Restrictive Covenants in Employment Contracts And Covenants Not to Compete

Image courtesy of posterize / freedigitalphotos.net

A restrictive covenant refers to a promise not to compete or solicit business.  Generally, this is used in business contracts with an employee.  In most scenarios, an employer will require the employees to sign these employment agreements at the outset of the career with a particular company.  When written well and enforced properly, restrictive covenants and covenants not to compete can be important for protecting business interests.  Not all states consider the enforceability of such agreements in the same manner.

An employer is placed at a great risk when trusting an employee to learn the tools of the trade and interact with critical customers.  In the short term, this can be extremely beneficial for business interests.  If the employee decides to strike out on their own, however, the original company can suffer devastating losses as a result of competition.  Without a restrictive covenant in place, the employee can freely compete with a former employer and company after that employee has left the company.

It is also possible that an employee planning a departure can do a great deal to prepare for their exit prior to actually announcing it.  For example, he or she might get financing from a bank or form a corporation.  These are just a handful of examples of what an employee headed towards the exit can do to set themselves up for success after departing your company.

What is a non-compete agreement?

The most restrictive form of covenant is known as a non-compete agreement.  These prohibit an employee from working for a competitor of your company for a specified period after they depart your business.  Another version of a non-compete that does not stretch as far is one that allow employees to take a job with a competitor but prohibits that employee from serving or reaching out to the ex-customers of the employer.

What is a non-solicitation covenant?

A non-solicitation covenant will prohibit the employee from contacting any customers of the former employer.  A non-disclosure agreement can protect the employer from the risk of information exposed by a former employee.  Finally, an assignment of intellectual property rights is used to give the employer the right to patent an invention that the employee develops.

When written properly, restrictive covenants can be critical for protecting a business and its owners from competition, the sharing of confidential information, and the loss of rights to inventions.  Hiring the right attorney to develop articulate and clear covenants is critical for success.