Can an employer enforce a restrictive covenant when the employee was terminated involuntary and without cause? Restrictive covenants are frequently utilized by employers to prevent an employee no longer with the company from negatively impacting the company. Restrictive covenants come in various forms some examples of which include, but are not limited to, covenants not to compete or non-compete agreements, confidentiality provisions, and non-solicitation agreements.
Both New York statutory and case law remain unclear on this issue. In Post v. Merrill, Lynch, Pierce, Fenner & Smith which was decided in 1979, the Court of Appeals held that it would be unreasonable to enforce a restrictive agreement if the employee’s termination was involuntary. Therefore, the forfeiture of the accumulated pension benefits due to the employee’s breach of a non-compete agreement was not enforceable. Several courts have cited Post when denying the enforcement of restrictive covenants where an employee’s termination was involuntary.
Generally, New York Law is not very supportive of restrictive covenants. The rational is that it restricts an employee’s right to earn a living which is a person’s fundamental right. The fact is, however, that these types of agreements will be endured and are therefore enforceable, provided certain conditions are met. To determine whether a restrictive covenant is valid and enforceable, New York and the majority of jurisdictions use the reasonableness standard. The Court of Appeals used several factors to determine the circumstances under which a restrictive covenant is reasonable and therefore lawful. The Court considered, among other relevant factors, the legitimate interest of the employer versus whether there is an undue hardship on the employee.
An exception to the reasonableness standard is the employee choice doctrine. The employee choice doctrine is based on the concept that where the employee’s termination is voluntary, he or she exercised discretion to accept the terms associated with his or her decision to separate from employment. Therefore, it is the employee’s choice to comply with the covenant and to receive the benefits or to violate the covenant and accordingly forfeit the benefits. In this context, the court must determine if the employee’s forfeiture of benefits is reasonable if there was an involuntary termination without cause. Furthermore, the New York Court of Appeals held that the employee choice doctrine is inapplicable where an employer deliberately creates an intolerable work environment that would effectively force a reasonable person to quit.
If you have further questions regarding covenants not to compete, confidentiality, or other restrictive covenants, call Gilbert Law Group at 631.630.0100.
Contributed by Sakine Oezcan