As an employer, restrictive covenants can be useful tools to protect your business; as an employee, they can be a great obstacle to your pursuit of new opportunities.
A restrictive covenant is an agreement that prevents or obligates an action by the subject of the agreement. In a Homeowners Association, for example, restrictive covenants may prevent you from keeping noisy roosters in your back yard, while obligating you to mow your lawn on a regular basis. These restrictive or prescriptive arrangements take on several forms in the context of employment, where they tend to prohibit employees from taking certain actions once they leave their employer.
Confidentiality and Non-Disclosure Agreements
Confidentiality agreements, which are also called non-disclosure agreements or NDAs, are exactly what they sound like—employees agree that during the course of their employment and then for a period thereafter, they will not reveal certain facts about the business of their employer. Employers must carefully define the information that they seek to protect; a court will not enforce an agreement that prohibits the dissemination of publicly-known information, nor will it enforce an agreement that prohibits the disclosure of more than is reasonable to protect the employer’s legitimate business interests. The most common types of confidential information protected by these agreements are customer lists and trade secrets (think of a “secret recipe” at a restaurant).
Non-competition agreements, which are often referred to as “non-competes,” restrict the employee from working in the same line of business as their employer while they are an employee and for a period thereafter. Consider a scenario in which you, an employer in a specialized field, spend a significant amount of time and resources to train an employee who had no skills when hired. After the training period ends, your newly-skilled employee resigns to work for a competitor, leaving you in the lurch. A non-competition agreement can help an employer protect its investment in such a situation. Employers must be cautious not to overreach with non-competes, as courts generally disfavor arrangements which substantially limit an employee’s ability to pursue his or her occupation. Courts will consider the length of time the restriction is in place and the geographic area to which the restriction applies (among other fairness and public policy considerations) when deciding whether to enforce a non-competition provision.
Non-solicitation agreements prohibit the employee from enticing others to follow them to their new company. Employees are most commonly restricted from contacting clients and prospective clients, suppliers, and colleagues. When subject to a non-solicitation agreement, employees should exercise caution in their communications after leaving their employer, as courts have held that merely touting the merits of a new employer in an announcement of their new role can constitute solicitation. Social media posts should be carefully considered.
While the law differs by jurisdiction, the question whether employment restrictive covenants are enforceable is a highly fact-dependent analysis that often turns on what a judge considers “reasonable.” Employers should also be aware that courts tend to require consideration (a return promise, an act, or a forbearance) be given to the employee for restrictive covenants to be enforceable. Moreover, members of certain professions must follow strict rules when imposing these restrictions; in some professions, they are outright unenforceable. Often, the only way an employer can enforce a restrictive covenant is by filing a lawsuit, which tends to be costly.
Employment restrictive covenants are complex. Employees should consult legal counsel when they are asked to sign these agreements, and when they plan to leave an employer having already signed them.
Employers should seek counsel to draft these covenants so that their interests are protected in the event an employee is in breach.
At Chipman Mazzucco Emerson LLC, we have years of experience assisting employers and employees with their legal needs. If an employment issue arises, we stand ready to assist.