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COVID-19 heightens risk

With so many employers trimming work forces in response to the Covid-19 pandemic, many terminated individuals will be taking positions with competing firms. Employers may be tempted to overlook the terms of restrictive covenants so their terminated workers can earn a living. Doing so, however, may jeopardize the employer’s future profitability.

“Employers who choose not to seek enforcement of restrictive covenants during this time should understand that failure to do so may hinder later enforcement,” cautions Joon Hwang, Shareholder in the Tysons Corner, Va., office of Littler Mendelson, P.C., the nation’s largest law firm defending employers in labor and employment disputes. He points out that future employees who breach restrictive covenants may assert a waiver argument—that the employer’s prior forbearance proves a lack of legitimate business interest to support enforcement of the agreements.

There is a solution to this conundrum. Hwang suggests employers take steps to minimize the risk their well-meaning inaction may have by memorializing their justification for not seeking to enforce the restrictive covenants. Legitimate reasons might include:

  • A lack of resources necessary to enforce the agreements due to the impact the pandemic has had on the employer's business
  • A decline in business from certain clients, or their bankruptcy
  • Model records of former employees for whom restrictive covenants have been unenforced, including the fact that the individuals returned all confidential information and agreed not to solicit customers serviced

Hwang offers another tip: “It would be helpful for employers to explicitly state that the decision not to enforce at this time should not be interpreted as a waiver of any future right to enforce the restrictive covenants against other former employees.”

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