Monthly Archives: September 2012

Legal Protections Against Competition by Former Employees

By John Whipple, Esq.
jwhipple@pashmanstein.com

What options are available to New Jersey employers trying to protect its business from a former employee who intends to compete?  The general mechanism for such protection is what is known as a “restrictive covenant.”  A restrictive covenant can come in a number of forms including confidentiality agreements, covenants not to compete (non-competition agreements), and non-solicitation agreements. As a general proposition, restrictive covenants are enforceable in New Jersey, though the permitted scope of these agreements varies depending upon the particular circumstances of the business.  The two key inquiries are: (1) what conduct does the employer want to restrict?; and (2) how does it intend to restrict it?

Employers have an interest in protecting a variety of “assets,” including its customers, trade secrets, confidential business information or certain client relationships. Generally, client relationships and current customers are subject to protection. However, covenants that attempt to simply stifle competition will not be enforceable. Trade secrets and proprietary business information, such as customer lists, pricing information and trade secrets, are protectable in New Jersey.  On the other hand, commonly known information, such as client addresses or information that is in the public domain, is not protectable. In addition, prospective customers are ordinarily not a protectable interest under New Jersey law.

In New Jersey, an employer can have an employee sign a restrictive covenant at any time, provided it is either a condition of initial or continued employment.  A refusal to sign a restrictive covenant can provide a legal basis for either refusing to hire or terminating an employee.

Whether a restrictive covenant is enforceable depends on whether the terms of the restrictions are reasonable.  Courts will look at whether the restrictive covenant is necessary to protect the legitimate interests of the employer, imposes no undue hardship on the employee and does not injure the public.  Legitimate interests of the employer include protection of trade secrets, confidential information and proprietary customer information.

Courts often view covenants that attempt to restrict an employee from working in his or her trade to be unenforceable. Covenants that prevent an employee from using his or her skills learned during the course of employment are usually unenforceable. Finally, even if the restrictive covenant is otherwise enforceable, the Courts may not enforce it if it would reduce marketplace competition.

In addition to the factors set forth above, New Jersey Courts examine the overall reasonableness of a restrictive covenant. The more narrow the restricted conduct the more likely it will be enforced. Generally, if the restriction is limited in scope, duration and geographic location, it will be enforced. Although it is a factually sensitive analysis, one to two years is frequently accepted as reasonable. Geographic limitations depend on the circumstances and the areas in which the employee performed his or her job.

Again, reasonableness is the key, whether in attempting to enforce a restrictive covenant or attempting to have an employee execute one.  When presented with a restrictive covenant, New Jersey courts are authorized to revise its terms if deemed unreasonable, though there is a risk that in doing so a court may render it hollow or meaningless. Therefore we recommend that an employer considering such protections have an attorney review the proposed restrictions prior to presentation to an employee for signature.

Federal Appeals Court Holds Employer Paying Award under Title VII for Back or Front Pay Must Make Deductions for Income and FICA Taxes

By Andrew M. Moskowitz, Esq.
amoskowitz@pashmanstein.com

Ian Noel was terminated in 2005 from his job at the Central New York Psychiatric Center.  Mr. Noel alleged that his termination was in retaliation for his cooperation with an investigation into racial discrimination and therefore in violation of Title VII of the Civil Rights Act of 1964.  A jury ruled in his favor and, after an appeal, Mr. Noel obtained a judgment against his former employer, the State of New York, for $318,217.48.  Of this amount, $280,000 was for back and front pay.

In issuing payment to Mr. Noel for the back and front pay portion of the judgment, the State of New York made deductions for state and federal income tax, Medicare, and Social Security.  It also deducted $8,400 for a “retirement contribution” and $19.06 for union dues.  Noel objected to these deductions and asked that the lower court require the State to pay him the full dollar amount of the judgment.  After the lower court granted Mr. Noel’s application, the State appealed.

In Noel v. New York State Office of Mental Health (2d Cir. Aug. 31, 2012), the Second Circuit Court of Appeals—which covers federal district courts in New York, Connecticut and Vermont—held that the State of New York was correct to withhold money for federal and state income taxes as well as Federal Insurance Contributions Act (“FICA”) taxes.  Indeed, the Court held that, because payments made pursuant to Title VII awards for back or front pay are wages as defined under the Internal Revenue Code, such deductions are mandatory.   However, the Court held that, in withholding monies for retirement contributions and union dues, the employer in Noel erred.

Under Title VII, an employee is entitled to recover back wages and benefits—known as back pay— as well as an award for future lost wages and benefits, which is called front pay.  The Court stated that it had “little difficulty” in reaching the conclusion that both back pay and front pay are “wages” as defined by the Internal Revenue Code.  The Court rejected the argument that the award should not be considered wages because it was not for services actually performed by an employee.  The Court noted that both back and front pay “are remuneration paid to an employee to compensate for what he would have earned had he not been the victim of discrimination.”  Therefore, the Court concluded that these amounts constitute wages.

The only conclusion that employers in New York, Connecticut and Vermont can draw from the Noel opinion is that, in instances in which a former employee alleges an entitlement to lost wages due to a violation of Title VII of the Civil Rights Act of 1964, any settlement of such a claim must make deductions for income and FICA taxes.