Escaping Noncompete Clauses & Other Employment Agreement Concerns

Managing Noncompete, Nonsolicitation and Other Employment Agreement Terms After Termination

In an earlier post, I addressed important legal considerations surrounding terminations and reductions of employee compensation as a result of the COVID-19 pandemic. This article discusses the effect termination has on:

noncompetition provisions and other restrictive covenants, and
sign-on and retention bonus repayment requirements.

Noncompetition Clauses Apply Regardless of Cause of Termination

Noncompetition clauses are intended to prevent you from working for your former employer’s “competitors,” or starting your own business and taking their customers. If you signed an Employment Agreement with a noncompetition clause while you were employed, or during your employment, read it carefully before you begin your job search or establish your own business. If you do not have a copy of what you signed, or do not know if you signed one, review your personnel file and copy any document that could include a noncompetition clause.

Your noncompetition clause likely limits you in some or all of the following ways:

restricts you for no more than two years from your termination,
prohibits you from doing work you did for your former employer,
prevents you from working in the same territory in which you worked for your former employer, or
prohibits you from taking your former employer’s customers.

If your noncompetition clause extends beyond two years, prevents you from doing work other than what you did for your former employer, or prohibits you from working in locations you did not previously work, a court could find your noncompetition clause “unreasonable” and declare it “unenforceable”.

Options for Managing Your Noncompetition Agreement Post-Employment

Even if your noncompetition clause appears to be “unreasonable”, ignoring it and directly violating it is ill-advised. Only a judge can legally determine a noncompetition agreement is “unreasonable” and declare it “unenforceable”. If you are subject to a noncompetition clause, your choices are:

adhere to it;
try to renegotiate it; or
ask a judge to declare the noncompetition clause “unenforceable”

Adhering to a Noncompetition Agreement

Seek employment or start a business that does not conflict with the terms of your noncompetition clause. Show prospective employers the noncompetition clause so the work you do will not violate the terms of the noncompetition clause. Some Employment Agreements require you to provide a copy of noncompetition clauses to prospective employers.

2. Renegotiating a Noncompetition Agreement

An employer has incentive to negotiate with you if the employer is concerned a judge could declare the noncompetition clause “unenforceable”. Employers who intentionally draft “unreasonable” noncompetition clauses to gain an advantage over departing employees, or whose noncompetition clauses were reasonable when drafted but have become “unreasonable” under today’s standards, may be willing to negotiate with you.

3. Ask a Judge to Find the Noncompete Agreement Unenforceable

Asking a judge to declare your noncompetition clause “unreasonable” and thus “unenforceable” is not a quick solution because litigation takes time and involves significant attorney’s fees. Some prospective employers will fund the challenge if your former employer is a competitor.

In a declaratory judgement action, judges have only two choices: the noncompetition clause is either reasonable or “unreasonable”. A judge may not “fix” a noncompetition clause even if the judge finds it “unreasonable”. A judicial determination that a noncompetition clause is “unenforceable” is a good outcome for an employee because the noncompetition clause will not restrict their job search or limit their ability to establish a competing business.

Negotiating Modifications to Noncompete Clauses

Negotiating modifications to your noncompetition clause is likely your best option if it is viable. Here’s an example. Jillian signed an Employment Agreement 15 years ago that prohibits her from selling the widgets she sold while employed for Company XYZ in the United States for two years after her termination. Her sales territory for the last 10 years was limited to only the upper Midwest, however. Because the territorial restriction in the noncompetition provision was far broader than her actual territory, Company XYZ was willing to modify the noncompetition provisions to avoid the risk that a court would find the provision “unreasonable” and declare it “unenforceable.” Jillian and Company XYZ agreed to modify her noncompetition paragraph to 1 year for sales of widgets in the upper Midwest. As a consequence of the modification, she could immediately sell widgets outside of the upper Midwest. The agreed-upon modification benefits Jillian because:

she is restricted for 1, rather than 2 years, from selling widgets in the upper Midwest,
she can immediately sell widgets outside the upper Midwest, and
she achieved these changes without filing a court action.

Disregard Anecdotal Information from Previous Employees

As you consider your options, do not fall into the trap of relying upon reports that your former employer did not enforce a noncompetition paragraph against a previously-departed employee. Even if that report is true, your former employer could decide to enforce it against you. There are often facts to explain the employer’s choice not to enforce one noncompete clause and not another, such as the former employee gave up something of value to the employer (waived a bonus or commissions), or provided something of value (provided consulting services at a reduced rate), to avoid litigation. Additionally, your noncompetition paragraph could include different language than the other employee’s agreement.

In summary, if you have a noncompetition clause,

read it very carefully before you begin your job search or establish a business;
if you have any questions about what the language means, consult with an employment lawyer;
if the terms adversely impact your job search, discuss with an employment lawyer whether you have leverage to negotiate a modification;
if you have the resources to fund a challenge regarding the reasonableness of the noncompetition clause, consult with an employment lawyer.

Do Not Recruit Former Colleagues If You Have a Nonsolicitation Provision

Many employers require employees to agree not to solicit their former colleagues to leave with them or to leave to join competitors. These provisions are called “nonsolicitation provisions” and may apply for no more than two years after termination. For employees who intend to set up a competing business, the nonsolicitation provision can prove especially difficult to navigate. Pay particular attention to the verbs of your nonsolicitation provision. Are you prohibited from “soliciting” or “recruiting” your former colleagues? If so, you may hire them so long as you do not take steps to encourage them to join you. If you are prohibited from “hiring” them, the impact on you, and them, is much more significant.

As with nondisparagement clauses, read nonsolicitation provisions carefully, then discuss with an employment lawyer if the terms are not clear or you want to consider renegotiating or challenging the agreement.

Repayment Obligations for Sign-On and Retention Bonuses Apply Even if You are Terminated

If you received a sign-on and/or a retention bonus, you may have agreed to repay some or all of it if you were terminated. Employers frequently link repayment obligations to the length of your employment and/or the circumstances of your termination. For example, an employer may forgo repayment if you work for them for at least 12 months. Other employers graduate the amount of repayment based upon the length of your employment. For example, you repay 100% if you are employed for less than 1 year, but your obligation to repay is reduced by 25% for each additional year you are employed. Some employers require repayment only if you resign your employment or if you are terminated “for cause”.

An employer may be willing to negotiate the amount you repay and over what period of time. Unfortunately, unlike the noncompetition clauses described above, these provisions are not subject to any “reasonableness” scrutiny by a court. Talk with an employment lawyer about whether you have leverage to negotiate better repayment terms.

A Severance Agreement Can Soften the Financial Impact of Termination Obligations

A severance or separation agreement can provide income after termination, modify your existing noncompetition and other restrictive covenants, and list the changes your employer was willing to make to your repayment obligations for a sign-on and/or retention bonus. The incentive for your employer to sign a severance or separation agreement with you is to obtain a promise from you not to sue them for anything related to your employment, to agree not to disparage your employer, and for your agreement not to disclose the terms of the severance or separation agreement except to your immediate family, attorney and tax and financial advisers. The benefit to you is severance pay, their agreement not to disparage you, and other additional benefits such as a substantive letter of reference, outplacement services paid by your former employer, and their contribution to your COBRA health insurance premiums. It is very important to review the terms of a severance agreement with an employment lawyer before you sign it. You will have 21 or 45 days to consider most severance agreements.

Summary

Know your rights and obligations under noncompetition clauses, nonsolicitation provisions and sign-on and retention bonus repayment provisions. Consider the potential benefits of a severance or separation agreement. Contact Hawks Quindel, S.C. for help.