The COVID-19 crisis has caused an unprecedented number of layoffs and pay cuts at workplaces across the nation. As impacted individuals pound the pavement in an abysmal job market, some employers and former employees are wondering how the current climate will affect the enforceability of their noncompete agreements. As courts weigh an employer’s need to protect its business interests versus a worker’s need to earn a living, the balance may have shifted toward workers’ needs as millions of Americans find themselves jobless. Given the considerable reduction in job opportunities, courts will carefully scrutinize the reasonableness of any covenants that restrict someone’s ability to work, even in states like Texas that are relatively lenient with regard to noncompete enforceability.
What Texas normally says about noncompete agreements
The Covenants Not to Compete Act of 1989 provides a basic roadmap for state and federal courts in Texas to follow when evaluating noncompetes.
The statute holds that a noncompete covenant must “be ancillary to or part of an otherwise enforceable agreement.” The requirements for such an agreement, however, have traditionally been minimal in the Lone Star State. Less-employer- friendly states only allow restrictive covenants with employment contracts that meet certain standards, such as those that specify a minimum duration of employment or those that contain a right to terminate the employee only for cause. But the bar is relatively low in Texas, which has bound former employees to noncompetes in the absence of employment contracts. In some cases, all employers have had to do to craft an enforceable noncompete agreement was provide the employee with the written promise of specialized training, confidential information or stock options.
Generally speaking, for a contract to be binding, each party must promise to give something of value to the other. In many states, for a noncompete to be upheld, an employer must provide a significant benefit to the employee at the time of signing, such as the initial hiring, a promotion or a raise. In Texas, however, noncompetes have been enforced even when their signing did not coincide with such an event.
The Texas statute specifies other requirements for a noncompete to be binding. It must contain reasonable limits regarding time, geographical area and scope of activity so that it doesn’t impose greater restraint than is necessary to protect the business interests of the employer. In other words, the shorter the duration and the narrower the geographic area and scope of activity, the more enforceable the agreement will be.
The impact of layoffs and pay cuts on noncompetes
In some states, noncompetes are unenforceable when employees are terminated without cause, such as when they are part of a COVID-19-related layoff. In Texas, however, the enforceability of a noncompete is not tied to the reason for termination.
But when there is an employment contract in place and it is breached by the employer, an existing noncompete may be unenforceable. A recent Texas Court of Appeals decision ruled that an employer who had breached an employment agreement by changing the employee’s status to independent contractor (rendering him ineligible for health benefits) without his consent could not enforce the restrictive covenant that was part of the employment agreement. The court ruled:
“An employer cannot wrongfully breach a provision of an
employment contract that is favorable to the employee (such as
reducing his wages without his consent and without contractual
authority to do so) and then go into a court of equity to secure, by
injunction, the enforcement of another provision favorable to it.”
Employers struggling to stay afloat amid the crisis should be wary that if they cut salaries or otherwise break the terms of employment contracts, that any noncompetes associated with those contracts may not be enforceable. Of course, if an employer is not contractually obligated to pay a certain salary, such as in an at-will employment relationship, then a pay cut would not constitute a breach of contract.
Which noncompete agreements are more likely to be enforced
Given the current climate, certain factors may have a larger impact on a noncompete agreement’s enforceability. Courts may be more likely to throw out agreements that were not initiated at the time of hire or a significant change to the employee’s position and/or compensation. Further, those agreements with narrower restrictions in terms of time, geographic area or scope of activity will more likely be upheld. Durations of more than a year or two will likely be reserved for key personnel who had access to major customers and trade secrets. Texas requires that the geographic scope be limited to the areas where the company does business or has customers, but those agreements that narrow the focus further may be more likely to be enforced. Say an energy company operates throughout Texas, and a particular salesperson’s territory is Houston. The narrower region would be a more enforceable geographic scope for that employee’s noncompete. Finally, a restrictive covenant that prevents someone from working in any capacity in a certain industry generally will not be upheld in the best of economies. Prohibiting the sales guy from joining another energy company may not fly, but the former employer can probably stop him from calling on its Houston customers.
At Sheehy, Ware & Pappas, our attorneys represent both employees and employers in the drafting, advising, reviewing, pursuing and defending the execution of noncompete agreements and in litigating noncompete disputes. Visit our website for more information.