Forfeiture for Competition Agreement – Can it Replace a Non-Compete Agreement?

Employers seeking to prevent employees from competing when an employment relationship terminates, typically do so through a non-compete agreement.  Non-compete agreements, however, have been subject to many limitations imposed by both the legislature and courts.  Thus, many employers are looking to forfeiture for competition agreements that offer the ability to limit an employee’s post-employment competition through an agreement the states an employee who competes will forfeit a certain benefit, such as a stock incentive, deferred compensation, or face some other negative consequence.  Forfeiture for competition provision are often combined with a “clawback” provision (requiring the employee to repay compensation following a specific event, such as working for a competitor) and can also include a “bad-boy” provision (used to allow for forfeiture and clawbacks for acts such as disclosing an employer’s confidential information, committing a crime or disparaging the employer).  To date, there are no published New Hampshire court decisions on the enforceability of these agreements, but given that they do not deprive an employee of the ability to earn a living, an employer can argue that that do not impose an undue hardship on the employee.

In determining whether a forfeiture for competition agreement may be a good alternative, an employer needs to determine the following issues:

1. There needs to be a benefit to be forfeited, which cannot be regularly earned income, such as wages, commissions or ordinary bonuses.  Forfeiting such earned income would violate state wage laws.
2. There needs to be reasonableness in the forfeiture provision and courts could still sustain a challenge if the employer cannot show a claimed protectable interest and/or that the restriction is reasonable.
3. Employers need to confirm that the forfeited benefit is not subject to state or ERISA protections, such as a vested benefit in a qualified plan.

In addition, restrictions on contracts with physicians, whether through a non-compete or forfeiture for competition agreement, are subject to the limitations of RSA 329:31-A, which took effect on August 5, 2016.  It provides that any agreement dealing with the professional relationship with a physician may not include any restriction on the right of such physician to practice medicine in any geographic area for any period after termination of such professional relationship.  This law applies to both new contracts and renewals of contracts entered into on or after August 5, 2016 and applies to physicians licensed by the board to practice in New Hampshire, but not to nurse practitioners, physician assistants, or other healthcare workers.

Whether an employer is considering a non-compete or forfeiture for competition clause, New Hampshire law requires that any restrictive covenant be reasonable given the particular circumstances of the case.  Specifically, the restriction must be (1) no greater than necessary to protect the legitimate business interests of the employer; (2) not impose an undue hardship on the employee; and (3) must not be injurious to public interest.

In addition, if a business proposes a non-competition agreement, it must meet the requirements of RSA 275:70 as amended in July 2014, that any employee who has not previously been employed shall be provided with a copy of any non-compete agreement prior to the employee’s acceptance of an offer of employment.

About the Author: Jennifer Eber https://orr-reno.com/our-people/jennifer-a-eber/

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