Virginia Passes Law Prohibiting Covenants Not to Compete for “Low-Wage” Employees

State laws passed in April 2020 are creating a sea change in Virginia's employment landscape. Historically, Virginia laws have held more favorable positions for employers, but with the flurry of recent legislation, employers should anticipate the impacts of having the pendulum swing decidedly more favorable for employees.

We previously discussed how employers may expect more employment discrimination claims under the Virginia Values Act. In this second article in our series, Sea Change in VA Employment Laws, we discuss groundbreaking changes in Virginia’s laws relative to restrictive covenants.

A New Day in Virginia for Restrictive Covenants

Beginning July 1, 2020, Virginia employers will be prohibited from entering into, enforcing, or threatening to enforce covenants not to compete with “low-wage” employees. Employers who are found by the Commissioner of the Department of Labor and Industry to have entered into, enforced, or threatened to enforce covenants not to compete with low-wage employees are subject to a $10,000

What a "Covenant Not to Compete" Means - According to the new law, a covenant not to compete is an agreement (included as a provision within a larger employment contract) between an employer and an employee that “restrains, prohibits, or otherwise restricts an individual’s ability, following the termination of the individual’s employment, to compete with” the individual’s former employer.

Who Are “Low-Wage Employees” - SB480 defines “low-wage employees” as individuals whose average weekly wage is less than the Commonwealth’s average weekly wage. Currently, the average weekly wage in the Commonwealth is $1,125.

The law explicitly includes the following categories in the definition of low-wage employees: interns, students, apprentices, or trainees who are employed to gain work or educational experiences, regardless of whether or not such employees are paid. The law also applies to independent contractors who are paid at an hourly rate less than the median hourly wage for the Commonwealth. The latest median hourly wage for the Commonwealth is $19.63. Notably, most sales employees are exempt from the new law because employees whose earnings come either wholly or predominantly from sales commissions, incentives, or bonuses are not covered. The term “predominantly” is not defined in the statute.

Non-Disclosure Agreements for Low-Wage Employees Permitted - Importantly, SB480 does not prohibit employees from entering into, enforcing, or threatening to enforce nondisclosure agreements which prohibit the taking, misappropriating, threatening to misappropriate, or sharing of trade secrets, proprietary information, or confidential information. The law allows an employer to prohibit a low-wage employee from initiating contact with or soliciting a customer; however, the statute states that a covenant not to compete shall not restrict an employee from providing a service to a customer when the employee has not initiated contact with or solicited the customer.

Civil Remedies and Civil Penalties - Covered employees may bring a civil claim against any employer that attempts to enforce a covenant not to compete. Such claims must be brought within two years of: (1) the date the employee signed the covenant not to compete; (2) the date the employee learned of the covenant; (3) the date the employment relationship was terminated; or (4) the date the employer takes any step to enforce the covenant not to compete, whichever date is later.

Employees who bring successful claims may recover liquidated damages, lost compensation, damages, and attorneys’ fees and costs (including expert witness fees). The amount of recoverable “liquidated damages” is not defined in the statute. Additionally, employees may obtain injunctive relief and the voiding of their noncompetition provision. Employers are prohibited from discriminating or retaliating against employees who file civil claims under the law.

Notice Requirements - All employers are required to post either a copy or an approved summary of the law (which will be codified as Virginia Code Section 40.1-28.7:7) where other federal or state employee notices are posted.

Key Takeaways

• Employers must now carefully determine whether they have “low-wage employees” in Virginia subject to covenants not to compete. The definition of “low-wage employees” is misleading as it includes anyone who makes less than the average weekly wage in Virginia. Moreover, the threshold definition of “low-wage employee” is subject to change as the average weekly wage of the Commonwealth changes.
• Beginning July 1, 2020, employers should cease the practice of entering into covenants not to compete with low-wage employees. The new law specifically states it does not apply to covenants not to compete that were entered into before July 1, 2020. That being said, now is a good time to review all existing restrictive covenants to determine whether they are up to date and enforceable under Virginia’s rapidly-changing laws.

For more information on "low-wage employee" compliance within SB480 or the newly codified Virginia Code Section 40.1-28.7:7, please contact your local Quarles & Brady attorney, or:

• Hans Riede: (202) 372-9529 / hans.riede@quarles.com
• Sarah Belger: (202) 372-9511 / sarah.belger@quarles.com
• Christian Yingling: (202) 780-2654 / christian.yingling@quarles.com