Beware of Signing Employment Contracts with Restrictive Covenants

Restrictive covenants are provisions in employment agreements that prohibit a person from working for a competitor after leaving his or her employer. The effect of such clauses varies greatly. In addition from limiting a former employee’s job opportunities, a restrictive covenant allows an employer to restrict the former employee from starting a business or forming a venture with others that competes against the former employer; contacting or soliciting former or current customers or employees of the former employer; and using confidential knowledge, trade secrets and other privileged information learned while working for the former employer. Many employers also place time and geographical restrictions in these covenants.

Believe it or not, such restrictive clauses are not always enforceable. Although every case is different, judges have been taking dimmer views of such attempts to restrict an employee’s livelihood. Whether or not such covenants are legal, defending lawsuits involving restrictive covenants is time-consuming and expensive, so employers should avoid placing such clauses in an employment contract. Many employers have a better chance of having their covenants enforced with a shorter geographic restriction, when such customers were procured by the company (not the employee) and when the prohibition period is no longer than 6-12 months.

Many employers have a tendency to “hang” such a clause over the individual’s head by threatening to institute legal action after a person’s resignation or termination. This can discourage employees from contacting prospective employers and customers in their industry. In many states, a covenant is not enforceable if it restricts a person’s right to work (especially if their trade is the only means of support); when the covenant is used by the company solely to protect its turf; when trade secrets are not involved; or if the person must work to support a family member with special needs or if their spouse is seriously ill. If your ex-employer threatens to sue you in order to enforce the covenant, be sure to contact an employment attorney immediately. During the trial, judges tend to be more sympathetic to the employees, so it wouldn’t be wise to badmouth your former employer in court.

Before an employee starts a job, they should carefully review and resist signing contracts with restrictive covenants, especially those that contain a liquidated damages provision (meaning that the company will ask the former employee to return part of their compensation or forfeit their benefits in the event they violate the agreement). They should also read what the covenant entails. If they feel the time restriction is excessive (i.e., two years), they should negotiate for a shorter timeframe (such as three months) and insist on the right to receive continued salary and other benefits while the restrictive covenant is in effect. Everything is negotiable before you sign on the dotted line.

Once your signature is on the contract, you may be bound by its terms. Also, be sure to obtain a copy of the agreement, then put it in a safe place. This saves you time and legal fees in trying to find it when you resign or are terminated.

If you are asked to sign an employment contract that contains a restrictive covenant, please contact an experienced employment law attorney first. Call Steven Mitchell Sack at (917) 371-8000.

Leave a Reply

Your email address will not be published. Required fields are marked *