The Business Divorce Law Report
Litigating with a former employee for violation of a restrictive covenant agreement becomes more complicated when the former employee was terminated without good cause. And because we are an at-will employment economy, this becomes an issue more frequently than one might imagine.
As one author notes, it typically is not the underperformer who creates a problem for their former employer. It’s the superstars, of course, that threaten to walk out the door not because they were fired but because they plan on taking a big chunk of business.
Include Poor Performance as Grounds for Termination
Nonetheless, the failure to include poor performance as “cause” for termination might be a fatal error to enforcing a restrictive covenant against a former employer with access to confidential information and the ability to compete unfairly with the former employer. Competitors have been known to hire ex-employees of a competitor less for their skills than for what they know about the other side.
In New Jersey, enforcement of a restrictive covenant involves a balancing of interests, part of which is the hardship brought on the employee if the agreement not to compete is upheld. A termination without cause will likely be a factor in the court’s analysis.
Employers Often Define ‘Cause’ Too Narrowly
“Many employers limit themselves by too narrowly defining ’cause’ in their agreements. In many instances, the definition of “cause” for terminating employment used by the employer focuses on various forms of employee misconduct, e.g., for theft, embezzlement, commission of a criminal offense, violation of a company policy, or conduct harmful to the organization’s reputation,” say Douglas Mishkin and Ronald Taylor is a recent post on enforceability of restrictive covenants.” The failure to include bad performance as cause, they warn, can open the door to competition.
Although the arrival of the new Administration moots the Obama White House’s recent “State Call to Action on Non-Compete Agreements” addressing that administration’s concerns about non-compete agreements in the workplace, the fact remains that non-competes are governed by state law, and that some of the issues raised in the “State Call” will remain with us.
One such issue is the enforcement of non-competes against employees who are terminated without cause. For example, some courts have found that an employer has no legitimate business interest in enforcing a non-compete when the employer terminates an employee without cause. Politics aside, this is a concern that employers can address so as to enhance their odds of enforcing a non-compete.
Many employers limit themselves by too narrowly defining “cause” in their agreements. In many instances, the definition of “cause” for terminating employment used by the employer focuses on various forms of employee misconduct, e.g., for theft, embezzlement, commission of a criminal offense, violation of a company policy, or conduct harmful to the organization’s reputation. “Cause” frequently does not include poor performance. As a result, an employee who is terminated for poor performance is, by definition, terminated without cause within the meaning of the agreement. In states like New York or Montana, that poorly performing employee, who was required to sign a non-compete for the same, legitimate reasons as other employees, would be free to compete upon termination.
Sometimes that’s not a problem, because as a practical matter a poor performer is simply not someone you need […]
See Rethinking “Cause” May Enhance the Enforceability of Your Non-Compete