Employee's Receipt Of Additional Severance After Voluntarily Resigning Supports Enforcement Of Noncompete Agreement

The Bottom Line

• To the extent that an employment contract does not already condition receipt of post-employment benefits on compliance with a noncompete, employers should consider offering departing employees (especially employees who are departing voluntarily or are terminated for cause) additional severance in exchange for a noncompete.
• Employers should offer benefits above and beyond what the employee is otherwise entitled to, and document that they are consideration for the restriction.
• If an employer takes this step and the employee proceeds to violate the noncompete, the employer should consult with counsel.

The enforceability of noncompete agreements is a perennially buzzworthy topic in New York and across the country. Generally, New York courts will enforce a noncompete agreement only to the extent that it is reasonable and necessary to protect valid business interests.

However, under New York's "employee choice doctrine," courts are more likely to enforce a noncompete agreement where an employee voluntarily resigns or is terminated with cause and receives post-employment benefits they would not otherwise be entitled to in exchange for agreeing to the restriction. The New York Supreme court recently reaffirmed this principle in Escalante v. Hotel Asset Value Enhancement, Inc.

The Employee Choice Doctrine

The employee choice doctrine applies when employers condition post-employment benefits, such as a severance payment, on compliance with a noncompete or other restrictive covenant. Under the doctrine, if an employee has the choice between (1) retaining the post-employment benefits and honoring the restrictive covenant or (2) forfeiting the benefits and avoiding the restriction, the restrictive covenant will be "enforceable without regard to reasonableness" as long as the employee "voluntarily" resigned or was terminated for cause.

The Escalante Decision

In Escalante, the plaintiff (Escalante) sought a declaratory judgment that the noncompete clause he had signed with the defendant (hotelAVE), his former employer, was unenforceable. When Escalante resigned from his employment with hotelAVE, he signed a separation agreement that reaffirmed his existing 24-month noncompete in exchange for a lump-sum severance. The agreement expressly noted that certain benefits exceeded what he was otherwise entitled to.

During negotiations of the separation agreement, Escalante specifically asked that one company, Aimbridge, be excluded from the scope of the noncompete. After hotelAve told Escalante that excluding Aimbridge would result in a decreased severance package, Escalante apparently dropped his request to exclude Aimbridge, signed the separation agreement, and received the full severance package. Three months later, however, Escalante began working for Aimbridge in breach of his noncompete. He then brought suit seeking to invalidate the noncompete.

The court dismissed Escalante's claim based on the employee choice doctrine. The court grounded its decision on several facts. Key factors included:

1. Escalante had voluntarily resigned from hotelAve, thereby triggering the employee choice doctrine.
2. He had negotiated a larger severance in exchange for the noncompete, knowing that the scope of the noncompete included Aimbridge.
3. Escalante received severance benefits to which he was not otherwise entitled as consideration for the noncompete.

Based on these facts, the court enforced the noncompete. The court essentially held that employees cannot have their cake and eat it too — if an employee voluntarily leaves their job and agrees to a noncompete in exchange for benefits to which they are not otherwise entitled, they cannot keep the benefits while circumventing the noncompete.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.