Recent changes in employment law and changes to the economy and workplace in general, due to the coronavirus pandemic, may require some employers to update their employment agreements and restricted covenant agreements. Discussed below are the top five reasons employers may wish to review and update their restrictive covenant agreements.
#1. No longer applicable to low-wage workers
As of July 1, Virginia employers were prohibited from entering into, enforcing, or threatening to enforce non-compete agreements with “low-wage” employees. Under Senate Bill 480, a “low-wage employee” is a worker whose average weekly earnings during the preceding 52 weeks “are less than the average weekly wage of the Commonwealth” pursuant to VA Code § 65.2-500. This includes interns, students, apprentices, or trainees employed, with or without pay. Low-wage employee also includes independent contractors paid an hourly rate less than the median hourly wage for the Commonwealth.
The prohibition applies to “covenants not to compete,” meaning “a covenant or agreement, including a provision of a contract of employment, between an employer and employee that restrains, prohibits, or otherwise restricts an individual’s ability, following the termination of the individual’s employment, to compete with his former employer.” The Bill states that a “covenant not to compete shall not restrict an employee from providing a service to a customer or client of the employer if the employee does not initiate contact with or solicit the customer or client.” The Bill applies to applicable non-competes entered into on or after July 1, 2020. Employers are also required to post notice of this new legislation in the workplace.
#2. Avoid civil action and penalties
Employers that violate Senate Bill 480 discussed above may be subject to a civil action and civil penalties of $10,000 per violation. Since the Bill prohibits employers from entering into non-competes with low-wage employees, employers that utilize non-competes for such employees should likely review and update their agreements to avoid liability for violations.
#3. Increase in Remote Workers
Restrictive covenants are typically unenforceable unless they are narrowly tailored to protect the legitimate business interests of the employer. “Narrowly tailored” often requires a limitation on the geographic scope of the covenant. The recent rise in individuals working remotely may bring about questions about the intersection of restrictive covenants and these individuals working remotely. Now, individuals may be physically working within a geographic area, but directing their work to another area.
Prior to the coronavirus pandemic, a New Jersey court considered the application of a restrictive covenant when a prior employee was telecommuting. In Oticon, Inc. v. Oliver, the New Jersey court held that an individual did not violate a non-compete when telecommuting to a location outside of the geographic scope of the non-compete. The court reasoned that it was no different than if the individual had physically commuted to a location outside of the restricted area. However, the non-compete at issue there didn’t address telecommuting. With the increase of positions that work remotely, employers may wish to consider whether or not to include provisions specifically addressing telecommuting in their restrictive covenants. Whether or not such covenants are enforceable will depend on whether they are viewed as narrowly tailored to protect the legitimate business interests of the employer.
#4. Pandemic related changes
When a court decides whether or not to impose restraints on a former employee’s ability to engage in business activity because of the existence of a non-compete agreement, the court typically considers the interests of the public and engages in a “balancing of the harms” analysis. Since the start of the pandemic, some courts have considered the current circumstances due to coronavirus when engaging in this analysis. Specifically, courts have considered the high unemployment rates and limitations individuals may face when seeking new employment. These considerations may weigh in favor of employees and against the enforceability of restrictive covenants, at least during the uncertain times resulting from the pandemic and related economic disruptions. While circumstances still weigh in favor of employees, employers may wish to review existing agreements to ensure they’re sufficiently “narrowly tailored” to increase chances courts will find them enforceable.
#5. Confidentiality concerns
Another consequence of the pandemic and increase in remote working is employees using personal devices and networks for work purposes. These personal devises may be less secure and confidential information or trade secrets may be stored on personal devices rather than on work devices with additional security measures. Additionally, information that may typically be communicated orally at team meetings or in secure settings may instead be written in emails and at risk of confidentiality issues. Employers may wish to review and update confidentiality and non-disclosure agreements to cover new circumstances and policies. Employers may also wish to create policies requiring emails to be labeled as “confidential” and provide training on current and updated confidentiality procedures.
In summary, due to the change in the law, pandemic, and related factors, all Virginia employers should review and, as appropriate, update their restrictive covenants.
- For additional information on restrictive covenants, visit this page.
- For information on enforceability of restrictive covenants in Virginia, visit this page.
- Finally, for a video by Merritt Green on Non-Compete Agreements, click https://youtu.be/J7y04v8Lhao.
If you need more guidance or information, contact the employment law experts at General Counsel, PC today at 703-991-7973. Our attorneys are experienced in reviewing, drafting, negotiating, and litigating non-compete and non-solicitation agreements for businesses and individuals across Virginia, specifically in Fairfax County, Arlington, Loudoun County, and Prince William.