James F. Mahoney, Attorney
Commentaries
 
     

April 2016

Using Restrictive Covenants in Job Separations

If you must “separate” employees, check on the best course of offering severance agreements to include non-compete provisions that don’t run afoul of the existing law or general feeling of judges and/or arbitrators.

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A good example is Utah.

Its “Post-Employment Restrictions Act,” HB 251 voids any “post-employment restrictive covenant” entered on or after May 10, 2016, that extends beyond one year from the date of separation of employment, unless a non-compete clause is included in a severance agreement; or it’s related to the sale of a business.

That said, the law does not affect non-solicitation, non-disclosure, or confidentiality agreements, which are specifically excluded from the definition of a post-employment restrictive covenant.

The law also does not affect agreements currently in place. But it will limit any agreements entered into on or after May 10, 2016, including any renewals of currently existing agreements.

If you use non-compete agreements – in any state – you may want to limit to one year the term of the post-employment obligation. It’s tough enough to enforce the year in many states because courts see the limitation as an infringement on the ex-employee’s right to make a living.

While you’re at it, take a look at your severance policy in general and form  agreements. Don’t forget to include the fact that the agreement is mutually agreed upon, necessary to protect the goodwill of your business, supported by adequate consideration, and entered in good faith.

Okay, so just what amount is adequate consideration. A “pat on the back and a 15 cent subway token” once was sufficient (if there was a subway around), but I don’t know what Hillary paid recently when she got stuck in that turnstile, but it didn’t seem to be sufficient.

There is no absolute definition of adequate compensation. It depends on the nature of the position, the person’s compensation, but 5% has been bandied about as adequate in some cases.

And that being said, you must be cautious because penalties for employers seeking to enforce non-compete agreements are painful if it is eventually determined in court or via arbitration that the agreement is void. Damages can include lost wages, attorney fees, court costs.

If you must “separate” employees, check on the best course of offering severance agreements to include non-compete provisions that don’t run afoul of the existing law or general feeling of judges and/or arbitrators.