Antonio Allen and Lu Pham
What impact does a temporary layoff have on a company’s non-compete agreement with an employee upon the employee’s return to work?
In general, non-compete agreements are legal restraints that prevent employees from competing against their employers during and after employment. Only three U.S. states — California, North Dakota, and Oklahoma — prohibit use of non-competes. As a result of the COVID-19 pandemic, employers across the country and industries were forced to temporarily lay off employees. Many of these employees were subject to non-competes. According to a 2016 report by the U.S. Treasury, 18% of all workers are covered by non-compete agreements.
The U.S. Bureau of Labor Statistics, reported a peak of roughly 18.1 million people or 11.5% of the U.S. workforce on temporary layoff in April, when much of the country was staying at home to slow the spread of the coronavirus. By the end of July, as many states began to re-open, that number had decreased to 9.2 million workers. This means that in July, roughly 9 million people returned to their jobs, permanently lost their jobs, found a new job, or left the workforce entirely.
So what does all of this mean for employers who temporarily laid off employees with whom they have non-compete agreements? For employers who made those temporary layoffs permanent, it means that, so long as the agreements comply with applicable state statutory and common law, those employers are free to enforce the agreements against their former employees.
In Texas, a non-compete is enforceable if it is ancillary to an otherwise enforceable agreement; is reasonable in terms of time, geography, and scope of activities restrained; and does not impose a greater restraint than necessary to protect the goodwill and other legitimate business interests of the employer. Although Texas courts have found time periods of five or even 10 years to be reasonable, the typical non-compete has a life span of one to two years.
For employers who brought employees back after a temporary layoff, in many instances, the clock on their non-compete agreements with those employees already has begun ticking down. In other words, employers’ No. 1 legal protection against talent, trade secret, and productivity-stealing competitors may be closer to expiring than they think. For example, it is likely that a non-compete that says that it is effective “during Employee's employment with the Company and for a period of 12 months thereafter” would have only a nine-month life span for an employee that was brought back after a three-month coronavirus-related layoff.
In an illustrative case before the Supreme Court of Massachusetts (Intertek Testing Services NA, Inc. v. Curtis-Strauss LLC, 98903F, 2000 WL 1473126, at *3 (Mass. Super. Aug. 8, 2000), an employer sued to enforce a non-compete against an employee who left to start a competing company. The employee signed a non-compete agreement when he was hired by the employer. The non-compete had an 18-month duration that was to be triggered by the employee’s termination.
The employee was temporarily transferred to a related, but legally distinct, entity for about a year before returning to the employer. The employee was taken off of the employer’s payroll and was no longer eligible to receive health care benefits or participate in the employer’s 401k program. When the employee returned, he again was placed on the employer’s payroll, but he was not required to sign a new non-compete agreement.
After another two years of working for the employer, the employee left to start his competing company. The employer argued in court that the employee remained its employee even while working for the related entity. The court disagreed, holding that the non-compete had expired by its own terms 18 months after the employer initially removed the employee from its payroll.
This case offers a key lesson that employers should heed to avoid the premature expiration of their non-compete agreements with returning employees who were temporarily laid off: require returning employees to sign a new non-compete that resets the clock.
But keep in mind that in Texas and most other states, an employer must give the employee something new (legally known as “consideration”) in exchange for the new non-compete agreement.
Unlike most contracts, a non-compete agreement in Texas must be supported by consideration that is related to the reason the employer must restrain the employee from competing. If you’re not sure whether your returning employee was still an employee while sitting at home, it is a good idea to consult your labor and employment attorney so your business is not disrupted by the coronavirus a second time.
Antonio Allen is a partner at the Pham Harrison, LLP law firm in Fort Worth. He is immediate past chair of the labor and employment section of the Tarrant County Bar Association. His practice focuses on providing litigation defense and counseling to employers of all sizes. Contact: [email protected].
Lu Pham is a founding partner at Pham Harrison, LLP. He is a board member of the Tarrant County Bar Association. His practice is focused on the representation of private and public sector employers in all facets of labor and employment disputes. Contact: [email protected].
