Revisiting Restrictive Covenants

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Accounting firms often use post-employment restrictive covenants to prevent their clients and employees from being poached by departing partners and employees. As the number of accountants moving between firms has started to pick up again, so too has the number of disputes concerning the enforceability of the restrictive covenants those accountants signed at their former firms.

Do you have adequate protections in place? The answer is probably no, unless you have undertaken a comprehensive review of your agreements and regularly revisit them. The law in most states limits the enforceability of restrictive covenants to what is “reasonably necessary” to protect the “legitimate interests” of the firm. The outcome of these cases is highly dependent on the facts of each case. Accordingly, even if all of your partners and employees sign the same restrictive covenant agreement, it may not be enforceable against all of them.

Considerable thought and attention should be devoted to developing a set of restrictive covenants that protects your firm’s legitimate interests, with provisions tailored to the circumstances relevant to the individuals you are seeking to restrict. To develop and tailor your protections, you will need to identify what you need to protect, who you want to restrict and how restrictions will protect the firm’s interests. Based on the complexity of the law in this area, you will need to consult with legal counsel. Finally, you will need to regularly review the agreements you have in place to confirm that they are still appropriate and address any altered circumstances, such as changes in the law, new firm policies or promotions.

If you are considering whether to bring in a new partner or employee, you need to determine whether that person is subject to any restrictive covenants. If so, be careful and be realistic, even if you believe the covenants may not be enforceable. Unless there is an iron-clad basis to have the covenant declared unenforceable, you should assume the covenant will be enforced or, at the very least, that it will take months of litigation to determine whether it is enforceable.

Everyone needs to consider the worst-case scenario and be prepared to deal with the ensuing reality. For example, if your firm is enjoined from accepting any clients from the candidate’s former firm, is there enough work to keep the candidate busy during the period of the injunction? You will expect candidates to honor their covenants and refrain from taking any information, files or property from the prior firm.

Whether you are trying to enhance the protections you have in place against the acts of unscrupulous departing partners or employees or assessing the risk associated with taking on an accountant who signed a restrictive covenant, you should never underestimate the importance of post-employment restrictive covenants.

Topics:  Non-Compete Agreements, Restrictive Covenants, Termination

Published In: General Business Updates, Labor & Employment Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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