In certain industries and key management positions, employers commonly require their employees to sign employment contracts containing certain restrictions on their current and post-employment
activities. Whether they are enforceable, and how to enforce them, is very dependent on applicable state law and the specific nature and scope of the covenant in question.
What Activities Do Restrictive Covenants In Employment Contracts Cover?
Restrictive covenants can include a broad range of post-employment activities intended to protect the employer’s business interests. Some of the most common restrictions include:
Non-compete agreement (NCA). In an NCA, the employee promises not to enter into business competition with the employer either during or after employment. The NCA restricts the employee from being able to work for a competitor of the employer. Such an agreement is also known as a non-compete clause, non-compete covenant, or covenant not to compete.
Non-disclosure agreement (NDA). An NDA prohibits the employee from revealing proprietary information pertaining to the employer or the employer’s business secrets to any other parties during or after employment.
Non-solicitation agreement. A non-solicitation agreement prohibits the former employee from soliciting the employer’s customers or suppliers by using knowledge about those customers, contractors, suppliers or other key personnel that the employee gained during employment.
Non-dealing agreement. Broader than a non-solicitation agreement, a non-dealing agreement prohibits the former employee from any dealing with the employer’s customers, contractors, suppliers or other key people or entities.
Non-poaching agreement. A non-poaching agreement is intended to prevent the former employee from stealing top-performing personnel from the employer to another business venture. It prohibits the former employee from “poaching” his or her former colleagues from the former employer.
Enforceability Of Restrictive Covenants In Employment Contracts
Enforcing restrictive covenants requires the employer to comply with procedures outlined in the agreement, and to ultimately file a lawsuit against the former employee.
The enforceability of restrictive covenants in employment contracts is highly dependent on state law and the reasonableness of the restrictions. Some states’ laws deem them unenforceable. For example, NCAs of any kind are unenforceable in California, even if the employee was compensated for it. Other states allow certain restrictive covenants in various degrees and circumstances.
In states that recognize the validity of restrictive covenants in employment contracts, the courts may be reluctant to enforce them unless the employer can prove that:
- they were designed to protect legitimate business interests of the employer; and
- they are reasonably limited in their scope, time and geographic location for that purpose
If the restrictive covenants are too broad, courts tend to conclude they are in reality unfair restraints on trade. Courts tend to protect the individual’s ability to work, and may find the real purpose of the covenants is to stifle the employee’s ability to gain employment, rather than a legitimate interest in protecting trade secrets.
Tips For Making The Enforceability More Likely
Make Sure Any Restrictive Covenants Your Company Uses Are Narrow in Scope
Keep the restrictions narrowly focused by stating a valid reason for having the restriction and limiting its application to certain geographical areas and for a set amount of time. Time periods of six months are generally reasonable, but the longer the period the restriction is effective, the more difficult it will be for the employer to justify it.
Build Levels of Restrictions Based on Seniority of Employees
Avoid using one-size-fits-all language. The extent of the restrictions should make sense relative to the employee’s access to the employer’s confidential information and the employee’s position within the company. Higher level employees or those with specialized and critical expertise (such as software engineers) will likely warrant more restrictive covenants than lower level staff members. Make sure the restrictions are reasonable to the level of the employee.
Consider Including a Garden Leave Clause
A “garden leave clause” is similar in effect to placing an employee on administrative leave. The garden leave clause provides that, when the employee gives appropriate notice of a planned separation, the employee will spend the notice period at home. The company will keep the employee on the company’s payroll during the notice period. This prevents the employee from going to work for a competitor right away and the employee will no longer have access to the company’s confidential information.
Periodically Review and Update the Restrictive Covenants Your Company Uses
Enlist the help of experienced legal counsel to review your restrictive covenants and update them as needed. To be prudent, you should do this annually. Experienced employment law attorneys will be able to identify whether any part of the language in your restrictive covenants have been rendered unenforceable by a court in your state or a state where your employees are located.
Conform to Any Industry Practice Regarding Restrictive Covenants
This is another area where experienced employment counsel can assist you. Counsel will be able to compare your company’s restrictive covenants to those in use by others in the industry and provide guidance on whether yours deviate too much from standard practice. If your restrictive covenants are too much outside of the business custom for the industry and the occupation in question, you run the risk that your restrictive covenants will be found unreasonable and unenforceable by a court. However, if your company can provide a legitimate business reason for the unusual restriction, a court may be willing to enforce it, although the outcome cannot be predicted with any degree of certainty.
Weigh Your Financial Objectives
Litigation is always unpredictable and expensive. When it comes to enforcing restrictive covenants in employment, the courts are often not sympathetic to employers. The risks and costs of litigation may exceed the risks and costs of an employee violating the restrictive covenants.
Consult With The Labor And Employment Law Experts At KPPB LAW
Get legal assistance with your employment contracts from attorneys who are experts in the labor and employment field. At KPPB LAW, the employment law experts can help you draft sound contract provisions and review any that you may be using to ensure your business interests are protected. Contact KPPB LAW today for more information.