Don’t want to sign that new non-compete agreement that your employer just rolled out? Unempoyment compensation may be an option at least according to one new court decision.
An employee does not necessarily forfeit unemployment compensation if he or she is discharged, or resigns rather than waiting to be discharged, for declining to sign a mandated restrictive covenant. Darr v. Roberts Marketing Group, LLC, MO Court of Appeals, Eastern District, Case No. ED100197 (Apr. 22, 2014).
Summary of Case
Darr, an insurance salesman, had been working for Roberts Marketing for three months when he and all other employees were told that continued employment was contingent on signing a non-competition agreement. They were given less than a week after being provided with a copy of the agreement to execute it or be discharged. Darr consulted with an attorney who advised him not to sign. Roberts Marketing refused to negotiate the terms, and so Darr refused to execute the agreement. Faced with imminent termination, he resigned and filed for unemployment compensation. A hearing officer concluded that Darr was entitled to receive benefits, but the Labor and Industrial Relations Commission reversed on the ground that he had voluntarily left his employment. On appeal to the Missouri Court of Appeals, the Commission’s decision was reversed.
Darr argued that the covenant was onerous with regard, for example, to its duration, geographical area covered, and scope of activities. It prohibited employees, for 36 months after the cessation of employment, from engaging “directly or indirectly . . . in any manner” in the telemarketing of life insurance anywhere in the U.S. and all of its territories. The 36-month term did not begin to run until the date the employee stopped violating the agreement. In the event of an actual or threatened breach, the company was entitled to “apply to any Court of competent jurisdiction for entry of an immediate restraining order or injunction.”
The agreement also stated that the employee agreed to waive all defenses and objections to the terms and conditions of the covenant, promised not to advance any contrary position, and waived trial by jury. An employee found to have committed a violation would be required (a) to pay the company, as “liquidated damages, and not a penalty” all sums the employee received, “directly or indirectly,” as a result of the violation, and (b) to reimburse the company for all costs and expenses, including reasonable attorneys’ fees, incurred in enforcing the agreement.
Court of Appeals Decision
According to the Court of Appeals, Darr was a “reasonably prudent” employee who was justified in declining the “mandatory acceptance of contractual conditions” which would unduly constrain his ability to earn a living, and would invite future lawsuits. The court also noted that Darr demonstrated good faith by attempting, albeit unsuccessfully, to negotiate the terms of the covenant with his employer. The court suggested that, in connection with seeking unemployment compensation, an employee might be justified in quitting if the employee reasonably believes that termination will result for refusing to execute a non-compete agreement mandated by the employer, even if the agreement does not contain egregious terms.
The most important lesson the Darr case teaches is that an employer who threatens to fire employees who refuse to sign a restrictive covenant may be liable to them if they in fact are discharged, or even if they resign, and then claim unemployment compensation.