Restrictive covenants in employment contracts are included to prevent employees from using their work experience and “inside knowledge” to harm their employer’s interests after they leave that employment. There are several variations covering different aspects of your job, but let’s start with the basics.
What is a Restrictive Covenant?
A covenant is, essentially, a type of contractual term. It is a legally enforceable agreement between parties outlining different responsibilities each party has to the other. In the case of a restrictive covenant, that promise is to refrain from doing certain things. Restrictive covenants are commonly used in a wide variety of contractual settings, for example in property law and in partnership agreements.
Covenants and Restrictions in Employment Contracts
Covenants and restrictions in employment contracts are a very important strategic asset to employers. Although employees do have some implied duties not to harm their employer while working for them, those duties end when their employment ends. Restrictive covenants are a way of keeping employees from harming a business after they leave. Additionally, because restrictive covenants prevent employees from harming a business, they allow employers to invest in their employees without assuming too much commercial risk.
There are several types of restrictive covenants typically found in the employment contract context:
Non Compete Agreements
Non-compete agreements/non compete clauses are contractual terms in which employees are restricted or delayed in their ability to compete with their employer after leaving their job. It allows companies to share their resources and inside knowledge with employees without fear that the employee will use that to compete with them down the line.
Non Solicitation Agreements
These covenants restrict an employee’s ability to solicit their employer’s customers and clients after leaving their job. It safeguards client lists and client relationships for an employer.
Non Disclosure Agreements
An essential part of running a successful team is the ability to share trade secrets and “insider knowledge and expertise” with employees without fearing that they will unreasonably exploit that knowledge later to compete with you. Non-disclosure covenants fulfill this function.
Non Dealing Agreements
Non dealing agreements/covenants provide that an ex-employee is not allowed to do business with any of the employer’s clients or customers, regardless of who approached whom. It essentially serves as a stronger measure than a non solicitation agreement and serves the same purpose.
These covenants provide that an employee is not allowed to approach and/or hire any of his ex-colleagues after leaving your employment.
Enforcing Restrictive Covenants
It is clear that restrictive covenants represent a significant limitation on the economic and contractual freedom of employees. For this reason, courts are not always willing to enforce them. If there is a breach of covenant, and the legality and enforceability of a restrictive covenant is challenged, the burden of proof will be on the employer to show that:
- The covenant is drafted to protect his/her justifiable, legitimate, and legally recognized business interests.
- The covenant is not too onerous (i.e. sufficiently narrow) on the employee
Courts take several factors into account when determining whether a covenant is reasonable in light of the circumstances and commercial context. Some of these factors are:
- A restrictive covenant must not be drafted too widely: If the term imposes more of a limitation on the employee than reasonably needed to protect the employer’s legitimate interests, it will not be enforced.
- Context: Courts tend to be more willing to enforce restrictive covenants in the context of the sale of a business, than in the context of an agreement between an individual employer and employee. In addition, courts take into account the employee’s position in the company: the more senior and strategically essential that employee was, the more likely courts are to enforce a restrictive covenant.
- The scope of the restriction: Courts will take into account the time period for which the restrictive covenant is concluded, as well as the size of the geographical area to which it is applicable, to decide whether a restriction is too onerous or not.
- Compensation: Contractual agreements are only valid if there was consideration/compensation: some benefit given to the employee in exchange for agreeing to the restriction on his/her actions. The larger this benefit, the more likely courts are to conclude that a restriction is fair and enforceable.
Employment Law Attorneys
If there is one clear conclusion that can be drawn from this discussion, it is that restrictive covenants should be carefully worded if they are to be enforceable. LawTrades works with experienced Employment Attorneys all over the country to provide personalized legal advice to help guide employees and business owners through any issue.