Restrictive covenants in employment contracts can be important tools for protecting your business from unfair competition, loss of confidential information, and potential employee poaching. But are your agreements legally enforceable?
Without proper drafting and careful consideration, these provisions could be challenged in court, leaving your business vulnerable.
Understanding Restrictive Covenants in Employment Contracts
Restrictive covenants are clauses in employment agreements that limit an employee’s actions during or after their employment. These agreements serve to protect the employer’s business interests, including trade secrets, customer relationships, and workforce stability. However, enforceability depends on several factors, including reasonableness and necessity.
Common Types of Restrictive Covenants
Employers typically use different types of restrictive covenants to safeguard their business. The most common include:
- Non-Compete Agreements – Used to prevent former employees from working for direct competitors for a specified time and within a specific geographic area. Though the Federal Trade Commission had adopted rules prohibiting these, a judicial decision and halted application of the rule. The FTC appealed the matter to the 5th Circuit Court of Appeals, where it is presently pending. The extent to which the current administration pursues the appeal is presently uncertain.
- Non-Solicitation Agreements – Prohibit employees from soliciting clients, customers, or co-workers after leaving the company.
- Confidentiality Agreements – Restrict employees from disclosing or using trade secrets and proprietary business information.
- Non-Recruitment Clauses – Prevent employees from recruiting former colleagues to join a competing business.
Each of these provisions must be carefully crafted to align with legal standards and avoid unnecessary restrictions that could make them unenforceable.
What Makes a Restrictive Covenant Enforceable?
While restrictive covenants can be valuable, courts scrutinize these agreements to ensure they are fair and reasonable. Employers must consider several key factors:
Reasonableness in Scope and Duration
A restrictive covenant must be limited in scope and duration. Courts will assess whether:
- The geographic restriction is appropriate based on the employer’s business reach.
- The time limitation is reasonable, typically no longer than one or two years.
- The agreement protects legitimate business interests without unduly restricting the employee’s ability to work.
Protection of Legitimate Business Interests
A restrictive covenant must serve to protect a valid business interest, such as trade secrets, proprietary information, customer relationships, or investments in training and development.
Agreements that are too broad or designed solely to prevent competition may not be enforceable.
Consideration for the Employee
For a restrictive covenant to be enforceable, the employee must receive adequate consideration. This could include:
- Initial employment offer
- A promotion or salary increase
- Access to confidential business information
Employers should ensure that employees receive something of value in exchange for signing a restrictive covenant.
How Employers Can Strengthen Their Employment Agreements
To maximize enforceability and avoid potential legal challenges, employers should take the following steps:
Clearly Define Terms and Restrictions
Vague or overly broad language can lead to an agreement being struck down in court. Be specific about what is restricted, the time frame, and the geographic limitations.
Review and Update Agreements Regularly
Laws governing restrictive covenants evolve over time. Regularly review employment agreements to ensure compliance with the latest legal standards.
Ensure Employees Understand the Agreement
Employees should acknowledge that they fully understand the terms before signing. Providing clear explanations and even an opportunity for legal review can help prevent future disputes.
Protecting Your Business With Well-Drafted Agreements
Restrictive covenants can be powerful tools to protect your business, but they must be carefully crafted to withstand legal scrutiny. Working with an experienced employment law attorney can help ensure that your agreements are enforceable and aligned with your business goals.
If you need assistance drafting or reviewing restrictive covenants in employment contracts, Anderson Jones, PLLC can help. Contact us to ensure your agreements provide the protection your business needs while remaining legally sound.