Enforcing Non-Compete Agreements in a Pandemic

Since the federal government declared a state of emergency in response to the COVID-19 pandemic, the U.S. Department of Labor has reported over 40 million new claims for unemployment benefits. With some estimates indicating that twenty percent of the workforce is subject to some form of a non-competition agreement with their employer, one question facing many companies is whether the agreements previously entered into with departing employees are still enforceable. The answer to this question depends on several considerations, including the specific state laws at issue, many of which have recently changed.

Enforcement Against Employees Terminated Without Cause – As discussed in a prior post, a majority of states determine whether a non-compete agreement is enforceable by analyzing (1) whether the agreement is supported by adequate consideration and (2) whether the agreement is reasonable with respect to time, geography, and scope of activities to be restrained. However, some state legislatures and courts have gone further, and narrowed the ability of an employer to enforce a non-compete agreement depending on the circumstances of the employee’s departure. For example, the Massachusetts Noncompetition Agreement Act, which is effective for non-compete agreements made on or after October 1, 2018, explicitly states that “a noncompetition agreement shall not be enforceable against . . . employees that have been terminated without cause or laid off.” M.G.L. c. 149 § 24L(a). While the term “cause” is not defined within Massachusetts’s statute, employers should be aware that if an employee is terminated solely because of a reduction in force in response to COVID-19, a Massachusetts non-compete agreement entered into on or after October 1, 2018 may not be enforceable. Though not codified by statute, other states, including Arkansas, the District of Columbia, Iowa, Maryland, Mississippi, Montana, New York, Pennsylvania, and Tennessee, factor in whether an employer or employee initiated the separation of employment in determining whether a non-competition agreement is enforceable.

State Law Legislative Changes Protecting Low Wage Earners – Virginia recently joined a number of other states, including Illinois, Maine, Maryland, Massachusetts, New Hampshire, Oregon, Rhode Island, and Washington, in enacting laws that restrict the enforcement of non-compete agreements against low wage earners. Effective July 1, 2020, Virginia employers may not “enter into, enforce, or threaten to enforce” a non-compete agreement with a “low wage employee.” Under the Virginia statute, a “low wage employee” is defined as a worker whose average weekly earnings during the previous 52 weeks are less than the state’s weekly average. Currently, this amount is approximately $1,204 per week, which annualizes to approximately $62,600 per year. Notably, the Virginia law goes a step farther than many other states by prohibiting the actual or threatened enforcement of non-compete agreements, and also permits a departing employee to file a private civil action against their former employer in response to an attempt to enforce a non-compete agreement. The Virginia statute also provides for a potential civil penalty of $10,000 for each employer violation.

Re-Hiring May Require New Agreement – Another common situation for employers to consider is when rehiring of employees or bringing them back from furlough. In June of this year, the United States Court of Appeals for the First Circuit in Russomano v. Novo Nordisk considered just this situation under Massachusetts and New Jersey state laws. In Russomano, the employee signed a non-compete agreement at the beginning of his employment in 2016. The employee was laid off from November 18, 2016, and was re-hired in a new role on December 8, 2016, at which time he signed a new one-year non-compete agreement. The employee was again terminated in June of 2018, and re-hired by the same employer in a new role in August of 2018, though he was not required to sign a third non-compete agreement. The employee resigned in January 2020 and began working for a competitor. On appeal, the First Circuit agreed with the trial court and found that the employee’s non-compete had expired in August 2019 – one year after the employee’s employment “terminated.” Thus, the employee’s accepting competitive employment in January 2020 could not serve as a basis for a breach of contract claim. Given the First Circuit’s decision, employers who rehire employees or bring them back from furlough may be best served to have those employees sign new non-compete agreements (with adequate consideration, of course) if the employers may wish to seek enforcement in the future.