Non-Competes in the Time of COVID-19

Jane Smith was a senior product developer at a global technology company. In early 2020, she was recruited by a rival tech company for a high-level management position at double the salary. Unfortunately, Jane’s first employer is headquartered in STATE, whose non-compete laws diminish her ability to advance elsewhere.

Non-compete agreements were a contentious topic even before COVID-19 decimated the U.S. economy.  

It is well understood that non-competes must be reasonable in order to be enforced, but what is deemed reasonable under one set of circumstances may be judged a violation of public policy in another. When evaluating a non-compete clause, courts generally consider whether the provision is reasonable in scope and duration and fairly balances the employer’s need to protect its business against an employee’s need to work. But in a world of mass layoffs and Depression-era level unemployment, has this balance shifted?

The spread of COVID-19 has raised new questions about the already controversial issue. First, there is the practical question of whether the COVID-19 pandemic impacts the legal enforceability of non-competes, to which the answer varies by state. For example, in Massachusetts non-compete agreements are not enforceable against employees terminated without cause and most layoffs triggered by the pandemic are considered to be without cause. In Pennsylvania, courts consider the facts of the situation on a case-by-case basis—including the circumstances surrounding the layoff.

Over the past few years, several states have taken legal measures to limit the scope and enforceability of non-competes. California, for instance, has outlawed non-competes altogether, while New York allows these types of agreements only to the extent they meet a specific set of criteria. Other states place an income floor on non-competes. As of January 1, 2020, non-competes in Washington are unenforceable against employees earning less than $100,000 per year and independent contractors earning less than $250,000. Those employees earning less than $100,000 cannot be held to a non-compete.

Given the record number of Americans filing for unemployment and facing an unprecedentedly bleak job market, employers can expect a shift in circumstances in which enforcing a non-compete would seem reasonable. The odds of a laid-off employee finding work in the current climate are reduced even more if he or she is bound by the restrictive terms of a non-compete agreement. This reality is further exacerbated by lower income: Low-earning employees have fewer resources to fight against a former employer attempting to enforce a non-compete.

There may be cases where, even in this climate, endeavoring to enforce a non-compete is an important company interest. Particularly where an employee is in a role where she had access to trade secrets or similar proprietary information, it may be crucially important for a company to ensure that that person is not handing valuable company assets to a competitor. Other than that type of situation, it would seem to be very much against public policy to legally pursue employees who have been laid off and interfere with their ability to become re-employed by another employer—even a competitor. 

It seems at this point in time, companies contemplating enforcing non-competes against employees terminated as a result of the pandemic should carefully weigh the actual business threat posed by an employee’s new employment with a competitor against the employee’s need to secure alternative employment. It is difficult to imagine courts, particularly in states where non-competes are already limited, favoring employers who seek to interfere with an employee’s ability to obtain a new job.

 

This article was written by RPJ Partner Nicole Page. It is intended as a general discussion, not to be considered legal advice or relied upon. Ms. Page practices in employment, entertainment and intellectual property law and regularly counsels clients on matters pertaining to harassment and discrimination. Please feel free to contact her for more information.