Does stock value or other assets matter towards the earning threshold in non competition agreements in WA?

[joefan]

Jurisdiction

Washington

I left my job a couple of months ago that I had signed a non-competition agreement with. However, it lists an exception in the agreement that is also the same exception discussed in the WA law.

As far as I understand the exception, the law says that the non-compete doesn't count when wages are below a certain threshold. But I wanted to confirm if anyone understands better how these things work.

Here is the main exception clause from the agreement:

This Section 4.1 will only apply if Employee earns more money than the threshold established by Washington law (RCW 49.62.040). As of January 1, 2020, that threshold is $100,000 per year.

Section 4.1 outlines the non-compete rules, which I didn't quote here because it's another paragraph.

WA state guidelines say the non-compete threshold is $120,559.99 for 2024 for employees (I was an employee).

When I left in February I earned about 67k per year, so that would've probably been my final salary for 2024. But does it take into account stock value? Or is this rule only applying to the salary/wage?

If stocks apply, then I think I'm still under the threshold using the last known value of my portfolio. But what if the stock value changes so that earnings + stock value went past the threshold? Or does 401K count too?

Also, do you have to earn over that threshold at the time of leaving, or is it the eventual yearly value, or is it based on previous year? For example, my 67k salary was about 5583 per month. I worked all of January but left in February. So I only earned part of the salary for this year. Either way in terms of wages/salary I never earned more than 100K in my previous role even with some extra income from vested RSU sales.

I was offered a job this week with a competitor, but doing different type of work. It's literally just grocery retail work.

There's nothing in the law that mentions stocks or other assets, so I was hoping that someone could clarify.

 

[welkin]

There's nothing in the law that mentions stocks or other assets, so I was hoping that someone could clarify.

That is because the law you linked to speaks to earnings from the employer you signed the NCA with.

If an employee or independent contractor has earnings less than the threshold specified under law, the non-compete agreements is considered void and unenforceable under RCW 49.62.

b) Unless the employee's earnings from the party seeking enforcement, when annualized, exceed one hundred thousand dollars per year. This dollar amount must be adjusted annually in accordance with RCW 49.62.040;

https://app.leg.wa.gov/RCW/default.aspx?cite=49.62.020

 

[adjusterjack]

There's nothing in the law that mentions stocks or other assets, so I was hoping that someone could clarify.

You're missing an important part of the statute:

"employee's earnings from the party seeking enforcement"

Does that answer your questions? It should.

 

[Tax Counsel]

I assume the stocks and investments are not stock or other investments in your employer, right?

If that's the case, then the value of those investments are not at issue. Nor would any gain from those investments matter either as those are not "earnings". What's going to count is the total you earned from working for the employer (see adjusterjack's comment above). Note that if the Federal Trade Commission (FTC) gets its way, most noncompete agreements will become unenforceable nationwide. It has proposed a rule to do just that, but it's facing legal challenges so I can't guess when or if the proposed rule will take effect.

If you received stock or other securities of your employer as part of your pay package, though, those may well count as earnings for the purposes of the agreement.

 

[joefan]

I assume the stocks and investments are not stock or other investments in your employer, right?

If that's the case, then the value of those investments are not at issue. Nor would any gain from those investments matter either as those are not "earnings". What's going to count is the total you earned from working for the employer (see adjusterjack's comment above). Note that if the Federal Trade Commission (FTC) gets its way, most noncompete agreements will become unenforceable nationwide. It has proposed a rule to do just that, but it's facing legal challenges so I can't guess when or if the proposed rule will take effect.

If you received stock or other securities of your employer as part of your pay package, though, those may well count as earnings for the purposes of the agreement.

The stocks are all with my former employer. The value of which was about 40k the last time I checked on my morgan stanley dashboard. I received the stocks/shares over the duration of my employment (about 7 years, although most of the stocks I received within the last three years).

The other investments are only the 401k with the former employer too. And I think the 401k had up to 5% of its assets with the former company.

Forgive me as I'm still learning the lingo, but it sounds like "earnings" are strictly the wages/salary?

What's going to count is the total you earned from working for the employer (see adjusterjack's comment above)

I saw their comment, but I wasn't sure what they meant until I read yours. It sounds like they're saying that only "earnings" count. And if I understand right, "earnings" only means the salary/wage and not stocks or other assets?

However, what do you mean by "total"? The total yearly salary or all the money made during my entire employment?

This comment sounds like the stocks could be applicable:

If you received stock or other securities of your employer as part of your pay package, though, those may well count as earnings for the purposes of the agreement.

My initial offer of employment included 12 shares. But then we got offered more shares each year kind of on an ad hoc basis. I can't remember how many shares I have now off the top of my head, but again the last I checked the value was around 40k.

So:

1. How do I know whether or not stocks/401k count as earnings?
2. How am I applying earnings towards the threshold? Is it my projected 2024 earnings had I stayed there (my 67k salary), or some other "total" (and how would I calculate this "total")

 

[joefan]

You're missing an important part of the statute:

"employee's earnings from the party seeking enforcement"

Does that answer your questions? It should.

From Tax Councils reply, it sounds like "earnings" only means direct salary/wages, not stocks or other assets. I assume that is what you mean too. If that is the case, then the non-compete doesn't apply to me because I never earned more than 100k per year at my job from wages and the threshold has increased since then too ( Even with some extra income from RSU vests, I don't think I ever earned more than 75k per year anyway).

However, they've also added another statement saying that if the stocks were part of my pay package, then that may count. They haven't replied yet and I've asked clarification on that.

I did receive stocks with my initial offer letter and have since accrued more over my years working there.

 

[Tax Counsel]

I think this will help you sort out what is included. Your agreement makes reference to the limits in the Washington state law that regulates non compete agreements. Revised Code of Washington (RCW) RCW § 49.62.010 provides the definitions of terms used in that law. The full description of the term "earnings" is:

(1) "Earnings" means the compensation reflected on box one of the employee's United States internal revenue service form W-2 that is paid to an employee over the prior year, or portion thereof for which the employee was employed, annualized and calculated as of the earlier of the date enforcement of the noncompetition covenant is sought or the date of separation from employment. "Earnings" also means payments reported on internal revenue service form 1099-MISC for independent contractors.

When the law was passed, the cap was $100,000 of earnings. But the law also indexed that to inflation, so in 2024 the cap is now $120,559.99.

Note that stock bonuses and compensation (wages) paid with company stock will also end up as taxable income to someone when they start getting the money from it.

 

[joefan]

I think this will help you sort out what is included. Your agreement makes reference to the limits in the Washington state law that regulates non compete agreements. Revised Code of Washington (RCW) RCW § 49.62.010 provides the definitions of terms used in that law. The full description of the term "earnings" is:



When the law was passed, the cap was $100,000 of earnings. But the law also indexed that to inflation, so in 2024 the cap is now $120,559.99.

Note that stock bonuses and compensation (wages) paid with company stock will also end up as taxable income to someone when they start getting the money from it.

Thanks for your help. I obviously missed that section where it explains what earnings is. But now it's making a lot more sense.

I'm curious about this line:

or portion thereof for which the employee was employed, annualized and calculated as of the earlier of the date enforcement of the noncompetition covenant is sought or the date of separation from employment

Does this line only apply if the former employer seeks to enforce the covenant? I don't know what it means by "portion" as it still saying that the income has to be "annualized" according to the enforcement date or separation date.

Do I get to choose which one applies because it says "or"? The first line that references box one on w2 makes more sense. I never made more or close to 100k let alone the updated amount to 124k.

But for the second line about "portions" and "annualizing" is more confusing because I'm not sure how to calculate or annualize my income according to the date that I left the company, other than just annualizing to the income that I would've made had I stayed, which still would've been below the threshold anyway.

 

[welkin]

I never made more or close to 100k let alone the updated amount to 124k.

Then what are you worried about?

But for the second line about "portions" and "annualizing" is more confusing because I'm not sure how to calculate or annualize my income according to the date that I left the company, other than just annualizing to the income that I would've made had I stayed, which still would've been below the threshold anyway.

How do you annualize an amount?

Say, for example, a consultant earned $10,000 in January, $12,000 in February, $9,000 in March, and $13,000 in April. The earned income figure for those four months totals $44,000. To annualize the consultant's income, multiply $44,000 by 12/4 to equal $132,000.

So, if you worked only part of a year, you would take the earnings for that part of the year and extrapolate it to what you may have made had you worked the entire year.

 

[joefan]

Then what are you worried about?

How do you annualize an amount?



So, if you worked only part of a year, you would take the earnings for that part of the year and extrapolate it to what you may have made had you worked the entire year.

Thanks that makes sense now.