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How does unemployment affect non-compete agreements?

It is no secret that the unemployment rate in the United States is the highest it has been in the country’s recorded past. While the cause of these unemployment surges may be out of our control, businesses may be at increased risk of losing a significant market share of their customers and clients. Businesses often train individuals in specific areas of skill to perform effectively in their work environment. But what happens to these individuals when they have been placed on furlough or laid off? Many employers have in place non-compete clauses in employment contracts to limit the business’ legitimate business interest in their trade secrets and customer goodwill. However, when historic levels of unemployment exist, how enforceable are these non-compete clauses against recently fired employees?

These fired or furloughed employees are seeking work to feed and shelter themselves and their families. Many of the same employees carry with them the trade secrets of business. While businesses hope that they may rehire these individuals after the events causing the high level of unemployment subside, the reality is that a high number of these employees will not be rehired by businesses. In a traditional market, a non-compete agreement between a business and previous employee may likely be enforceable when they begin to work for a competing business. These employees carry a high level of skill in specific areas, skills they may not be able to use if non-compete clauses are enforceable. Further, this balance also considers the level of effect such use of trade secrets will have on businesses. There is a balance of rights that is applied by public policy between the need to protect the trade secrets and goodwill developed by a business and the individual rights of the employee to live and seek employment. How this public policy is interpreted differs significantly between jurisdictions.

Considerations that are made for the enforcement of non-compete agreements in different jurisdictions include, but are not limited to, the type of work performed, the level of skill required to perform the work, the level of skill prior to employment, the category of information available to the employee, the level of pay provided to the employee, how egregious employee action against the business is, how restrictive the non-compete clause is, actual need based on the business’ need to protect its legitimate business interests and public policy matters including the events that transpired leading to the termination of employment. Many non-compete agreements have not been written for situations where external pressures are effecting the market economy and, thus, may not be enforceable in such times due to the inclusion, or exclusion, of certain terms, dependent on the jurisdiction where the non-compete agreement is to be enforced.

Whether entering into a new contract or assessing the terms of a contract already entered into, parties should understand how to interpret their non-compete agreements and how these clauses are affected by periods of high unemployment. Through advisement by an experienced attorney who understands the balance of business interests and individual employee rights, parties may be more equipped to handle the appropriate steps moving forward in protecting both interests in times of uncertainty.