Non-compete and other restrictive covenants are commonly used by employers in many industries to protect their trade secrets and legitimate business interests. While employees may be willing to sign them when they take a new position, they are often frustrated by them when it comes time to look for a new job. Some employees take to Google to see if their agreement is enforceable. What they find on Google often provides them with false confidence that their non-compete or other restrictive covenant is unenforceable, but relying on Google research in the complicated, fact-sensitive legal morass of non-compete agreements is risky business. True, a Google search can turn up numerous court opinions that express the view that non-competes are viewed unfavorably by courts as anti-competitive restraints on trade and, as such, are narrowly construed and enforced only to the extent that they protect a legitimate business interest of an employer. However, those cases may or may not be useful in deciding whether your restrictive covenant is likely to be enforced. First, the law governing non-competition agreements varies from state to state. Thus, an opinion by a court in California applying California law (which bars enforcement of restrictive covenants except under specific, narrow circumstances), for example, is of little help in assessing whether a court in New Jersey or Pennsylvania, where non-competes are routinely enforced, is likely to enforce a restrictive covenant under that state’s laws. Making the analysis even more complicated, courts decide whether to enforce restrictive covenants based upon a thorough review of the specific language used in the agreement; even slight variations in the language of the agreement can lead to vastly different results. In addition, because they are viewed as anti-competitive, a court will generally enforce one only if it is well drafted so that its restrictions narrowly target the business interests at issue and nothing more. The finer points of enforcing restrictive covenants, such as non-competes, are too detailed to address here, but employees with employment agreements that contain restrictive covenants and businesses that are hiring employees subject to them should not rely on Google to assess their enforceability or their liability for a breach.
Savvy employer takeaways: Employers should have an experienced employment lawyer evaluate the enforceability of their employees’ post-employment restrictions and the enforceability of post-employment restrictions by which prospective employees may be bound. Employers should also require candidates to disclose whether they are subject to any restrictive covenants before offering them employment.
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In a ruling that challenges the adage that quitters never win, the New Jersey Appellate Division determined that an employee who resigned her job was eligible for benefits reversing a decision of the Unemployment Appeals Tribunal. In re Cottman, the applicant was denied unemployment benefits on the basis that she voluntarily resigned her employment. Cottman did not dispute that she resigned her employment when her babysitter cancelled and she had no child care available for her child. When Cottman tried to call out of work, her former employer did not dispute that Cottman was told by her supervisor she may be terminated if she did not appear for work or find a replacement to cover for her shift. While the Appellate Division acknowledged that leaving work for personal reasons, no matter how compelling, ordinarily disqualifies an applicant from receiving benefits, the Court held Cottman was not disqualified because she only resigned under the threat of being terminated. The Court found her violation of her employer’s policy would have led to termination based on its past practice even though her supervisor used the word “may.” Since the Court found Cottman would have been qualified for benefits if she were terminated and she only resigned under the threat of termination, it reversed the Appeals Tribunal’s decision denying benefits.
Savvy employer takeaways: Employers should not threaten employees with termination unless they really mean it, and they should understand that employees who react to such threats by resigning may, under the right circumstances, be eligible to collect unemployment.
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In Philadelphia, a federal court judge entered a nearly $4.6 million judgment in favor of a group of exotic dancers and against a strip club, the Penthouse Club. In the class action, the dancers argued they had been mischaracterized as independent contractors instead of as employees and, as a result, the dancers were deprived of minimum wages and tips they earned. The club argued it was not an employer and merely rented space to the exotic dancers, whom the club treated as independent contractors, but the jury rejected that argument and found the club was an employer. In this case, the club was deemed an employer because, among other things, it had the power to ban dancers (or fire them if they were employees) for violating club rules. The club required dancers to pay “tip outs” to other club employees such as fees to management, the DJ, the “house moms,” the emcee, security workers, and valets. As a result, the dancers argued their wages and tips, which they were entitled to keep as employees, were diverted. This fact pattern is increasingly common because dancers from across the country assert similar claims, but it also extends to other businesses that use similar pay models, such as exercise studios.
Savvy employer takeaways: Proceed with the utmost caution when using the independent contractor designation for service providers, ensure tipped employees are paid in accordance with applicable federal and state laws, and impose limits on tip-pooling and other tip-sharing rules.
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