A brief primer on COVID-related layoffs and non-compete clauses in North Carolina.
Though typically not favored under North Carolina law, non-competes are a common component of employment agreements and are enforceable so long as certain criteria are satisfied. However, with unemployment numbers skyrocketing throughout the ongoing COVID-19 pandemic, enforcing an otherwise valid non-compete agreement may be more challenging.
Enforcing a non-compete against a former employee who leaves to pursue employment with a competitor has its fair share of challenges, but in a time where millions of laid-off employees nationwide are scrambling to secure employment, enforcing a non-compete may be perceived as a violation of public policy. It could also hurt your business by sending the wrong message, hurting your public image, and risking important business relationships.
Employers should consult an experienced employment attorney to assess the validity of the business’s non-compete agreements and to receive counsel on whether pursuing litigation to enforce a non-compete against a former employee is the best decision in this environment. As you consider the best methods to protect your business, here are the basics of non-compete enforceability in North Carolina.
Why a non-compete?
A non-compete clause is a restriction typically found within an employment agreement or contract that takes effect at the end of the employee/employer relationship. While non-competes are not limited to a specific title or industry, these employment restrictions are most common with leadership roles and in positions where employees have access to important, confidential, or proprietary business information or customer information.
These clauses can protect the employer by preventing a former employee from sharing what and who he knows with the competition. A non-compete may also encourage longevity with the company while discouraging job-hopping between companies.
Is my non-compete enforceable?
Under North Carolina law, a non-compete is not illegal, but the law is not exactly written to favor these clauses. To be enforceable, a non-compete agreement must be carefully constructed to fit within the specific criteria required under North Carolina law. If any part of the agreement is too broad or considered an unreasonable limitation, a court will not rewrite the clause to make it fit within the legal requirements. Rather, judges have the discretion to enforce only the portion of the agreement that it deems enforceable and disregard any portion of the agreement deemed too broad, unreasonable, or otherwise against public policy.
As more and more businesses are forced to lay off employees or permanently close their doors, it will only become more difficult for individuals to find comparable employment after losing their jobs. A non-compete that further limits an individual’s ability to secure comparable employment will likely face harsh criticism for violating public policy.
There are five main criteria for enforceability:
- The agreement must be in writing;
- The non-compete agreement must be part of an employment contract;
- There must be valuable consideration for the employee’s agreement;
- The non-compete must be limited to a reasonable time and territory; and
- The agreement must be designed to protect a legitimate business interest.
Generally, the consideration requirement is not an issue if the non-compete was signed as part of the initial employment contract. However, consideration can be a questionable issue if the employee was asked to sign the non-compete during employment. A non-compete signed after an employee has signed the initial employment contract must be supported by new consideration, such as a raise, bonus, or other incentives.
The reasonableness of time and territory is probably the most common criteria for which a non-compete is deemed unenforceable. Because every non-compete is unique, the market for the industry and position varies. There is no set rule for what parameters are considered reasonable, but rather the court will review the language of the non-compete applied to the circumstances to determine if the time and territory components of the agreement are reasonable. With the impact of COVID-19 on businesses in North Carolina and worldwide, it’s safe to assume that the reasonableness of this component may be subject to more scrutiny than usual.
Should I enforce my non-compete?
Under normal circumstances, your non-compete may be enforceable and it may be in the best interests of your business to enforce it. However, even though enforcing the non-compete may be important to protect your business, the act of suing a former employee to enforce it is not without consequences. It may make more sense to do what you can to protect your business through other means now and delay any formal efforts to enforce non-compete agreements against former employees until the pandemic-related employment crisis dissipates.
As you consider enforcing a non-compete against a former employee who was part of a COVID layoff, evaluate the following:
1. Current Legal Atmosphere
If other businesses in your area have tried to enforce non-competes in this environment and failed, that is something to consider. Filing a lawsuit has ramifications. Not only can litigation be expensive and timely but given the impact COVID has had on employment across the country, suing a former employee who was fortunate enough to secure employment after being laid off by your business could have unintended consequences of causing more harm to your business than good.
2. Actual Risk
If a former employee accepts employment with a competitor, that does not necessarily mean there is a threat. Before moving to enforce a non-compete, you should exercise due diligence in examining what risk the former employee and his or her new employment creates for your business and explore alternative options to eliminate those risks, relying on a lawsuit only as a last resort.
Are there other ways to manage risk? If your business is being harmed because a former employee shared or is likely to share trade secrets, business practices, or disclose other confidential information with your competitor, filing an injunction may provide a quicker and more effective remedy. An injunction is a court order that can be used to restrict the former employee and/or the new employer in competition with your business from acting on or divulging the harmful, private information.
For more information about non-compete agreements or if a former employee violates a non-compete with your company, contact an experienced employment law attorney for assistance.
Hammer Law PLLC is not a litigation firm. We do not handle lawsuits, cases, or claims against employers. If you are seeking legal assistance in this area, we will be unable to assist you.