Class Action Alert: “Conflict of Interest” Policies Are the Newest Trend for Class Action Lawsuits Against Employers in Washington State

Following a recent Washington Supreme Court decision, plaintiffs’ attorneys in Washington are targeting a new type of class action claim against employers: alleged violations of Washington’s noncompetition statute based on “conflict of interest” policies that seek to prevent employees from simultaneously working for the employer’s competitors. Employers need to be aware of whether they have such policies, which may be in the form of a conflict of interest policy, duty of loyalty clause, or noncompetition agreement, and, if so, respond accordingly.

Background

Washington enacted RCW 49.62 to restrict the use of noncompetion agreements and to facilitate workforce mobility. While most of the statute addresses post-employment restrictions, RCW 49.62.070 prohibits employers from restricting employees who earn less than twice the state minimum wage from:

• Holding a second job;
• Working for another employer;
• Working as an independent contractor; or
• Being self-employed.

However, the statute also affirms that this right does not alter the employee’s duty of loyalty to their primary employer. In other words, an employee’s second job cannot negatively affect the business and/or interests of the primary employer. Until recently, the scope of the duty of loyalty, and whether it could justify broad restrictions during employment, remained unclear.

In David v. Freedom Vans LLC, two employees earning below the wage threshold signed noncompete agreements broadly prohibiting any involvement with a competitor during their employment. The employees challenged these agreements, arguing they conflicted with their rights under RCW 49.62.070.

While the lower courts upheld the agreements, the Washington Supreme Court reversed, finding that such broad restrictions were unenforceable. The Court emphasized that although employers can expect loyalty and take reasonable steps to prevent conflicts of interest, any limitations must be narrowly drawn and justified by legitimate business interests.

Implications of the Ruling

This decision has wide-reaching implications for employers given Washington’s current minimum wage of $16.66/hour. RCW 49.62.070 applies to employees earning less than $33.32/hour (approximately $69,305 annually for full-time workers). Violations of RCW 49.62, including RCW 49.62.070, permit the employee to seek the greater of their actual damages or a statutory penalty of $5,000 per violation, plus reasonable attorneys’ fees, expenses, and costs.

Given the hefty statutory penalties associated with a purported violation of RCW 49.62.070, class action attorneys have begun scrutinizing “conflict of interest” or similar policies contained in employee handbooks that restrict employee mobility during employment. Class action lawsuits have begun to crop up, seeking the $5,000 penalty—per employee—for each Washington employee earning below the applicable threshold based on these policies.

What Can Washington Employers Do to Protect Their Business?

To ensure compliance and reduce legal risk, employers should consider taking the following steps:

1) Review and revise employment agreements: Identify any noncompete clauses (even if not labelled as such) that affect employees earning less than twice the minimum wage and assess whether they meet the new enforceability standard.

2) Update employee handbooks and HR policies: Remove or revise blanket prohibitions on secondary employment unless narrowly tailored, including those contained in “conflict of interest,” “standards of conduct,” or similar policies.

3) Consider alternative protective measures: Where appropriate, use confidentiality agreements, intellectual property clauses, or limited nonsolicitation provisions instead of broad noncompetes.

4) Consult legal counsel before enforcing or drafting restrictive covenants, including “conflict of interest” policies, for lower-wage workers to ensure compliance with RCW 49.62.070 and the Court’s guidance.

Need Assistance?

Our firm is available to help you evaluate your current employment practices and ensure your contracts comply with the latest legal developments. Please contact Leah Lively or Alexandra Shulman to schedule a policy review or to discuss tailored strategies for protecting your business interests within the bounds of Washington law.

This communication is not intended to create or constitute, nor does it create or constitute, an attorney-client or any other legal relationship. No statement in this communication constitutes legal advice nor should any communication herein be construed, relied upon, or interpreted as legal advice. This communication is for general information purposes only regarding recent legal developments of interest, and is not a substitute for legal counsel on any subject matter. No reader should act or refrain from acting on the basis of any information included herein without seeking appropriate legal advice on the particular facts and circumstances affecting that reader. For more information, visit www.buchalter.com.