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The Furloughed Non-Compete

December 2, 2020

Michael J. Davey, Esquire

Employment Law Department

Eckell Sparks Law Firm

mdavey@eckellsparks.com

610-565-3700

Let’s say you’re an employer. In March, you furloughed an employee because of COVID-19 who had a 6-month non-compete agreement. In October, you then found your business situation hadn’t improved, more restrictions might be looming, and the time had come to tell the employee that he or she was no longer furloughed, but now officially terminated.

If you think you’re safe from having that employee wind up working virtually for one of your direct competitors until sometime next Spring, think again.

In Russomano v. Novo Nordisk, Inc., the First Circuit Court of Appeals (which oversees federal appeals from district courts in Maine, Massachusetts, New Hampshire, Puerto Rico, and Rhode Island), found that the clock on a non-compete timer started ticking when the employer laid off an employee, telling him his “position had been eliminated,” and that his “employment [would] end effective August 3, 2018.” The employer’s letter also encouraged the employee to apply for other positions in the company, and informed him that he couldn’t get severance benefits if he accepted a new position within the company before August 3.

As luck would have it, the employee did start hunting for other positions in the same company, landed one, and started on August 6, 2018. On January 6, 2020, the employee resigned; three weeks later, he was sitting at a desk working for a direct competitor.

Not surprisingly, the former employer filed suit, arguing that when the employee took on his previous role (the one the employer eliminated on August 3, 2018) he had signed a one-year non-compete agreement. As such, the employer contended that the employee couldn’t work for a competitor until at least January 6, 2021—one year after he resigned from the company.

The Court of Appeals wasn’t convinced. Instead, it found that the language of the letter sent to the employee informing him of the elimination of his prior position was pretty clear—his employment had ended “effective August 3, 2018.” The employer tried to argue that the employee had actually remained employed the whole time, and really just transferred from one position to another. But the Court didn’t buy it.  Rather, it found that because the employee’s job with the non-compete ended “effective August 3, 2018,” the one-year clock started ticking on that date, and ran out on August 3, 2019. Therefore, when the employee left and went to work for a competitor in January of 2020, nothing stopped him from doing so.

Now while a decision of the First Circuit Court of Appeals isn’t legally binding here in Pennsylvania, and the facts of this case didn’t have anything to do with COVID-19, there are still important lessons to be learned:

First, pay attention to the language used to tell an employee with a non-compete agreement that he/she is being furloughed. If phrases like “job elimination” or “ending effectively immediately,” are used, you might unintentionally back yourself into a termination situation that starts the non-compete clock running.

Second, if an employee is brought back from furlough into a different position, have him/her sign a new non-compete agreement, preferably with a little extra money paid to the employee to shore up the contract (Pennsylvania requires some additional, valuable consideration to make a contract legally binding).

Third, you might want to look back on whether you currently have any employees sitting on furlough who have non-compete agreements. Admittedly, non-competes of six months or less as used in my opening example are rare. But one-year non-competes are pretty common. If you furloughed an employee in mid-March because of COVID-19, that one-year anniversary is coming up fast.

Have other questions about the impact of COVID-19 on your life, your job, or your business? Visit our Coronavirus Resources page, or call us for a free consultation.

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