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Mar 12 2015
Fear often comes from misunderstandings or rumors that have existed so long they are accepted as truth. However, if you peel away the emotion from the facts, restrictive covenants can become fairly easy to understand.
There is a lot of confusion about non-competes and restrictive covenants: misunderstandings as to how they are applied, when they can be enforced, and their purpose. This article should clear some fog away from the terms non-compete or restrictive covenant and bring their true intent into the open. Hopefully, it will allow you to breathe easier and feel empowered.
I’ve heard the phrase thrown around, what are we really talking about? What is a restrictive covenant?
According to a legal dictionary, it’s “a contract in which a party agrees to be restricted in some regards as to future conduct.” Restricted, according to dictionary.com is defined as “confined, limited; to confine or to keep within limits, as of space, action, choice, intensity, or quantity”.
In employment, a restrictive covenant is a contract that prohibits an employee from competing with his former employer for a certain period of time after the employee has left the company, or prevents the former employee from soliciting or dealing with customers of the company by using knowledge of those customers gained during the prior employment.
Why do employers require that their employees sign a restrictive covenant?
The employer may have invested a great deal of time and money in its product and customer relations. They do not want to risk having their trade secrets taken away from the company because an employee leaves or lose customer relationships because an employee entices those customers away from the employer.
What conditions are typically contained within a restrictive covenant?
A restrictive covenant can limit an employee’s actions in a number of areas, including, using trade secrets after leaving the employer, prohibiting a former employee from soliciting employees of the employer and prohibiting the former employee from competing with the employer. For instance, a non-solicitation provision prevents an employee from soliciting former co-workers from leaving their former employer and begin working with the employee or the employee’s new employer.
Non-compete provisions restrict an employee from working in a similar role for a competing organization or providing the same services to the employer’s customers - regardless of who contacted who, a non-compete provision can prevent a former employee from providing the same services to a client from the former employer.
Confidentiality provisions can identify what trade secrets cannot be used for the benefit of a future employer or other company. A single restrictive covenant can include all the above as well as additional provisions.
Do I have to sign it? Really?
An employer can require that the restrictive covenant be signed as a condition of employment or a condition of continued employment. If an employer requires an employee to sign it upon commencing employment, the employee could have the job offer rescinded as a result of his refusing to sign it. If an individual is an employee at will, and the employer requires that one be signed after he has begun working of the employer, then the employer could terminate the employee for failing to sign the agreement.
An employee or prospective employee has a right to consult with an attorney to determine the impact the agreement may have on them; however, an employer is not under an obligation to negotiate the terms of the agreement.
Some individuals, who are high up in a company or deemed to be star performers may have greater ability to negotiate changes to the agreement based upon their position or value to the company. Nonetheless, unless there are other contract provisions in place prior to being presented a restrictive covenant, it is likely that failure to execute an agreement could result in termination or withdrawal of a job offer.
What can I do if a potential employer or a current employer asks me to sign a restrictive covenant?
It depends on the state in which you are doing business as to how enforceable the document is. Besides that, before you sign it, you can consult an attorney. They may advise you to suggest different wording or not to sign it at all, or they may tell you the covenant is not realistically enforceable. In some cases, an employee may be able to negotiate a modification to the terms of the agreement.
Which positions in a company are most likely to have a restrictive covenant put into place?
Those in the front line of a company (high up executives, sales force, product developers, etc.), are most likely to have an employer require that a restrictive covenant be implemented as these individuals are most likely to have access to trade secrets, or who have access to proprietary information, such as, business development, sales, pricing schedules or product development.
How long are they enforceable? Should I be worried?
The time period in which they become enforceable does not begin until the employee leaves the company or former employer. Therefore, even though an employee may have signed the agreement many years prior and worked for the employer for a long time, the enforceability period does not begin until the termination of the employee-employer relationship. Typically, a non-compete provision will not last longer than two years, but in individual cases, it is possible a non-compete could last a longer period.
Also different states have different policies concerning how they will enforce the non-compete provisions. For instance, New York and New Jersey lean toward protecting proprietary rights and enforce restrictive covenants so long as they are deemed reasonable in duration and scope. Virginia courts closely scrutinize non-compete provisions to determine if they are narrowly crafted and are not too broad or overly burdensome on the employee, which is to try to ensure there is not an improper restraint on trade. California and a handful of other states maintain that restrictive covenants are unenforceable all together as a result of being against public policy. As such, in evaluating a non-compete provision, an individual should consult the law applicable to the agreement to determine the extent the provision is enforceable.
What happens if I have a non-compete provision in place and a former client wants to do business with me at my new employer?
The extent to which a non-compete would prohibit a former employee from providing the same or similar services to a customer of his former employer is based mainly on the language of the non-compete provision. However, generally speaking, it likely does not matter who contacted whom. If the non-compete prohibits an individual from providing services to a customer of the former employer, then it is the services that cannot be provided regardless of who initiated the contact or requested that the services be provided.
Is a non-compete only enforceable for certain circumstances when you leave a job?
A non-compete or restrictive covenant is enforceable whether you resign, you are terminated, you are laid off or if your position is eliminated, unless there are provisions listed in the non-compete or restrictive covenant providing that it does not apply if the employment relationship is terminated under specified circumstances.
And how does this all impact my future severance? How does a restrictive covenant affect severance, if I lose my job?
If an employee does not have a restrictive covenant, then a severance may seek to have one imposed upon the employee. If a restrictive covenant is in place, the restrictive covenant may be referenced; however, it is unlikely that it would be removed or voided as a result of a severance being offered.
Since a non-compete by its very nature, is seen to be a restriction of commerce, when is it enforceable?
When the former employer can show a judge or court that the covenant is specifically designed to protect its legitimate business interests and that the restrictions imposed are reasonable in time and scope, then it is likely that its provisions can be enforced.
What would a court or a judge be determining if there is litigation seeking to enforce a restrictive covenant?
Is the restrictive covenant reasonable in time and scope? Were any of the provisions of the restrictive covenant breached? What was the loss that was incurred? Were the losses a direct result of the former employee breaching the restrictive covenant? What was deemed to be confidential or a trade secret under the agreement? Was any proprietary or trade secret information used in violation of the agreement? Other issues may be raised and addressed in litigation as well depending on the specific issues raised in the case.
In conclusion, should I be concerned? Does this really concern or impact me? How often would a former employer take legal action and sue for a breach of restrictive covenant?
Restrictive covenants, are contractual obligations that must be followed, except in states where they are against public policy. Therefore, if an employee has a restrictive covenant, then he or she should be carefully reviewed and complied with their term. However, for an employer to undertake legal action to enforce a restrictive covenant, it has to be worth a substantial amount of time and money on the former employer’s part, and they have to understand that publicity and client relationships could be impacted. In order to receive damages, the former employer would have to show that there has been some loss directly resulting from the breach of contract. The former employer could seek injunctive relief in the form of forbidding or prohibiting the former employee from acting in violation of the agreement regardless of whether there are quantifiable damages associated with the former employee’s actions. In either case, the burden of proof is on the former employer who initiated the lawsuit.
This article was written by Susan Goldberg of Susan Goldberg Executive Search Consulting with the assistance of James T. Prusinowski Esq. of Trimboli & Prusinowski.