Obviously, employment agreements are necessary for laying out the specific terms and conditions of the employment relationship, so your employees and contractors understand exactly what’s expected of them while working for you. But employee agreements can also be used to prevent workers from harming your company after they leave your employment.
Whenever an employee is terminated, laid off, or resigns, there’s always the chance that the individual might use the inside knowledge of your operation to benefit a competitor. Indeed, someone with an in-depth understanding of your company’s technology, processes, and clients would likely be a highly attractive asset to a competing business.
Adding restrictive covenants to your employment agreements can protect your company from being harmed in this manner.
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So what is a restrictive covenant? I’m glad you asked. Restrictive covenants are legally binding agreements that prohibit departing employees (and contractors) from taking certain actions after they leave your employment. Restrictive covenants are often contained in a clause within a larger employment agreement, but they can also be a stand-alone contract.
While there are several different types of restrictive covenants—each designed to prevent an ex-employee from engaging in a specific action—the following three are the most commonly used in employment agreements. Note that enforcement of restrictive covenants is governed by state law, and the level at which such agreements are enforced often varies greatly from state to state.
Non-Compete
A non-compete agreement restricts an employee’s ability to compete with your company after their employment with you ends. Specifically, non-competes seek to prevent departing employees from taking a position with a competitor—or starting their own business—and using your proprietary company information to compete with you.
Because non-competes have the potential to prevent a former employee from making a living, they should be narrowly drafted to protect your legitimate business interests, rather than broadly stifling all competition (that’s a no-no). Yet even well-drafted non-competes can be difficult to enforce. For example, some states, such as California, ban non-compete agreements altogether.
To increase the chances they will hold up in court, non-compete agreements should be limited in duration—typically six months to a year—and only restrict employment within the specific geographic area where you operate. Since state laws differ widely when interpreting whether a non-compete is overly restrictive, meet with us to ensure the terms of your employment agreements are tailored to suit our state’s requirements.
Non-Solicitation
A non-solicitation agreement prohibits a worker from soliciting, or poaching, your clients, customers, and employees after leaving your employment. Such agreements are designed to prevent a departing employee from taking advantage of the relationships they developed while working for you by convincing your clientele and/or staff to leave your company and follow them.
Because they do not prevent ex-employees from working in their chosen profession after leaving your place of employment, courts are typically more likely to enforce non-solicitation agreements versus non-competes. That said, certain states view non-solicitation agreements more favorably than others, and no matter where you’re located, the terms of these restrictions should be limited in duration, scope, and geography to afford the best chances of enforcement.
We can support you in drafting non-solicitation agreements that will protect your company’s clients and employees from being poached, without posing any undue hardship on those who leave your business to pursue other opportunities.
Non-Disclosure
A non-disclosure agreement (NDA), or confidentiality agreement, prohibits an employee from disclosing your company’s confidential and proprietary information—often known as trade secrets—to any person outside the company. An NDA can apply both while the employee/contractor is working for your business as well as after they leave.
Information covered by NDAs cannot be generally known by the public and must give your business a competitive advantage in the marketplace. When drafted properly, NDAs can cover not only your company’s core trade secrets, but also all of your sensitive materials, including customer lists, financial data, internal communications, vendor lists, phone numbers, email addresses, among other items.
Because trade secrets are among a company’s most valuable business assets, state courts are more likely to enforce NDAs compared with most other restrictive covenants. To this end, you should routinely include non-disclosure provisions in employment agreements for all employees and contractors who have access to confidential information. We can assist you in creating NDAs that will offer you the maximum level of protection for your sensitive materials.
Tread Lightly
Including restrictive covenants in your employment agreements can be an effective way to strategically protect your company’s competitive edge. To be sure, the mere presence of such provisions in your employment contracts can deter team members from working for competitors and/or ward off competitors from seeking to hire them.
That said, restrictive covenants have come under fire in state courts lately as being unfair to employees and imposing overly harsh restrictions on competition and innovation. What’s more, if deemed invalid by a court, even a minor restrictive provision could potentially nullify the entire employment agreement.
Given this, it’s critical to ensure all restrictive covenants within your employment agreements are legally sound well before the need to enforce them arises. Moreover, you should NEVER use generic legal documents you find online to create your employment agreements, as these fill-in-the-blank forms can end up doing your business more harm than good.
Whether you need to draw up new employment agreements containing restrictive covenants, or you would like us to review your existing agreements, shoot us an email today. We can help you identify the proprietary information and processes that warrant such protections and tailor your agreements to ensure these valuable assets don’t fall into the wrong hands.