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Restrictive Covenants: The Employee Choice Doctrine Explained … Yet Again

The “employee choice” doctrine is one of those employment terms that is as misunderstood as “right to work,” “employment at will” and my personal favorite, “labor lawyer”.  But a recent New York Federal court in IBM v Smadi, spelled it out pretty clearly: the employee choice doctrine is alive and well and has just a few simple components.

The basics: the employee choice doctrine is an exception to the usual requirement that a covenant not to compete be reasonable.  In other words, reasonableness be damned if an employee has the choice between not competing, and receiving certain contractual benefits, or competing and giving up those benefits.  But the Smadi case of reminds us of a few other principles that supplement this straightforward doctrine.

First: the employee must voluntarily leave employment.  The point, of course, is that it has to be the employee who makes an actual choice between competing or receiving a benefit.  If the employee is terminated, the employer has in fact made the choice for the employee and any restrictive covenant the employer seeks to enforce will be subjected to the usual reasonableness standard.

Second: the employer must demonstrate that it continues to be willing to employ the individual.  This is a natural follow-on to corollary number one above: the employer must apparently sincerely regret the employee’s decision to leave.

Once these two components are met, an employer is free to condition future benefits on the employee’s choice – and to allow forfeiture or rescission at some future date though presumably, there must be a specific end date.  In the IBM case, the court found a two year time period to be reasonable.

Restrictive covenants continue to challenge employers.  But a carefully drafted non-compete provision providing for forfeiture of benefits may, in certain circumstances, be an excellent method to guide post-employment behavior.

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Jennifer B. Rubin is a Mintz Member who advises clients on employment issues like wage and hour compliance. Her clients range from start-ups to Fortune 50 companies and business executives in the technology, financial services, publishing, professional services, and health care industries.