Because employees often are given access to valuable company property like customer lists and bidding procedures, companies trying to achieve the dual goals of employee retention and business protection often turn to restrictive covenants.
Restrictive covenants usually include language barring an employee from competing with his employer during—and for a time after—employment. Commonly referred to as a non-compete covenant, restrictive covenants often also forbid an employee from using the employer’s confidential information in future work and recruiting coworkers on behalf of a future employer.
Guidelines to Follow
The specific requirements for an enforceable restrictive covenant differ by state, and some states view them as restraints of trade. In fact, non-compete agreements in employment relationships are generally
illegal in California.
An enforceable covenant must be reasonable in time and geographic scope. Courts vary on the question of reasonability, largely making case-by-case determinations based on the industry and the employee’s specific circumstances.
For example, an agreement not to compete worldwide for two years may be reasonable when dealing with a polymer scientist who is one of only a handful of people in the world possessing the skill and who works in an industry wherein geographic proximity to customers is not crucial. In contrast, that kind of broad geographic non-compete covenant could not be reasonably imposed on a project manager or a plumbing subcontractor. On the other hand, the courts in Delaware, for example, likely would find reasonable a two-year ban with a geographic scope of 50 miles.
Other states appear to fall in the same ballpark, but employers should recognize what is reasonable can vary greatly depending on an employee’s industry and specific job. To determine whether the restrictions are reasonably needed to safeguard an employer’s business, courts look to where the employer is actually doing business, and how quickly new technology develops and new clients are made in that industry.
Adequate Consideration
An enforceable restrictive covenant must be reasonable and supported by “adequate consideration,” meaning some value should be given to the employee in exchange for signing the restrictive covenant.
Restrictive covenants must involve some mutual consideration to be enforceable, meaning that both sides (employer and employee) must give up something of value. An employee’s agreement not to compete represents value. To constitute adequate consideration in exchange, an employer can provide some small financial payment ($100 should be enough). Or, if the agreement is signed upon hiring, the hiring decision can constitute adequate consideration. In at-will employment states, merely allowing the employee to continue employment can constitute adequate consideration.
Generally, a restrictive covenant can be enforced even when an employee is fired.
Other guidelines for drafting restrictive covenant strategies include:
- Tailor restrictive covenants in accordance with each state’s requirements.
- Make agreements only as broad as needed to safeguard legitimate business interests.Restrictive covenants should be in plain English, not legalese.
- Only employees whose jobs involve customer relations, trade secrets or confidential information should be required to sign restrictive covenants.
- Add a “no solicitation of employees” clause to the covenant if the company is concerned about employee “raiding.”
- Include an “attorney’s fees” provision so the employer can be reimbursed for fees in the event enforcement is needed.
- Do not allow employees who have access to truly confidential information to refuse to sign a restrictive covenant. Likewise, do not seek to enforce existing covenants randomly.
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Friday, September 3, 2010