New york law employee non solicitation agreements

By Jeffrey S. Boxer, Esq., Alex Malyshev, Esq., and Megan E. McKenzie, Esq., Carter Ledyard & Milburn LLP

(May 17, 2022) - Carter Ledyard & Milburn attorneys Jeff Boxer, Alex Malyshev and Megan McKenzie discuss New York state court considerations of post-employment covenants including nonsolicitation of employees clauses.

In today's knowledge-based economy, an employer's most valuable asset is often its workforce. This is because of both the employees' innate skills and the client relationships and employer-specific industry knowledge that employees develop during their employment (often with the significant support of the employer).

New York, like most states, is an "employment-at-will" state — giving both parties the ability to terminate an employment relationship with little or no notice and for any (non-discriminatory) reason. Nevertheless, New York law recognizes that, in appropriate circumstances, the parties can agree on post-employment restrictive covenants that limit an employee's actions during and, more importantly, after employment.

There are several kinds of post-employment restrictions (also known as "covenants"). The first, and perhaps the most well-known, is a non-compete agreement. In a non-compete agreement, an employee agrees not to do certain types of work for a competitor of the employer for a specified period of time, often in a defined geographic area.

The second type of post-employment restriction prevents the departing employee from soliciting or encouraging certain clients of the former employer to terminate or reduce their business with the employer (often with the intention of having those clients following the employee to their new employer). This is generally known as a non-solicit of clients.

The third type of post-employment restriction (and the focus of this article) is a no-hire or non-solicitation of employees provision. A non-solicit of employees provision prevents a departing employee from soliciting or encouraging other employees to leave the employer. A no-hire provision prevents a departing employee from participating in hiring employees of his or her former employer.

In recent years courts have begun to scrutinize non-solicit of employees and no-hire agreements more closely.

Under New York law, a post-employment restrictive covenant is enforceable if it (1) is no greater than is required for the protection of the legitimate interest of the employer, (2) does not impose an undue hardship on the employee, and (3) does not injure the public. 1

Broadly speaking, an employer has a legitimate interest "(1) to prevent an employee's solicitation or disclosure of trade secrets, (2) to prevent an employee's release of confidential information regarding the employer's customers, or (3) in those cases [where] the employee's services to the employer are deemed special or unique", including where the employee developed unique relationships with clients at the employer's expense. 2

In determining whether a specific restriction is no greater than needed to protect the employer's legitimate interest, courts have looked at the reasonableness of the restrictions as weighed against the hardship they create for the employee. Whether a particular restriction is reasonable depends on the underlying facts: what may be reasonable in one situation might not be reasonable in a different situation.

Traditionally, this test for enforceability has been applied extensively to agreements containing non-competes and non-solicitation of client provisions, but there was little judicial guidance when it came to non-solicits of employees. 3

This has changed in the past 10 years as courts have confirmed that the test for enforcing other types of restrictive covenants applies with equal force to non-solicitation of employees provisions. 4 While traditional wisdom has been that non-solicitation of employees provisions are still more likely to be enforced because they are less burdensome to departing employees, recent decisions show that courts have begun to look at these provisions more closely and will not act as a "rubber stamp."

As is the case with any other restrictive covenant, a non-solicit of employees or no-hire provision must protect a legitimate interest of the employer, namely protection of the employer's trade secrets, confidential information, good will, or unique client relationships. In the context of provisions precluding solicitation or hiring of employees, courts have now explained that the employer's legitimate interest is not tied to whether the departing employee who is soliciting others had access to trade secrets or confidential information or embodied the employer's good will and unique client relationships.

Instead, the legitimate interest is in protecting the trade secrets, confidential information, good will, or unique client relationships tied to the remaining employees who are being solicited. In other words, the employer has a legitimate interest sufficient to support enforcing a non-solicit or no-hire of employees if the employee being solicited has access to trade secrets or confidential information or embodies the employer's good will or unique client relationships.

Courts have rejected attempts to expand an employer's legitimate protectible interest in the context of solicitation or hiring of employees.

For example, courts have indicated that the following were not legitimate interests that could support no-hire or non-solicit of employees provisions:

To be enforceable, a non-solicit of employees or no-hire provision must be no broader than needed to protect the employer's legitimate interest and must not impose an undue hardship on the employee. As a practical matter, this means that the restriction must be narrowly tailored and reasonable. Reasonableness depends on the specific facts of each situation, including the length of the restriction, the scope of the restriction, which remaining employees the restriction purports to cover, whether there is a geographic or other limit to the restriction, and the position of the departing employee to whom the restriction applies.

Courts also have recognized that a covenant not to solicit or hire employees is "inherently more reasonable and less restrictive" then a covenant not to compete. 6 This is because a non-solicit of employees does not "prevent a former employee from pursuing his or her livelihood." 7 "[A] non-recruitment clause, as opposed to a non-compete clause, does not infringe on an employees [sic] ability to engage in an occupation, but merely infringes on his ability to recruit former co-workers to engage in competitive businesses. [Former employees] are free, under this provision of the contract, to undertake any occupation they choose. Therefore, the non-recruitment clause is inherently more reasonable and less restrictive than its counterpart, lending further support to its legitimacy." 8

Nonetheless, courts have refused to enforce these provisions in some circumstances. For example, Judge Jed Rakoff in the Southern District of New York has questioned the extent to which a non-solicit of employees can be reasonable if it prevents at-will employees from coordinating their departures. 9

Judge Rakoff has also expressed concern that a broadly worded non-solicit of employees acted as a "gag rule" because it prohibited "any" speech by a current at-will employee that encourages or induces another employee to terminate his employment. 10 Other New York cases generally have not gone this far, so it remains to be seen whether other judges follow suit. Nevertheless, employers should be aware of these decisions — even if they are currently outliers.

Providing the court with sufficient information is key to enforcing a non-solicit or no-hire of employees provision. To demonstrate that it has a legitimate protectible interest and that the restrictions are reasonable, an employer should provide evidence about both the departing employee doing the soliciting and the employee who is being solicited.

In particular, employers can explain which employees are being solicited, what their duties are, what access they have to confidential information or trade secrets, what relationships they have with clients, and what the employer has done to help develop those client relationships and protect those trade secrets or confidential information.

As one court pointed out, to succeed on a claim for breach of a non-solicit or no-hire of employees based on unique client relationships, the employer "must show that: (1) the employees diverted by Defendants posed a substantial risk that if they left, their customers would follow, (2) the departed employees would engage or did engage in competitive business with [the employer], and that (3) [the employer] provided substantial resources and assistance in cultivating the customer base such that it would be unfair to allow employees to steal those customers to compete with it." 11

Similarly, it is important to provide a court with evidence of actual solicitation whenever possible. While evidence is often circumstantial, at least one court has held that the fact that the departing employees jointly searched for new employment was not sufficient evidence of improper solicitation, particularly where the employees indicated that they had each separately decided to leave the employer prior to jointly searching for employment. 12

Recent guidance from New York courts has clarified that employee non-solicit and no-hire provisions will be evaluated just like other restrictive covenants. This means they will be enforced only if they protect the employer's legitimate interests, are narrowly tailored and reasonable and are not injurious to the public.

While there is still only a relative handful of cases applying this standard to employee non-solicit and no-hire provisions, those cases provide important insight into how courts view these provisions. Employers can take advantage of these insights to review their agreements and policies to ensure that the provisions on which they rely conform to the latest developments in this evolving area of the law.