Court Upholds Strict Noncompete Tied to Incentive Payments

By Jeffrey Rhodes May 6, 2020
businessmen reviewing contract

A voluntary incentive investment plan created by a government recruitment firm that barred signing executives from acts of disloyalty against it or its subsidiaries for 30 months after departure was enforceable, the 4th U.S. Circuit Court of Appeals ruled.

Allegis Group Inc., a Maryland corporation, and its subsidiaries, Aerotek and TEKsystems, recruit, screen and place candidates in temporary and permanent employment positions for clients throughout the United States. Aerotek specifically concentrates on staffing scientific, software and engineering positions; TEKsystems concentrates on staffing information technology and communications positions. Their clients include the U.S. Department of Defense and other government agencies and contractors.

Allegis' subsidiaries operate in close collaboration. Employees of Aerotek and TEKsystems have access to much of the two organizations' proprietary information, including active customer histories and analyses, key contacts, information for recruiters on candidates, bill rate information and prospective client lists.

Four high-level Aerotek executives were required to sign restrictive covenants of noncompetition and nonsolicitation in their employment agreements. In addition, these four employees qualified for and elected to participate in Allegis' incentive plan. The plan provided employees with incentive payments in exchange for continuing loyalty and protection of the Allegis companies' interests for 30 months following separation from Allegis or any of its subsidiaries.

Allegis created the incentive plan to provide a method for select management or highly compensated employees to acquire an interest in the companies' economic progress and promote their long-term growth. Under the incentive plan, qualified employees who chose to participate earned units that would provide returns similar to those that Allegis Group stock would provide, over and above the dividends paid by its subsidiaries. The units had no value other than providing potential income that could be earned under the terms and conditions of the incentive plan.

Upon separation from service, plan participants could receive payments equivalent to the value of the units over a 30-month period if they followed certain restrictions. The plan prohibited participants from approaching, contacting, soliciting or inducing any regular employee to leave any of the companies. The plan also prohibited soliciting, diverting or taking away any staff, temporary personnel, trade, business or goodwill from the companies.

On departing from Aerotek, one of the employees—the regional vice president for Aerotek's mid-Atlantic region—received payments totaling over $1.4 million from the value of his accrued units in the plan.

During the 30-month period, the employee incorporated two staffing companies. By the end of the 30 months, one of the companies had billed $130,000 for staffing services to Lockheed Martin, Catalyst Health Solutions, Catalyst RX and Siteworx, all former clients of TEKsystems.

Before the end of the 30-month period, that employee contacted two former account managers, who had also signed the incentive plan, to discuss hiring them at his new companies. His companies hired them and another former account manager during their 30-month restricted periods; two of them had already received incentive payments of $17,702 and $6,195, respectively, from Allegis.

In July 2012, Allegis, Aerotek and TEKsystems sued the four former employees alleging that they breached their obligations under the incentive plan and their employment agreements. The plaintiffs sought return of all payments made to the employees under the plan and compensatory damages.

The parties brought cross motions for summary judgment. The district court granted summary judgment to Allegis, Aerotek and TEKsystems on their claim made under the incentive plan and ordered the defendants to return the incentive payments they had received, with interest.

The defendants appealed to the 4th Circuit. They claimed that the incentive plan posed restrictive covenants that were unenforceable because their scope was not reasonably tailored to protect the companies' legitimate business interests.

[SHRM members-only HR Q&A: Can an employer make noncompete and confidentiality agreements a condition of employment for current employees?]

The 4th Circuit disagreed with the employees and found that the incentive plan did not have to satisfy the requirements of an ordinary restrictive covenant. Rather, because the incentive plan was a voluntary program designed to promote the Allegis companies' economic development, the terms' conditions could be enforced as written. The 4th Circuit further found that those terms were reasonable, given that the payments were voluntarily made and the plan specifically indicated that compliance was a precondition to payment.

Based on this analysis, the 4th Circuit upheld the district court's enforcement of the plan against the employees.

Allegis Group Inc. v. Jordan, 4th Cir., No. 18-1769 (Feb. 27, 2020).

Professional Pointer: This decision provides a blueprint for employers to seek expanded, post-employment restrictive covenants for executives. By making voluntary post-employment payments, the employer can potentially impose stricter requirements than they can in an ordinary noncompete.

Jeffrey Rhodes is an attorney with McInroy, Rigby & Rhodes LLP in Arlington, Va.

[Looking for state-specific information? See State & Local Updates.]


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