Remote Working Means It’s Time To Revisit Your Restrictive Covenants

Fox Rothschild LLP

Fox Rothschild LLP

The COVID-19 pandemic has accelerated an already shifting work landscape. Prior to the pandemic, some employees in certain specific positions worked remotely. Now, by necessity, the practice has become widespread. With this shift, many employers have come to realize that remote working is an easy and convenient alternative to the traditional in-office workspace. As the office environment changes, so too must the measures employers take to protect their business interests. One such measure — restrictive covenants — is often analyzed in terms of reasonableness of duration and geographic scope, but what happens when remote working renders the geographic scope meaningless? 

Restrictive covenants, such as non-compete or non-solicitation agreements, are generally disfavored because they act as a restraint on trade. While some jurisdictions ban them outright, most jurisdictions require that, to be enforceable, the restrictions must be narrowly tailored to protect a legitimate business interest.  That means that such agreements must be reasonable in both duration and geographic restriction. For example, a court may find that a nationwide non-compete imposed by a regional business is too restrictive and not designed to protect an actual business interest. Therefore, restrictions are generally more appropriately tied to a specific geographic distance from the employer’s location. 

Location, Location, Location

With remote working, however, an individual can be physically located within a geographic area, but direct their work to a location outside of that area. Some may argue that the legitimate business interest being protected is not really the physical location of the individual, but rather, the work they are performing. But of course, an employer that is concerned about a former employee working for a competitor will not take solace in that explanation. The former employer will argue that the legitimate interest is the employee’s knowledge of the business, including its confidential and proprietary business information, and therefore, the location of the employee is what matters. 

Before the pandemic, at least one New Jersey court examined this issue. In Oticon, Inc. v. Oliver, et al., Docket No.: SOM-C-12049-19, the court held that telecommuting to a location outside of a non-compete’s geographic restriction is not a violation because it is no different than physically commuting outside of the restricted area. Like most non-competes, the agreement in that case did not specifically address the issue of telecommuting. But relying on Calabotta v. Phibro Animal Health Corp., 460 N.J. Super. 38 (App. Div. 2019), the court held that the onus is on the employer to draft the agreement in a manner that addresses this issue. 

In a Related Opinion

In Calabotta, the Appellate Division in New Jersey touched upon the issue, but did not address it directly. There, the court examined whether the New Jersey Law Against Discrimination, a statute that is meant to be construed broadly, can apply to employees who are working outside of New Jersey for an employer located in New Jersey. While at first glance, this case appears to be unrelated to the issue of restrictive covenants, the court made two parting observations that were instructive to the Oliver court’s equitable consideration of that issue and are particularly prescient now. The court stated:

First, we are cognizant that the … analysis becomes increasingly more complicated in our world as employees and their supervisors more often perform their work tasks remotely in multiple locations rather than in a traditional common physical location. The “office” where an individual works can be an elusive or non-existent concept these days. Work is now conducted often via digital means transcending jurisdictional boundaries. These trends invariably complicate the application of geographic factors in determining which states' laws apply to an employment relationship, absent agreement of the parties. We do not presume in this opinion to begin to resolve those innumerable hypothetical scenarios.

Our second parting observation is that we expect employers will attempt to resolve uncertainty about the governing law by including in employment agreements clear and explicit choice-of-law provisions

(Emphasis added).

In other words, employers need to get with the times and that means addressing these new issues directly in their agreements with employees. 

This is even more relevant today than it was a year ago. The pandemic has softened opposition to remote working among its former skeptics, whether company leadership or individual managers. Employers cannot sit idly by while the world around them changes. It is time for employers to revise their existing employment agreements and restrictive covenants and address this issue directly. 

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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