QUESTION: RESTRICTING X EMPLOYEE FROM WORKING FOR COMPETITOR
How legal is the recent statement by GE restricting existing employees from seeking positions with competitors in light of its statement that it was selling GE Capital and positions would be terminated in a year? And there is no non-compete provision in a contract.
Editor in Chief
Metropolitan Burglar and Fire Alarm Assoc of New York
Restricting employees from accepting employment from your competitor is difficult to enforce, and in some states entirely unenforceable. There is a significant difference between restricting employees from:
- leaving your employ with copies of your records,
- soliciting or servicing your customers after they leave,
- soliciting or servicing your customers on behalf of a competitor, and
- starting a new business that is in direct competition with your business,
and restricting employees from:
- accepting employment with a competitor,
- opening a new business, and
- competing with you on the open market.
Which of the above do you think requires a contract between an employer and employee? Well, you don't need a contract to prohibit your employee from leaving your employ with your business records, though that means physical records, not what's in the mind of the employee. An employer can also expect, and is entitled to, employee loyalty, which means no competition while the employee is still employed by the employer. You don't need a contract for that.
So while your x employee may be entitled to solicit and service your customers, you can restrict that by agreement and the employee would not be able to use your physical business records to compete, mainly because the x employee should not be in possession of your business records. Restrictive covenants in employment contracts will be enforced to the extent necessary to protect the employer and not create a hardship for the employee.
Without a contract an employer cannot restrict an employee from accepting new employment with a competitor. With a contract an employer can, in most states, restrict an employee for a reasonable period of time and in a reasonable manner. The test will be what is necessary for the employer and not a hardship on the employee. Also the employees position and what was self learned and achieved as opposed to provided and taught will be a factor. For example, an experienced salesman who came to the job with customers or builds his own client base may have a better chance of claiming that a restriction on other employment is unfair, whereas a new salesman for whom the employer has invested training, leads and other assistance may have a harder time avoiding a reasonable restrictive covenant. No employer wants to be the training ground for competitors to poach their trainees.
What about the employer who does have employees under contract with restrictive covenant and then sells to another company? The agreement will undoubtedly be assignable and applicable to the new owner, so it will be as enforceable as it would be if the employer tried to enforce it. What about the employer who goes out of business but nevertheless wants to enforce the restrictive covenant? That's more problematic because the employer has no real interest to protect. By the way as I write this I'm wondering what about the employer who goes bankrupt and the bankruptcy trustee [which is another of my roles] wants to sell a going concern or the good will of the bankrupt business. I believe a trustee could enforce the restrictive covenant to the extent that the employer would have been able to, and would get an order from the Bankruptcy Court to that effect.
If an employer sells or merges its business and the employee is terminated, what restriction on future employment affects the employee? That's really the question Arnold asks above. First I would look at the agreement. The agreement may have an employment term that the employer is now breaching by early termination. In that case it's going to be difficult to enforce a restriction, but it's possible if the agreement deals with the scenario. An employment contract may have certain incentives at inception, during employment or after termination, that provides enough consideration to justify the restriction. Or the employee may have been introduced to such sensitive information that makes the restrictions reasonable. These issues should have been negotiated in the employment agreement and set forth in detail. That's one reason to have a litigator as opposed to a transactional lawyer review the agreement. The orientation is different. A transactional lawyer focuses on how to make the deal, the litigator on how the agreement will deal with all of the events that arise when the relationship does not go as expected.
Absent an agreement, employees are going to be able to accept new employment or openly compete with the former employer, they just can't use the physical records of the x employer.
Make things easy on yourself. Get the Employment Agreement right now and get your employees to sign it tomorrow.