Non-Compete Agreement Enforceability Following Furlough during COVID-19

Does your company protect itself through non-competition agreements? Has your company furloughed or temporarily laid off employees during the COVID-19 pandemic? If the answer to both questions is “yes,” you should consider having your furloughed employees sign new non-competes when they return to work.

Non-competition agreements are valuable tools for many Indiana businesses. When well drafted, such contracts can protect your company from unfair competition by departing employees who may seek to solicit your customers, steal your employees, and generally use your business models and techniques for the benefit of a competitor. For example, a stock brokerage may ask its brokers to agree not to take similar jobs with its competitors in the same area for a period of time (often, a year or more) after their employment with the brokerage ends. In that way, the brokerage protects its customer relationships if key employees resign or are terminated.

Nevertheless, Indiana courts do not always enforce non-competition agreements. To be enforceable, non-competition agreements must be reasonably tailored in terms of scope, geography, and time to protect the legitimate business interests of your company. Non-competition agreements should ideally be executed by your employees when they begin work for your business. However, Indiana courts have recognized that reasonable non-competition agreements executed during the term of employment are still enforceable if the agreement was entered into based upon the promise of the employee’s continued employment. Clark Sales & Service, Inc. v. Smith, 4 N.E.3d 772 (Ind. Ct. App. 2014).

However, if there is a gap in the employment relationship – whether due to furlough, temporary lay-offs, or otherwise – non-competition agreements entered before the break may not be enforceable afterward against returning employees. See Nightingale Home Health Care v. Helmuth, 15 N.E.3d 1080 (Ind. Ct. App. 2014) (holding that, when an employee who was subject to a non-competition agreement left the business for ten days, the contract did not automatically renew upon his re-hiring).

Many Indiana businesses have furloughed or temporarily laid off employees in light of COVID-19. If those businesses used non-competition agreements and wish to rehire their furloughed employees, we recommend employers consider preparing new contracts that can be executed by the returning employees upon their re-start dates. Otherwise, there is a substantial risk that an Indiana court may follow the Nightingale case and declare that the pre-furlough non-competition agreements do not apply after the reinstatement.

The attorneys of McNeelyLaw LLP have experience in drafting, implementing, and enforcing non-competition agreements. We are prepared to help your company protect itself against unfair competition, and to guide your business as it enters new contracts with returning employees.

This McNeelyLaw LLP publication should not be construed as legal advice or legal opinion of any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.