While the long-term impact of the COVID-19 pandemic on the employment landscape remains to be seen, a key concern for employers at this juncture is the enforceability of previously agreed upon non-compete agreements. In short, employees who have been rehired or recalled may no longer be bound by post-employment restrictive covenants signed before a layoff.
Moreover, courts in New York are generally reluctant to enforce non-compete agreements and will likely void an agreement that is overly broad or restrictive. Given the novel issues facing employers in the time of the coronavirus, the best way to ensure the enforceability of non-compete agreements for returning workers is to consult with an experienced employment law attorney.
Non-compete Agreements at a Glance
A non-compete agreement can be a stand-alone agreement or included as a restrictive covenant in an employment agreement that prohibits an employee from working for an employer’s competitors within a geographic area for a set period of time after the employment relationship ends. For a non-compete to be enforceable, however, it must be reasonable.
Generally, the courts in New York rely on a 4-factor test to determine whether a non-compete agreement or restrictive covenant is “reasonable” and therefore enforceable:
- Whether the restriction is necessary to protect the business’s legitimate interests (e.g. trade secrets, proprietary information)
- Whether the agreement is overly broad or creates an undue hardship (e.g. prevents the employee from finding work)
- Whether the agreement is reasonable in terms of duration and geographic scope
- Whether the agreement is harmful to the pubic
Also non-compete, the courts have held that a non-compete agreement is unenforceable if the employee is terminated without cause, such as a layoff.
Non-Compete Agreements in the Time of the Pandemic
While the courts will look to balance the employer’s legitimate business interests with the employee’s need to continue making a living, that balance has likely shifted because of the massive pandemic-related layoffs. This raises questions about the impact of rehiring employees on the enforceability of non-competes.
A recent case out of Michigan may shed some light on the issue. In June, the U.S. Court of Appeals for the First Circuit affirmed a district court ruling that blocked pharmaceutical maker Novo Nordisk from enforcing a non-compete agreement against an employee who was briefly laid off and rehired before taking a position with a competitor.
The employee, who initially joined Novo Nordisk in January 2016, signed a confidentiality and non-compete agreement as a condition of his employment. After being laid off in November 2016, he was rehired the following month and signed a new restrictive covenant agreement.
In June 2018, the company notified the employee in writing that his employment will end on August 3, 2018. He was rehired three days later but was not asked to sign a new non-compete.
After the employee resigned in January 2020 to take a job with a competing company, he filed suit in Massachusetts state court seeking a declaratory judgment that his future employment would not violate the agreements he signed with Novo Nordisk.
Novo Nordisk filed a motion with the U.S. District Court of Massachusetts seeking a restraining order and injunction against the (former) employee. The company argued that the non-compete agreement signed by the employee when he was rehired in December 2016 still applied because he had been continuously employed since then.
The district court denied the motion and the First Circuit affirmed the ruling, finding that the June 2018 termination letter effectively ended his employment on August 3, 2018. Although he was rehired on August 6, 2018, the court refuted Novo Nordisk’s claim that the employee was not laid off but transferred to a new position in the company.
The First Circuit’s ruling in the Novo Nordisk matter indicates that rehired or recalled employees may not be bound by post-employment restrictive covenants signed prior to a layoff. Whether non-competes are enforceable ultimately depends on the facts of each case, however. In any event, an experienced employment law attorney can help to determine if non-compete agreements for returning employees still apply as businesses begin to reopen.
Finally, employers in New York should also be mindful of the 4-factor test the courts rely on and consider whether enforcing a non-compete in the current climate may create an undue hardship for an employee or be considered against public policy.