Understanding Arizona Non-Compete Waivers
January 27, 2021
Understanding Arizona Non-Compete Waivers
The recent $22 billion Schwab-TD Ameritrade merger month created a behemoth online brokerage firm. Unfortunately, it also resulted in the layoffs of nearly 1,000 workers, mostly TD Ameritrade. Though many of these workers received severance pay, some lower-level staff claim to have been wrongfully prevented from applying for new jobs, an already daunting task due to COVID-19, as a result of overly restrictive non-compete agreements.
The formal non-compete agreements are imposed on managing directors (the highest-ranking employees at TDA) and employees who were previously granted restricted stock units under TDA’s award agreements. Severances, based on length of service, were offered to these employees in exchange for signing a 12-month term non-compete. While this may have been a substantial sum for managing director-level employees, employees who were three to four tiers down received less severance but were still bound by the same non-compete terms.
Many of these employees have sought non-compete waivers from Schwab-TDA but reported that most have not been granted, despite employee claims that they were told at layoff that Schwab-TDA would be “extremely flexible when reviewing requests.”
Additionally, employees have not been provided any clear guidelines on how to succeed on a waiver request, but, typically, waivers are only granted in situations where the former employee is patently unthreatening (i.e., a low level and unskilled employee seeking a position in a far-off international market where the company does not compete).
One former employee did get approval for a job in California with competitor Fidelity. This may be due to California’s historically lax stance on enforcing non-compete agreements.
How to manage non-compete enforcement and whether or not to waive them all together are issues that many employers find themselves navigating, especially in the face of unexpected or widespread layoffs. Below, we will discuss some things to keep in mind as well as ways to limit your exposure when working with former employees.
Every state has different requirements as to what is or is not enforceable. Because of that, it is important to review the specific situation of each non-compete agreement carefully. The general rule is that non-compete agreements must serve the purpose of protecting an employer’s legitimate business interest, such as:
– Protection of confidential information or trade secrets
– Protection of client lists or customer relationships
– Protection of highly trained or skilled employees
Consistency is Key
Inconsistent enforcement of non-compete among former employees can call into question whether an employer has a legitimate interest in preventing a former employee to work for a competitor and if they have taken reasonable and uniform steps to enforce protection.
Some of the chaos surrounding Schwab-TDA’s treatment of these non-compete agreements seem to stem from TD Ameritrade’s previous informal policy of looking the other way when employees bound by non-compete agreements went to work for one of their competitors.
Though non-competes are typically established with the understanding that their intent goes beyond the verbatim language of the contract, meaning employers can choose to have flexibility in deciding to enforce them, inconsistent enforcement criteria can cause problems and raise claims.
How to Manage Waivers
Employers should take steps to minimize the risk that a decision to waive a non-compete for one former employee will preclude them from effectively arguing that their legitimate interests are not worthy of protection in the future.
In the event that a non-compete is waived, employers should memorialize, on a case-by-case basis, their rationale for waiving or not seeking enforcement of that particular employee’s agreement. The rationale can also be included in a settlement agreement or as part of a severance package. With this documentation in place, you will be easily able to distinguish waiver incidents from those where you believe the non-compete must be enforced to protect a legitimate business interest. You will also consistently show that you review and consider certain criteria when making such a decision.
Here are some reasons that can be used to differentiate non-compete waiver decisions from enforcement decisions:
The Employee Is Not Seen As a Threat
Here a company could reference characteristics like:
– A lower-level employee’s limited access to trade secrets or sensitive information
– An employee’s extensive history as a trusted member of the company
– The return of all confidential information in the employee’s possession at the time of termination
– The employee’s continued assistance with transitioning ongoing business even after departure
Lack of Resources
As a practical matter, if an employer lacks the resources necessary to enforce the agreement at a particular time, they should document that they will not pursue enforcement, but may for future employees should resources become available.
Employers can acknowledge that enforcement of the non-compete may impose an unintended, undue hardship on the employee. In doing so, employers should document the unique circumstance of that employee so as to differentiate future circumstances of enforcement.
Alternatives to Both Waiver & Strict Enforcement
An employer can seek to implement a nondisclosure agreement with their current employees to prevent them from disclosing confidential information and trade secrets to anyone outside of the business for the duration of an employee’s employment and for a period of time following termination.
An employer can require that an employee agrees that if they go to work for a competitor, they will not solicit any of their former employer’s clients or employees, nor will they use or provide any of the former employer’s confidential information at the new position.
Each of these agreements provide a way for employers to protect their legitimate business interests, while at the same time allow flexibility to former employees to secure new positions.
Given the number of layoffs implemented by Schwab-TDA, they will be dealing with non-compete issues for several months. It is also important to recognize that many courts, including many in Arizona, are hesitant to enforce non-compete agreements against employees who were involuntarily terminated. Each state had different rules and requirements for the enforcement of restrictive covenants. Please speak to an attorney about your specific situation.
As an employer, you can avoid similar confusion by adhering to the guidelines above and consulting with an attorney. A thorough review and update of your agreements may be necessary to make sure you clearly describe the legitimate business interest you are seeking to protect. Also, an attorney can assist with drafting your employment agreements and human resource policies so as to ensure you are as protected as possible as well as advise on future enforcement disputes and waiver decisions.
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