Over the weekend, The New York Times ran a surprising (at least to me) article about how Idaho has implemented a legal framework that gives employers a great deal of flexibility in an area getting a good deal more publicity of late: Non-compete agreements. (H/T to a post by Suzanne Lucas in Inc. too.)

When everyone has a non-compete agreement, what problems does that cause? Lots, according to the article:

For the most part, states have been moving toward making it easier for people to switch teams, but Idaho went the other direction with legislation that was friendlier to employers. The resulting law was particularly strict because it put the onus on employees to prove that they would not harm their former employers by taking the new jobs.

Proponents note that the statute applies only to “key employees” who tend to have more responsibility and better pay. But employment lawyers say Idaho companies tie down all levels of workers, not just top executives, with tough employment contracts.

Contrast that with California, which bans nearly all types of non-compete agreement, and lately, Massachusetts, and suddenly, Connecticut’s laws on non-compete agreements look downright moderate.

Indeed, for now at least, Connecticut employers have a good deal more flexibility on non-compete agreements that in other areas of employment law.

In fact, I was reminded of this when I looked back on a post from 2014 that noted the same thing — also in response to an article from The New York Times. It seems back then, the newspaper was also bemoaning the increasing use of non-compete agreements. Hmm.

In any event, employers in Connecticut should be mindful of this edict from the courts from 40 years ago that still rings true today:

In order to be valid and binding, a covenant which restricts the activities of an employee following the termination of his employment must be partial and restricted in its operation “in respect either to time or place, … and must be reasonable—that is, it should afford only a fair protection to the interest of the party in whose favor it is made and must not be so large in its operation as to interfere with the interests of the public. The interests of the employee himself must also be protected, and a restrictive covenant is unenforceable if by its terms the employee is precluded from pursuing his occupation and thus prevented from supporting himself and his family.

worker3After nine-plus years of writing about employment law in Connecticut, it’s getting to be pretty rare to find a topic that I haven’t at least touched upon, but here’s one: The Duty of Loyalty.

Indeed, a new Connecticut Supreme Court case is giving me the opportunity to do so.

The case arises from an employee who, while working for one employer, was secretly working as an independent contractor for a competitor.  The employer sued under a breach of the duty of loyalty claim.

The case, Wall Systems Inc. v. Pompa, officially released last week, can be downloaded here.

Lawyers will look at the case because it sets forth what types of damages are recoverable when a breach of a duty of loyalty claim is established.  In doing so, the court makes it clear that a trial court has some discretion in fashioning the appropriate remedy:

We agree with the plaintiff that the remedies of forfeiture of compensation paid by an employer, and disgorgement of amounts received from third parties, are available when an employer proves that its employee has breached his or her duty of loyalty, regardless of whether the employer has proven damages as a result of that breach. Nevertheless, the remedies are not mandatory upon the finding of a breach of the duty of loyalty, intentional or otherwise, but rather, are discretionary ones whose imposition is dependent upon the equities of the case at hand. Moreover, while certain factors, including harm to the employer, should not preclude a finding that the employee has committed a breach of the duty of loyalty, they nevertheless may be considered in the fashioning of a remedy. Here, because the trial court properly exercised its broad discretion when it awarded damages but declined to order forfeiture or disgorgement, we will not disturb its judgment on this basis.

But I think the more interesting point for companies is to understand the scope of the duty of loyalty.

In discussing the scope of this duty, the Connecticut Supreme Court reaffirmed principles that were last set forth in detail over 50 years ago in Town & Country House & Homes Service, Inc. v. Evans.  In that case, the court found an employee breached the duty of loyalty by soliciting employer’s customers for his own competing business while still working for the employer.

The court noted that an employee’s duty of loyalty includes “the duty not to compete … and the duty not to disclose confidential information”.  The court noted that this duty not to compete is during the employment relationship — not necessarily after — and is not dependent on the use of employer’s property of confidential information.

The court went on to say that the duty of loyalty “also includes the duty to refreain from acquiring material benefits from third parties in connection with transaction undertaken on the employer’s behalf.”  What does this mean? Essentially, it bars the collection of “secret commissions and kickbacks which might cause the employee to act at the expense or detriment of his or her employer”.

An employer may seek the forfeiture of an employee’s compensation for the period of disloyalty, but the court concludes that such a remedy is an equitable one and subject to the facts of the particular case.

But it’s always important to read the footnotes and here, in footnote 9, the Court inserted the notion that the duty of loyalty may not apply all employees.  “The scope of the duty of loyalty that an employee owes to an employer may vary with the nature of their relationship. Employees occupying a position of trust and confidence, for example, owe a higher duty than those performing low-level tasks.”

Still, the case is an excellent one for employers to keep in mind — particularly if the employer does not have restrictive covenants with its employees.  If the employees are engaging in competing work while still employed, the employer can use this case — and the theories behind it — to see the appropriate remedies.

With the appropriate employee, the employer can further strengthen its arguments, but including this in an employment agreement along with restrictive covenants.  In such a case, the court reminds parties that an employer could then terminate that agreement prematurely and seek recovery of damages directly attributable to the employee’s breach.

Employers should consider consulting with their favored outside counsel to see how this decision may apply to them.

 

senate2003While I normally make my year-end reflections at, well, year end, I can’t help but take this moment to see the big picture: We’re hearing an awful lot about restrictive covenants.

These covenants — often in the shape of non-compete clauses or non-solicitation (of employees or customers) clauses — have become popular because companies are looking to protect their financial interests.

Connecticut — despite its reputation for being anti-business — still has relatively strong protections for employers who want to use these clauses for their employee.

But these clauses are coming under attack more and more as their use becomes more widespread.

Jay Wolman, on The Legal Satyricon, noted that non-disparagement clauses in separation agreements may be one area where courts are reluctant to enforce. As a result, employers may want to use severability clauses to have the agreements upheld even if one provision is overbroad:

These clauses are very common, but likely are not long for this world.  In the interim, employer counsel may want to rethink the standard severability clause.  Although employers are certainly keen on obtaining as much a release as possible, it may be time to reconsider whether the agreement should survive if the former employee can simply ignore these clauses.

The ABA Journal of Labor & Employment Law also recently published an article on “Developing Trends in Non-Compete Agreements and Other Restrictive Covenants.” As the authors note, courts still tend to enforce the covenant “if it protects a legitimate business interest, the employee received consideration for the covenant, it is narrowly tailored, and the time and territorial limitations are no greater than necessary to protect the employer’s business interests.”

Despite this, the authors are quick to highlight the fact that each state interprets such things differently.

The New York Times even last year noted the trend of employers using these clauses more.  And not in a good way.

With this publicity in mind, Connecticut is again taking the lead — at least from a federal perspective.

Slate reported last week that Senator Chris Murphy introduced legislation that would ban non-compete agreements altogether for workers who make less than $15 per hour.

It would also require companies to let potential hires know ahead of time that they will be required to sign a non-compete agreement.

The bill, called the Mobility and Opportunity for Vulnerable Employees Act (MOVE) is also co-sponsored by Connecticut’s other senator, Richard Blumenthal.

At a press conference, Senator Murphy said that the bill was necessary in a free labor market.  “If workers can’t go to a competitor for a promised higher wage, then the market fluidity — the labor fluidity that creates upward pressure on wages — disappears,” Murphy said. “If workers are locked into jobs because of non-compete clauses, then there is no reason for companies to raise their wages.”

Without bi-partisan support, the odds of this bill passing are somewhere between never and no.  But don’t be surprised if we see this pop up again at a state level in the next legislative session.

interviewOn Friday, I had the opportunity to speak to the Human Resource Association of Greater New Haven. My sincere thanks to them for the invitation.

The group asked me to talk about various legal traps employers face in the hiring process and solutions to avoiding those issues.  Here are some of the points we talked about.

  1. Don’t Ask Bad Interview Questions – This is, in some ways, the easiest area to fix.  There are several types of questions that are (mostly) improper for employers to ask, such as, “Are you disabled?” or “Are you planning on having kids soon?”.  I’ve talked about this before, but the key is to plan your questions ahead of time and know which areas to avoid.
  2. Train Your Managers – Now that you know which questions are proper or improper to ask, be sure to let your hiring supervisors who are doing many of these interviews what the rules are as well. Don’t assume that they will ask good questions. Provide some training to them to give them the do’s and don’ts in the hiring process.
  3. Check the I-9s.  This is an area that can be overlooked, but it is important for employers to review the proper documentation at the time of an employee’s hire. New employees who forget their identification papers in the hopes that you’ll forget about it in a few days are cause for concern. Beyond that, be sure to keep your documentation on this or you’ll be susceptible to a government audit.
  4. Comply with FCRA.   Do you use a third-party to do background checks on new hires? If so, be sure to follow the Fair Credit Reporting Act, which mandates certain documentation be provided to employees and certain procedures to be followed. I’ve talked about it in a prior post as well.
  5. Implement Restrictive Covenants at Hiring.  When you use restrictive covenants (such as non-solicitation provisions) for your key employees, be sure to have that paperwork done at the time of an offer, or, on the employee’s first day at work. While continued employment could be enough consideration in some agreements, making a new job contingent on the restrictive covenants is a near sure-fire way to make sure there is sufficient consideration.  Some states, like Oregon, even mandate it in their laws.

Back in June, I talked about the standard that courts will follow in deciding whether or not to enforce a non-compete agreement between an employer and an employee.  (Go read it here first.)

But many employers want to know something more straightforward: How long can I make the restrictive covenant in my agreement; in other words, how long can the non-compete provision be?

The answer, of course, is “it depends” — in general, the higher-ranked the employee, the broader the scope of the non-compete.  And it also depends on other factors, such as the type of businesses the employee would be prevented from working for, and the geographic nature of the restrictions.

Of course, that’s not a satisfying answer either because again, the central questions is, what’s the maximum amount of time that a court will enforce a non-compete agreement?

In Connecticut, two years is seen by some as the typical time period for enforcing a non-compete agreement, as one case ruled back in 1988.

But where the time restriction is accompanied by a narrow geographic or industry restriction, courts have granted non-competes of five years.  Here are some examples:

Can you do something longer? Perhaps. In one reported instance in another state, a ten year non-compete agreement was ruled enforceable! But that’s definitely the exception, rather than the rule.

Indeed, a five-year non-compete isn’t going to work in some (many?) employment agreements.  So before you rewrite all of your agreements to have a broad restrictive covenant, you should check with experienced employment law counsel and figure out if your agreement really is narrowly tailored to meet you needs.  And experienced counsel can also add in certain contract provisions to help in those instances where the courts may have concerns with a broader non-compete.

But if you’ve been wondering if you courts enforce five-year non-compete agreements, the above cases show that it happens — perhaps even with more regularity than you might first think.

In the July/August issue of the Connecticut Lawyer magazine, attorney Joseph Blyskal has the first of a two-part article on the state of restrictive covenants in employment agreements in Connecticut.  I’ve talked about this several times before (most recently earlier this summer), but the Connecticut Lawyer article is recommended reading as well (it’s behind a paywall).

It’s worth reviewing a few key points that can be derived from the article.

First, the author concedes that there has been a lack of controlling cases from any of the key appellate courts lately.  He readily admits that the recent cases do nothing to change the “welll-established standards governing enforceability of restrictive covenants in employment agreements.”

And what is that standard? Over 50 years old, it remains a fact-specific inquiry that “requires the actual impact of particular arrangements on competition [to] be examined to determine whether they have a pernicious effect on competition and lack any redeeming virtue.”

The article then goes on to discuss how various cases apply the factors that courts use to decide whether or not restrictions are reasonable.  Employers are fairing in the middle on a cursory review of the cases.  Where the restrictive covenants are in writing and are not overreaching, courts have upheld them, but too often employers try to enforce overbroad provisions or, in one instance, try to create restrictions after-the-fact.

Another takeaway from the article is the observation that claims are also being made lately on a related law: The Connecticut Uniform Trade Secret Act (CUTSA).  The author teases that this will be discussed further in part two, which will be published later this month.

All told, for those interested in the subject, the article provides a good recap of the state of affairs for restrictive covenants.

The New York Times this morning has an article that suggests that non-compete agreements are being used increasingly in a broader array of jobs.

Pick your fights carefully

His evidence? Well, the article doesn’t cite that.

Though, to the reporter’s credit, in noting the discussion going on in Massachusetts over legislation on the topic, he cites to a trade group’s executive vice president who said, “The ban to noncompetes is legislation in search of an issue.”It quotes one professor as saying “There has been a definite, significant rise in the use of noncompetes, and not only for high tech, not only for high-skilled knowledge positions.”

Connecticut went through this same discussion last year. Indeed, a watered-down bill restricting the use of non-compete agreements passed the Connecticut General Assembly last year.  But Governor Malloy vetoed it stating that the bill left “certain key terms undefined or unclear.”

“As a result” he added, “this bill has the potential to produce legal uncertainty and ambiguity in the event of a merger or acquisition. If I signed into law, costly and time-consuming litigation would likely be required to provide necessary clarity.”

Thus, Connecticut is still following the “common law” when it comes to non-compete agreements — that is, the law that has been developed through court cases over the years.  Even the Connecticut Law Tribune suggested that such a path may be the right one for the state:

Noncompetition agreements have a valid place in today’s economy, but their growing use to stifle healthy marketplace competition, their theoretical underpinnings as a strained corollary to the employment at-will rule and the disproportionate bargaining strength often used by employers to obtain them have infected these contracts with a taint of inherent unfairness and commercial impropriety. There is a need for reform—reform carried out through the process of common law evolution.

The governing principles of noncompete agreements in Connecticut have been fairly well-settled.  As one court stated nearly 40 years ago:

In order to be valid and binding, a covenant which restricts the activities of an employee following the termination of his employment must be partial and restricted in its operation “in respect either to time or place, … and must be reasonable—that is, it should afford only a fair protection to the interest of the party in whose favor it is made and must not be so large in its operation as to interfere with the interests of the public.  The interests of the employee himself must also be protected, and a restrictive covenant is unenforceable if by its terms the employee is precluded from pursuing his occupation and thus prevented from supporting himself and his family.

What does that mean for employers? Ultimately, it means creating a non-compete that is narrowly tailored to protect a legitimate business interest. Having all employees — from your senior vice president to the mail clerk — sign the same agreement with the same restrictions may prove to be its undoing.

There are, of course, exceptions to the rule — security guards, for example. California bans them.  Other states, like Georgia, have statutory restrictions on them.

So before you seek to enforce your non-compete agreement, check with local counsel first to make sure it’s going to pass muster.

 

Last Thursday, I had the opportunity to speak at the Tri-State SHRM Conference held at Foxwoods Resort Casino.  The session was led by Marc Kroll of Comp360 and I thank him publicly for both the invitation and the coordination. But a post about the great work that HR consultants like Marc do is a topic for another post.

If there was a phrase that I’m sure HR personnel never thought they’d hear discussed at a Human Resources conference it would’ve been “data privacy”.  After all, shouldn’t that be something for a Information Technology summit?

But in presenting the topic: “Pirates of the Data Stream: HR’s Role In Securing Corporate Information” to a full room,  it confirmed what I had been seeing anecdotally — that HR personnel have an increasing role in making sure company data remains private.  I was approached aftewards by several people who appreciated the focus on the topic.

There were several suggestions we talked about in detail at the conference.  I’ll highlight just a few things we discussed:

  • Have a policy. Yes, it’s a cliche. But you still need one.  And make sure it’s workable.   Your policy is no good if no one follows it.
  • Train and educate your workforce (with particular emphasis on your senior executives) on the need to take reasonable steps to protect confidential company data.  This can’t just be for new employees, but needs to be an ongoing effort.
  • Audit yourself to determine where your data leakage is coming from. And don’t just focus on the electronic data; your personnel files in paper format still need to be secured as well.  Consider hiring a third-party to help find the holes in your data storage.
  • Use agreements with restrictive covenants that prohibit employee use of confidential data not only when the employee is working for you, but also when the employee leaves.

And lest you think that this is mere scaremongering, the headlines from this morning illustrate that this issue is continuing to move to the mainstream: Target’s CEO stepped down because of a massive data breach last fall.

Human Resources has a significant role to play in preserving company and employee data.  It’s time to begin the discussion at your company if you haven’t already.   If you need assistance in that endeavor, consult your lawyer or your favorite HR consultant.

One of the bills that passed the Connecticut General Assembly last year was a bill that would have limited the scope and use of noncompete agreements.

But as I noted in a post last summer, Governor Malloy vetoed that piece of legislation.

In his veto message, however, he signaled a willingness to agree to some future compromise on the bill noting that “additional protections for employees may be warranted to guarantee a reasonable period of time to review a written noncompete agreement before entering into an agreement in the first instance.”

He went on state that “it would begetter for both employers and employees to receive greater clarity from the General Assembly on this issue next session.”

Late last month, the Connecticut Law Tribune ran an editorial suggesting that a legislative solution may not the best path forward, even in light of what it viewed as employer’s over reliance on them.

Noncompetition agreements have a valid place in today’s economy, but their growing use to stifle healthy marketplace competition, their theoretical underpinnings as a strained corollary to the employment at-will rule and the disproportionate bargaining strength often used by employers to obtain them have infected these contracts with a taint of inherent unfairness and commercial impropriety. There is a need for reform—reform carried out through the process of common law evolution.

Why did the editorial board conclude that legislative remedies are “not the best answer”?Because they are often “drastic and short-sighted”.  The board instead proposed that change come about in “orderly judicial reconsideration and doctrinal evolution.”

The editorial goes on to discuss the issues with noncompete agreements in greater detail and it’s worth a read.  It notes that noncompete agreements “have a valid role to play in Connecticut’s economic mosaic” and that “legislative reform would doctrinally freeze them in time.”

It is advice well worth considering as the General Assembly takes up this task.  It may be best to have no bill, then a lousy one.

(For a look at how one state, Georgia, has tackled this issue with legislation, check out this presentation.)

For employers, now is the time to speak up to your local legislators that a bill on the subject may not be the best path to what they may want to achieve.

It’s the summer and let’s face it, our minds turn to mush.

Cooking up a lawsuit

That’s why reality television thrives in the summer.  Just the ones on food and dining alone could make up an evening: Chopped. Restaurant Impossible. The Next Food Network Star.

(Confession time: I may have watched a few too many episodes of these shows, with a particular fondness for Diners, Drive-ins and Dives.  Have you tried the Connecticut-featured ones?)

So, today’s post requires no heavy lifting. Instead, it’s a peek inside the restaurant industry (h/t to an unnamed Washington, D.C. partner for tipping me off to the story) with its dark secrets exposed.

A new lawsuit filed by a high-end dining establishment in Washington DC alleges that its executive chef abandoned his post before his three year gig was up and is now in breach of his contract.

According to the Washington City Paper, an Indian restaurant “is suing its former chef Manish Tyagi for more than $30,000 the restaurant says it spent on immigration legal fees, housing, training, and marketing for the chef, who left before his contract ran out. The lawsuit also accuses Tyagi of exploiting Rasika’s name and reputation and using “proprietary and confidential business secrets” to obtain a new position.”

Wait a second. Chefs have “proprietary and confidential business secrets”? That is what is alleged here.

In support of the Complaint, a copy of the actual contract is enclosed.  Sadly, though, there are no specifics to what trade secret the restaurant is attempting to protect. So that Tandoori Chicken Tikka recipe I suppose still remains a secret.

The contract also provides for a two year non-compete, though the article suggests that is not an issue here because the chef has set up shop in San Francisco.

(As an aside, the contract also specifies that the chef’s compensation is strictly confidential and he can’t talk about it with others. I wonder what the NLRB would think about that?)

So, lest you think the restrictive covenant craze is only for companies, think again.  Here, even a high end restaurant has put one in to try to lock in a chef from going to its competition.  And from our experience, it is increasingly common for restaurants to try to lock in talent for a period of time, though we’ve yet to see lots of litigation over chefs in Connecticut.  Might that start to change? We’ll see.

I suspect that this case — like many others out there — will settle at some point. Why? Because at the end of the day, these aren’t super-rich chefs fighting over, um, the same piece of pie. The executive chef here made $55,000.  Nothing to sneeze at, but hardly the six figure salary that some might think they would take home.

As I said, secrets exposed indeed.