tagline
logo

While COVID-Related Employment Claims Are on the Rise, Courts May Be Hesitant to Enforce Restrictive Covenants

| Feb 17, 2021 | Employment Contracts, Partnership Agreements, & Non-Competes |

 

In recent years, many companies have asked new and continuing employees at all levels to sign non-compete, non-solicitation, and non-recruitment agreements. Sometimes, these restrictive covenants are part of a carefully negotiated employment agreement for an employee managing sensitive or valuable projects. Often, however, these agreements are boilerplate clauses tucked into hiring documents that a new employee may not understand (or even read).

When a worker is subject to restrictive covenants and tries to leave employment and get another job in their field, they may find themselves defending against threats of legal action by their former employer. Workers who are laid off indefinitely or terminated due to the COVID-19 coronavirus may be unpleasantly surprised to find their previous employer attempting to enforce restrictive covenants and prevent them from working for competitors, or worse, a wider range of companies.

The Arguments For and Against Non-Compete, Non-Solicitation, and Non-Recruitment Agreements

Restrictive covenants protect an employer’s legitimate business interests, and the laws vary from state to state on what circumstances are necessary for them to be enforceable. In general, an agreement must be narrowly tailored to protect legitimate business interests while limiting restrictions on an employee’s ability to freely pursue their trade. Some courts look at restrictive covenants on a case-by-case basis for reasonableness; others have more specific rules, such as requiring they be limited in time, place, and scope (e.g., restricting a dentist from opening a dental practice within 10 miles of his current employer for two years after voluntary termination of employment).

States agree, however, that non-compete agreements may not be used to punish or bully employees. Agreements that force a worker to choose between staying at their company or being unable to continue to work in their profession are not permitted. If a non-compete agreement seems to restrict a worker’s right to seek other employment as a punishment or threat rather than legitimately protecting a company’s interests, a court may conclude it is unenforceable as a matter of public policy. By applying specific guidelines or a general standard of reasonableness, courts balance the potential harm to an employer against the potential burden on an employee.

Public Policy Considerations

Unfortunately, defending against legal action can be expensive and time-consuming for an employee. Workers may not be able to support themselves while they struggle to resolve or avoid a lawsuit. Some courts have refused to enforce these agreements against low-wage workers on public policy grounds in the past few years. The COVID-19 coronavirus pandemic has worsened this situation, causing restrictions on mobility, a rise in unemployment, and the decimation of certain industries (like travel, hospitality, aviation, live entertainment, recreation, and others). Many workers have been laid off as businesses close temporarily or permanently. The overall uncertainty has caused many companies to pause or delay new hiring.

Because of this, some courts have refused to uphold restrictive covenants against former employees who face a much more difficult re-employment landscape than either party anticipated when they were initially agreed to by the employee. Lockdowns, travel restrictions, health concerns, and the economic recession have contributed additional burdens and impediments to former employees already weighted down by restrictive covenants.

Plus, the increased prevalence of working from home complicates the determination of whether an employee is complying with geographic restrictions. For example, would a worker subject to a provision that they cannot work for a competitor within a 50-mile radius be violating that restrictive covenant if their remote work location is within those boundaries, even if the employer’s business location is not?

Recent Cases

A few recent decisions indicate that courts are giving great weight to the increased difficulty of finding new employment, relocating, or changing career paths and tending towards non-enforcement of broad restrictive covenants.

In Texas, a federal judge refused to grant injunctive relief to a multimillion-dollar landscaping company against a former employee now working for a competitor in violation of his non-competition agreement. The court in Yellowstone Landscape v. Fuentes concluded the defendant, who “earns approximately $70,000 per year and supports a family of five… [would] lose his job and be out of work in the middle of a pandemic if an injunction is granted.”

A federal court in Indiana took “judicial notice of the broad-scale economic disruptions caused by the COVID-19 pandemic that cast doubt on [the defendant] ’s employment prospects, as it does for the vast majority of Americans during these challenging times.”

In balancing the harms of enforcing restrictive covenants against a group of indefinitely laid-off employees, a federal judge in Pennsylvania took pains to note that:

In light of the coronavirus pandemic and closing of nonessential businesses, employment opportunities were limited. The harm to [defendant employee] if an injunction is granted is great as he will once again be without a job and income. Although the stay-at-home orders issued by the Governor of the Commonwealth of Pennsylvania ended on June 4, 2020, not all businesses are open…. The likelihood of [defendant] finding employment at this time is therefore reduced, especially if [he] is enjoined from working with a competing company, which is the area in which he has the most experience. According to the Bureau of Labor Statistics, the unemployment rates over the past few months are the highest in more than seventy years.

Don’t Automatically Assume An Employment Agreement’s Restrictive Covenant Is Invalid

Although courts may consider the plight of workers seeking new employment in a tight job market, this doesn’t mean that all restrictive covenants are now unenforceable. Particularly, decisions regarding confidentiality, trade secret, non-disclosure, and non-solicitation provisions may be generally unaffected. As the court noted in another Texas federal decision, difficult employment situations and increased difficulties in conducting court business do not excuse a defendant’s blatant violations of his restrictive covenants or the need for timely injunctive relief

As the COVID-19 pandemic continues, some courts may decline to enforce covenants they might have deemed reasonable six months ago because of the increased harm to workers or to further the greater public good. If you have questions about the enforceability of a restrictive covenant, please consult with an experienced attorney.

tell us about your case

Archives

our office locations

Outten & Golden LLP
685 Third Avenue, 25th Floor  
New York, NY 10017  
Phone: 212-245-1000
Map and Directions

Outten & Golden LLP
One California Street, 12th Floor
San Francisco, CA 94111
Phone:415-638-8800
Map and Directions

Outten & Golden LLP
601 Massachussetts Avenue NW
Second Floor West Suite 200W
Washington, DC 20001
Phone:202-847-4400
Map and Directions