Annual Review Helps Employers Ensure Compliance and Enforceability of Employment Agreements

By Marla B. Matthews

March 2007

As an employer, when is the last time you reviewed existing employment agreements, noncompete agreements and HR policies and manuals? A recent federal court decision involving the enforceability of a 27-year-old noncompete agreement should serve as a reminder to employers that employment agreements and HR policies should be reviewed and updated on an annual basis to ensure compliance and enforceability.

In McGough v. Nalco Co., No. 06-1466, 2006 U.S. App. LEXIS 25972 (4th Cir. Oct. 19, 2006), a former employee of a water treatment chemical company asked a court to decide whether a 27-year old covenant not to compete was enforceable. Hired by the company in 1978, the 24-year-old began work as an entry-level employee. From 1978 to 1989, he worked as a sales representative in Alabama. From 1989 to 2005, when he left the company to work for a competitor, the employee worked “at least in part” in West Virginia. During the last two years of his employment with the company, he served as an industry technical consultant, assisting coal preparation plants in Indiana, Illinois, Kentucky, Ohio, West Virginia, Pennsylvania, Virginia, Alabama, Washington and Eastern Canada.

Shortly after beginning work for the company in 1978, the employee signed a “Field Representative Agreement.” This agreement contained a covenant not to compete for a period of two years following termination. The geographic scope of the covenant not to compete included the entire United States.

After the employee asked a court to determine whether the covenant not to compete was enforceable, the company sought a preliminary injunction to prevent the employee from continuing to work for his new employer while the litigation was pending. The trial court denied the company’s request for a preliminary injunction and the appellate court affirmed this decision.

In order to obtain a preliminary injunction, the company had to prove that the court would likely find the noncompete agreement enforceable. Because the agreement contained a nationwide bar on competition for a period of two years, both the trial court and the appellate court held that the agreement was not reasonable and was not enforceable under West Virginia law. The appellate court seemed particularly troubled by the fact that rather than being limited to a ban on competition in the region where the employee had worked over the past two years, the employee would be banned from working for a competitor of the company anywhere in the country.

Although this case was decided under West Virginia law, New Hampshire courts also use a reasonableness standard when reviewing covenants not to compete. As is true in many jurisdictions, New Hampshire courts are wary of covenants not to compete because they restrict a person’s ability to procure employment. Thus, when considering whether a covenant not to compete is enforceable, New Hampshire courts employ the following three-step analysis:

(1) Is the restriction greater than necessary to protect the legitimate interests of the employer?

(2) Does the restriction impose an undue hardship on the employee? and

(3) Is the restriction injurious to the public interest?

If the answer to any of these three questions is yes, the court will not enforce the covenant.

Because circumstances change so quickly in today’s business world, this case should serve as a reminder to employers that all employment and noncompete agreements should be reviewed annually. Employers need to determine whether, due to changed circumstances, a court is likely to find that a covenant not to compete is still reasonable. If a covenant not to compete needs to be modified, all of the traditional principles of contract formation apply, including whether this new agreement is supported by consideration. Legal counsel can assist with this process.

In addition to reviewing employment and noncompete agreements, employers would be wise to conduct an annual review of HR manuals, handbooks, policies and procedures. This review will help ensure compliance with the law and may help to avoid human resources related complaints.

With the explosion of employment-related legislation, it is important for employers to review their employee handbooks annually. The policies in the handbook should comply with state and federal law and be consistent with the employer’s actual practices. The same is true for job descriptions. As the title and responsibilities associated with a particular position change, so too should the job description.

Employers should also review their policies on workplace harassment. In order to have this defense available in litigation, employers must demonstrate a sincere commitment to using this policy to deal with harassment issues that arise in the workplace. It simply isn’t enough just to have a policy. If additional training is needed for managers or other employees, that should be scheduled as well.

If an employer already has a records management/document destruction policy, this policy should also be reviewed annually in light of changed practices within the company as well as new technology. If an employer is part of a regulated industry (i.e. insurance company, bank), state and federal law must be consulted to be sure that an employer’s destruction policy does not conflict with record retention requirements. If an employer does not have one of these policies in place, it is a good time to develop one.

Finally, employers should consider conducting an annual review of employee personnel files. Is information missing? Are unnecessary items being placed in personnel files? An employer’s own review of employee personnel files is likely to be less stressful than if the state or federal Department of Labor stops by to conduct an audit.

lthough it seems that there is never enough time to accomplish all of the tasks that are on an employer’s “to do” list, an annual review of employment agreements, noncompete agreements, HR policies and handbooks may help to avoid future HR-related claims which are sure to be draining on an employer’s time and resources.