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 to worry about once s/he is gone. But that’s not always the case. A poor performer still had access to your proprietary information; is still knowledgeable about the ways of your business; still saw and heard enough to be of value to your competitors – in short, a poor performer may still pose a threat to you of unfair competition. Indeed, it is possible to conjure a scenario in which an employee might deliberately underperform to avoid a post-employment restriction.
This scenario, and the possible additional judicial wariness about enforcing non-competes in no-cause terminations, should prompt employers to rethink their “cause” provisions. Employers should consider including poor performance as a “cause” for termination; it is a cause for termination. Expressly including it within the definition of “cause” may strengthen an employer’s argument for enforcing a non-compete against an employee who is terminated for poor performance. Otherwise, an employer may in effect be penalized for firing an employee “merely” for underperformance, i.e., without cause.
Depending on the nature or rank of the employee, it may be appropriate to make distinctions between “poor performance cause” and misconduct-based cause. Surely an employee terminated for misconduct-based cause should forfeit any right to contractual post-employment severance or benefits. Whether “poor performance cause” should also result in forfeiture is another question.
Whatever the politics and whatever the jurisdiction (where non-competes are otherwise enforceable), employers should be looking at all of the possible angles that might enhance their odds of enforcing their non-competes. Being clear that poor performance is indeed a cause for termination is one such angle.