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To Compete, or Non Compete? Understanding Restrictive Covenants in Employment Agreements

July 20, 2022

Whether you are a business owner or an employee, understanding restrictive covenants (“non-competes”) is important. Restrictive covenants are promises in contracts that limit or prohibit one party from engaging in a specific action or behavior. Although restrictive covenants can appear in many different contracts, including real estate, asset purchase and partnership agreements, they are perhaps most commonly used in employment agreements to dictate what obligations remain once the contract expires, and the employment relationship ends. For example, a restriction might prohibit a salesperson from soliciting her former clients for two years after she leaves her job or prohibit her for a time from selling the same products for a new employer in her old territory. Here are some helpful tips and definitions to refer to when contemplating the different types of restrictive covenants found in employment agreements.

•            Non-competition: prohibits former employees from competing against their former employer by taking the same or a similar type of job elsewhere. Usually, this means imposing limitations based on the type of work, job or industry, as well as setting restrictions within a geographical area (a radius of miles) and a period of time (a term of years).

•            Non-solicitation: prohibits former employees from soliciting the clients, customers or referral sources of their former employer. These provisions can also prevent a former employee from soliciting other employees from the employer in order to avoid a mass exodus of staff. Like non-competes, these provisions should specify how long the restriction will last.

•            Non-disclosure: prohibits former employees from disclosing or using an employer’s valuable confidential information. Sometimes these are also called confidentiality agreements. Regardless of how they are characterized, these provisions are meant to protect company trade secrets, like customer and price lists, computer algorithms and secret recipes (think Coke and KFC), which if revealed, would assist competitors. They can also help safeguard the private information of third parties like medical patients.  If your company has trade secrets, written confidentiality agreements with knowledgeable employees should be a must.

Non-disparagement provisions are similar to non-disclosure agreements in the sense that they limit what a former employee is allowed to publicly say, by prohibiting former employees from saying negative things about the company and its managers and employees. These provisions are often specific about where negative statements can’t be made, barring them from Facebook, Twitter, Instagram and other social media.  

In recent years, many states have reconsidered their laws regarding restrictive covenants, limiting them, making them harder to enforce and sometimes making them illegal.  In nearby Washington DC, for example, the Ban on Non-Compete Agreements Amendment Act of 2020 will eventually take effect (there have been many delays), barring restrictions on many employees. Suffice to say, the landscape for restrictive covenants and their enforcement under the law is ever changing. How one approaches drafting, negotiating and enforcing these provisions will depend on the law, as well as who you are and what you are trying to achieve. For example, employers use restrictive covenants to protect their legitimate business interests, but need to be careful because if restrictions are too extreme, they may be unenforceable.  Employees aim to reduce the limitations imposed upon them when they leave a job so that they can find employment elsewhere without too much hassle, like having to changing industries or move far away to a new, unrestricted city.

 

About the Author: Jack Bloomberg helps professionals and businesses on a wide variety of matters, including, drafting and negotiating restrictive covenants in employment and independent contractor agreements

 

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