevents employees from competing with their employers even after their employment ends. These agreements range in terms of geography (where the employee can’t compete), and duration (for how long after the employment ends).

Proponents of non-compete agreements argue that these agreements protect proprietary information, encourage investments in employee training and development, and preserve client and customer relationships. Critics of these agreements contend that they stifle employee mobility and limit career opportunities, inhibit competition in the labor market, and typically are a result of unequal bargaining power between the employer and prospective employees.

The Changing Landscape of Non-Compete Agreements

Recently, the Federal Trade Commission (the “FTC”) adopted a broad ban on non-compete agreements. With limited exceptions, its rule prohibited employers from requiring new employees to sign non-compete agreements and prohibited the enforcement of existing agreements against employees. This meant that in many cases, employers could no longer restrict their former employees from engaging in competitive activities or working for competitors after leaving their employment.

However, a recent district court decision stalled implementation of the FTC’s rule. It reasoned that the FTC had exceeded its power in establishing the rule and labeled it “arbitrary and capricious.” This decision applies nationwide. As a result of the court decision, the agency is unable to enforce the rule.

On October 18, 2024, the agency appealed the Texas court ruling, which means that federal law is unsettled on the enforceability of non-competes. Until the appeal is decided, the FTC has advised that it will address egregious non-compete agreements through individual enforcement actions.

Comparison of Non-Compete Clauses in the DMV Area

An important result of the Texas court’s decision is that state law determines how employers can use non-compete agreements, if at all. The District of Columbia, Maryland, and Virgina each have their own unique set of laws regulating the use of non-compete agreements. What the three jurisdictions have in common is that non-compete agreements generally may not be used with low-wage earners.

The District of Columbia

The District of Columbia’s law covers employees who spend more than 50% of their working time in the District. Several types of employees are exempt from the law, meaning they can be subject to a non-compete. They are:

1. Highly compensated employees, defined as employees making $150,000/year or more (the threshold is $250,000/year for certain medical specialists (primarily licensed physicians who have completed their residency)).
2. Broadcast employees, meaning creators of a television, radio, satellite, cable station or network.

For highly-paid employees, there are limits on the length of time that they can be prevented from competing:

• Employees earning $150,000/year or more are limited to a one-year agreement.
• Medical specialists earning $250,000/year or more are limited to a two-year agreement.

Buyers of businesses have more flexibility in using non-competes to prevent sellers from competing post-sale.

Employers in the District of Columbia who try to use an illegal non-compete agreement can be fined up to $1,000 per violation. Also, employers may owe each affected employee monetary relief for each violation (ranging from $250 to $1,000 for covered employees and $250 for highly compensated individuals).

Maryland

In Maryland, employers are prohibited from using non-compete agreements for the following individuals:

• Low-wage workers earning $22.50/hour or less (150% of the minimum wage).
• Licensed as veterinarians or veterinary technicians.

Beginning in July 2025, Maryland will expand the class of employees who cannot be subject to a non-compete. This prohibited class will include employees who are required to be licensed under the Health Occupations Article (which includes most health care providers), provide direct patient care, and earn $350,00 or less annually. Such employees who earn more than that amount can be subject to a non-compete agreement, provided that it does not extend beyond one year and does not exceed an area that is 10 miles from their primary place of employment.

While there are no statutorily-imposed fines for violating the non-compete laws, clauses in an agreement that don’t comply with the law will not be enforced.

Virginia

Virginia law prohibits the use of non-compete agreements for all “low-wage” employees, defined as:

• Employees who earn less than $1,410 per week (less than Virginia’s average weekly wage).
• Independent contractors earning less than the median hourly wage for all occupations ($24/hour).
• Interns, students, apprentices, and trainees who are employed, either with or without pay, in order to gain work or educational experience.

A low-wage employee does not include salespersons predominately compensated by commissions, incentives, or bonuses.

Virginia law requires employers to post notices about the non-compete law; employers who don’t post can be fined for noncompliance. Also, employers who use illegal non-compete agreements may have to pay the government $10,000 per violation, and can be liable to the employee for damages and attorneys’ fees.

Use Non-Competes Cautiously

It’s important for all employers throughout the DMV to fully understand the changing law on non-compete agreements. Each jurisdiction has specific rules regarding their use. And, in some cases, civil fines can be imposed and employees can even bring suits for damages against employers who try to enforce illegal non-compete agreements. Non-compete agreements should be used cautiously, when necessary.

The attorneys at Hamelburg Law, LLC are committed to helping employers navigate the evolving legal landscape and develop effective strategies to achieve their business objectives while complying with legal requirements, like employment laws involving non-compete agreements. For more information on how your business may use non-compete agreements in the DMV, consult with our experienced business law attorneys. This blog was written by Jamie Hamelburg, DJ Carswell, Jr., and Sarah Benjamin, a recent graduate of the American University Washington College of Law.