Non-compete agreements are a mainstay of many employment agreements. On the surface, they’re designed to prevent employees from leaving a company in favor of a competitor and taking valuable trade secrets along with them.

 

These agreements are generally designed with voluntary resignations in mind. When a company decides to reduce its workforce, however, the standing of these non-compete agreements may change. 

 

When employees are laid off due to lack of work, elimination of the position, or an economic downturn, it’s viewed as an overly-restrictive clause that can prevent people from earning an honest living. 

 

In fact, several states including Arkansas, Iowa, Kentucky, Maine, Mississippi, New York, Pennsylvania, South Dakota, or Tennessee, and the District of Columbia, have ruled that non-compete agreements are not considered to be enforceable when they apply to an employee who has been laid off. 

 

According to Fisher Phillips, an employment law firm, “The courts in these ten jurisdictions have refused to enforce restrictive covenants against employees whose employment is terminated for reasons other than their performance or conduct, i.e., as the result of a layoff, reduction in force, or elimination of position unrelated to the employee’s performance or conduct. Thus, whether a termination was “for cause” or not “for cause” can render the restrictive covenant ineffective.”

So what does this mean for you as an employer? Well, it means that you should definitely consider whether or not an employee is held subject to a non-compete agreement before you include him or her in the layoff. If they do, then consider the likelihood of whether or not that individual will seek employment with a competitive firm in the industry. 

Keep in mind that if they’re laid off, there is a very strong possibility that any non-compete agreement they have will be invalidated in the event of litigation.