Essential Protection: Restrictive Covenants of Your Employees

by Buchanan Ingersoll & Rooney PC

No one knows your company better than your employees. And while great employees can be your most valuable asset, disloyal employees can use their insider information to harm or compete against you. You need protection, and an indispensable tool is the contract. Contracts can restrict what employees may do—both during and after their employment. These types of clauses are called restrictive covenants. They can be included in employment contracts or in separate confidentiality, non-solicitation and non-competition agreements. This post discusses the most common types of restrictive covenants and some tips to keep in mind when considering them.

Restrictive covenants are promises to refrain from certain behavior. Ideally, they will deter the harmful conduct, but sometimes they will need to be enforced in a court. Thus, it is important to know what types of restrictions a court would enforce, and that varies by state. Because these covenants often pit employer interests against employee rights, courts will typically enforce only reasonable restrictions—those narrowly tailored to protect legitimate business interests.

Every employment relationship is unique; so too is the application of this reasonableness test—a restriction reasonable for one may not be for another. So you should avoid boilerplate language; instead, consider your particular business interests and how they can be protected (within reason.) An effective restrictive covenant requires balance: if written overly broad or vague it may be unenforceable, but too narrow and it may omit unforeseen interests needing protection. One solution is to pair a broadly worded restriction with a nonexclusive list of specifically banned activities.

Non-Compete Clauses

These clauses prohibit employees from competing against you—on their own or for a competitor during the term of employment and for an agreed upon period of time after termination of employment. Banning the employee from all business activity would be unreasonable (and thus unenforceable), so limit the clause to the kinds of business you do or may do in the future. Restrict not only working for a competitor or starting a competing business, but also consulting and advising. Be sure to specify the geographic area of the restriction and how long it will last after they leave. Reasonableness will depend on the nature of your business, but generally courts disfavor restrictions that prevent employees from earning a living. Thus, the longer and broader the restriction the less likely it will be enforceable.

Non-Poaching Clauses

These clauses prohibit employees from attempting to induce other employees to leave your company during the term of employment and for an agreed upon period of time after termination of employment. Specify who is covered, and consider including former and future employees within a reasonable window. Also include any independent contractors engaged by the company.

Non-Solicitation Clauses

These clauses ban attempts to steal away your customers, clients, vendors, suppliers, and anyone else that deals with your company during the term of employment and for an agreed upon period of time after termination of employment. The restriction should cover any attempt to induce these contacts to stop or reduce their business with you. Include former and potential customers with whom you have contact. The restriction should also bar the employee from doing business with them in any way that interferes with your business.

Non-Disclosure and Non-Use of Confidential Information Clauses

These clauses prohibit employees from divulging or using to their advantage information learned while in your employ. For the most sensitive and proprietary information, trade secret protection may be available and would last as long as that information stays secret (i.e., during the term of employment and at all times thereafter. But also consider restricting other sensitive information for a reasonable time. Enumerate the types of information your company considers valuable; this can help employees understand what needs to be protected. Add a restriction requiring employees to turn over all company-related information in any form when they leave. To guard against inadvertent disclosures, require assurances that they use their best efforts to guard all company information both during and after their employment.

Intellectual Property Ownership Clauses

Employees have the potential to create all kinds of intellectual property. A clause that grants the company ownership in all intellectual property created by the employee during their employment can avoid costly squabbles down the road. Define intellectual property as everything created as part of their work, or using knowledge acquired as an employee, or created using company resources. Include an assurance that the employee will cooperate in assisting you with ownership documents even after they leave. Finally, require them to disclose all IP they may have owned before joining the company to avoid a later claim that it was created prior to working for you.

Other Considerations

Besides reasonableness, enforceability could depend on whether the employee really agreed to the restrictions and was offered something in return. This can be accomplished by having them read and sign the restrictive covenant as part of an employment agreement, promotion or exit package, or at any other time. It’s also important to verify that the employee is not already bound by some other restrictive covenant from a previous job. Periodically review and update the employee’s restrictive covenants as their responsibilities may change over time. Finally, the enforceability of these covenants could be affected if the employer breaches the employment or other contract.

Restrictive covenants are a useful tool for employers, but laws vary significantly by jurisdiction.

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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