Tens of millions of employees have been laid off or furloughed as a result of the COVID-19 pandemic. Now that the reopening process has begun in most states, many of those employees are being rehired and reactivated. For the month of May 2020, the unemployment rate actually started to decline after the massive increase over the prior few months, as businesses began the return to normal and employers who obtained relief from the Paycheck Protection Program (PPP) under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) restored their workforces to pre-pandemic levels in order to secure loan forgiveness.
One thing that employers may not be considering when they rehire laid off or furloughed employees is what impact this has on prior restrictive covenant agreements with those employees. We previously discussed whether non-competes are enforceable against employees who are laid off. But what about employees who are laid off and then rehired, or furloughed and then reactivated? Are restrictive covenant agreements signed by employees prior to the layoffs or furloughs still enforceable if they ultimately leave and join a competitor down the road? The answer depends on whether the employee was technically, even if temporarily, laid off rather than furloughed, and what state’s law applies.
When an employee is laid off, his or her employment is terminated and he or she is not entitled to any ongoing compensation or benefits, but may take advantage of unemployment benefits. Furloughs, on the other hand, typically involve an employee continuing to be employed, albeit with reduced hours and compensation (sometimes down to zero), while retaining health insurance and still being eligible for unemployment benefits. This is an important distinction with regard to the enforcement of restrictive covenants, because the non-compete or non-solicitation periods typically begin to run upon termination of employment. Thus, a laid off employee’s restrictions would likely begin to run as of the date of the layoff, whereas a furloughed employee’s restrictions likely would not begin running as of the date of the furlough because their employment was not terminated, at least in the eyes of the law.
In that vein, we previously discussed a recent decision in which pharmaceutical company Novo Nordisk sought to enforce a 12-month non-compete agreement against an employee who entered into the non-compete agreement when he was hired in 2016, was laid off in 2018, and then was rehired three days later in a different capacity but without entering into a new non-compete agreement. The employee then left to join a competitor in 2020. The US District Court for the District of Massachusetts held that the employee’s 12-month non-compete period began to run when he was briefly laid off in 2018, and was not automatically revived by his re-hiring into a different role three days later. Accordingly, the one-year non-compete expired in August 2019 and was no longer enforceable in 2020. Employees who are laid off and then rehired as a result of the pandemic may find themselves in the same position as that employee, with an argument that their restrictions began to run as of the date of their layoff, even if they are rehired and continue to work for the company during the non-compete period. For this reason, employers who laid off employees should be sure that any applicable restrictive covenants are made a condition to rehiring.
Furloughed employees likely would not have the same argument, as their employment never technically “terminated,” and many continued to receive health insurance (and in some cases, partial compensation). However, in some states, like Massachusetts, that recognize the “material change doctrine,” furloughed employees may be able to argue that their employment relationship was materially changed as a result of the furlough, and thus their restrictive covenants are invalid. This is a difficult defense in normal circumstances, and would be much more difficult if the employee returns to his or her prior role and spends several months or years in that role before attempting to make the argument, but it is nonetheless something to think about. We recommend that employers in Massachusetts (and elsewhere) include language in all restrictive covenant agreements stating that the agreement will remain in full force and effect regardless of any change to employment, material or otherwise, to mitigate this risk.
In any event, when rehiring laid off employees or reactivating furloughed employees, employers should be wary of the risk that a court may deem a temporary break in employment a “termination” that causes the clock to begin running for time-limited restrictive covenants. Employers should consult with experienced counsel to discuss how to minimize this risk.