According to a March 26, 2020, News Release issued by the Department of Labor (“DOL”), initial unemployment claims in the United States soared to a seasonally adjusted 3.3 million the week ending March 21, 2020, the greatest single week increase in recorded history, primarily because of layoffs resulting from COVID-19. Indeed, the DOL reports that:
During the week ending March 21, the increase in initial claims are due to the impacts of the COVID-19 virus. Nearly every state providing comments cited the COVID-19 virus impacts. States continued to cite services industries broadly, particularly accommodation and food services. Additional industries heavily cited for the increases included the health care and social assistance, arts, entertainment and recreation, transportation and warehousing, and manufacturing industries.
Some researchers estimate that as many 1 in 5 US employees are subject to non-compete agreements. This means that, in all likelihood, hundreds of thousands of employees who are subject to non-compete agreements were terminated in the last week or so alone.
While non-compete agreements are often necessary to protect an employer’s legitimate business interests, such as trade secrets and customer goodwill, in light of the unprecedented COVID-19 crisis, many employers are asking whether they can enforce non-compete agreements against employees who are laid off. Indeed, many of those laid off in the current crisis were no doubt key employees, let go not for performance issues but rather due to business necessity. If such employees obtained new employment with an opportunistic competitor instead of being re-hired after the crisis has passed, they could pose serious risks to former employers because of their access to confidential information and customer relationships. Not surprisingly then, some affected employers are concerned that this (hopefully) short-lived health crisis may convert into a longer term business crisis as a result of competitive hiring.
According to the latest edition of Seyfarth’s 50 State Desktop Reference: What Businesses Need to Know about Non-Competes and Trade Secrets Law, 28 states permit enforcement of non-competes against discharged employees, three likely would do so, nine would not, and in 10 states the issue is unresolved. There are, of course, nuances in each state.
Indeed, several states have enacted new laws over the past year or so that are very employee-friendly, often limiting the enforceability of non-competes against low wage employees, and in some instances prohibiting the enforcement of non-competes against employees who are laid off or terminated without cause. For instance, in October 2018, Massachusetts enacted a new law that expressly provides that “A noncompetition agreement shall not be enforceable against the following types of workers: . . . (iii) employees that have been terminated without cause or laid off.”
So the answer to whether an employer can enforce non-compete agreements against employees who are laid off, like many issues in this area of law, depends on the state, and in some instances how much the employee earns. In most states, however, the answer is generally yes. Another, perhaps more appropriate question, however, is whether employers should do so in the current climate, and if they decide to, whether they should seek injunctive relief. As we previously wrote about the question of whether to request emergency injunctive relief during the current COVID-19 crisis, the answer will largely depend on the facts of the case—the more egregious an employee’s conduct, and the more serious the threat to a company’s trade secrets, goodwill, or customer relationships, the more likely a company will feel compelled to enforce a non-compete against a laid off employee (and the more likely a court will take it seriously under the current circumstances and consider granting injunctive relief).
Prior to taking any action against a departing employee during a time of high unemployment such as the present, companies should consider the actual risk that the former employee poses by working for a competitor, potential alternatives to a lawsuit, and the public relations ramifications of filing a lawsuit. Nevertheless, companies should not tolerate misappropriation of trade secrets under any circumstances, and should take whatever action they deem necessary to protect those rights.