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Restrictive Covenant Employment Guide For Employers

If you are an employer in a highly mobile and competitive industry, whether it is banking, tech, staffing or otherwise, obtaining a valid restrictive covenant agreement is a key step in protecting yourself from unfair competition if your employees are poached by rivals or otherwise seek to compete with you after leaving.   But unless it is properly- and narrowly-drafted and the circumstances under which it is obtained are appropriate, the agreement and the employer’s ability to enforce the agreement will be subject to challenge, and that agreement for which the employer paid good money may prove unenforceable.

Our Blog recently informed our readership about the New York Court of Appeals case, Brown & Brown v. Johnson (HNRK Blog dated June 12, 2015).  To save readers the trouble of looking, we discussed the fact that the circumstances under which an employee signs a restrictive covenant agreement may impact its enforceability.  In Brown, one of the issues was the validity of a non-solicitation clause and whether the [former employer/former employee] was entitled to summary judgment even though the clause was overbroad on its face because it purported to ban the former employee from working with any of the former employer’s customers, including those with whom the former employee had no contact. Yet, the court resisted either blue penciling (redrafting the agreement to make it more reasonable and thus enforceable) or eliminating the clause entirely.  As we reported:

The court further considered whether it could partially enforce the clause—i.e., give effect to the restriction only to the extent necessary to protect a legitimate employer interest.  A New York court may modify a restrictive covenant, but only if the agreement was not the result of coercion, over-reaching, or other misconduct. In Brown & Brown, the Court held that summary judgment was not appropriate on this point because fact questions remained regarding the propriety of the former employer’s conduct.  In particular, the Court noted that there was conflicting evidence as to whether the former employer may have used coercive bargaining power when it asked the employee to sign the employment contract after she had resigned from her prior position.

There is a Time and Place for Everything

To ensure the enforceability of your restrictive covenant agreements, we suggest attention to the following issues:

  1. Are the restrictive covenants narrowly drawn?

a. Ensure that the non-compete and non-solicitation provisions are limited in duration and reasonably tied to the employee’s employment, industry, and compensation level.

b. Limit the geographical scope of the non-compete or be prepared to defend in a courtroom the reasons for a broader or unlimited territory.

c. Limit the non-solicitation provision to clients/accounts that are actually serviced or managed by the employee signing the agreement.

d. State in the agreement the legitimate interests that require protection for the employer, for example: key client relationships arising from the employee’s employment, or trade secrets such as trading algorithms, etc.

2. Are the conditions for signing appropriate?

To be safe, an employer should take the following steps when presenting a prospective or current employee with a restrictive covenant.  As we noted in our earlier post [hyperlink], the Brown & Brown court identified as an issue of fact whether the employer improperly coerced the employee into signing the agreement.  We recommend that an employer follow—and carefully document—the following steps:

  • Inform the applicant during the interview process that he or she would be required to sign a restrictive covenant.
  • Provide the applicant with a sample of the restrictive covenant and explain why a restrictive covenant is necessary and (as needed) the impact it may have on their future employability.
  • Provide the applicant sufficient time to have the agreement reviewed by the applicant, applicant’s legal counsel or advisor.
  • Ensure that the applicant has an opportunity to negotiate or ask questions about the terms of the restrictive covenants.
  • If an existing employee is asked to sign a restrictive covenant agreement, the process set forth in 2(a)-(d) should be followed, and in addition ensure that you have provided the employee additional consideration for entering into the contract beyond their continued employment with your company and set forth the nature of that consideration in the agreement. (In some jurisdictions continued employment is sufficient consideration to bind the employee’s promise but not in others. We suggest that you check with legal counsel to determine the requirements in your jurisdiction.).
  • Periodically review the restrictive covenant with the employee and renew and alter it as needed so it remains relevant and appropriate to the employee’s current position.

3. Use skilled legal counsel to draft the agreement.

There are plenty of restrictive covenant forms on the web to copy from and adapt to a given business. We don’t, however, suggest generating home-brewed contracts.  Protection of trade secrets and guarding against unfair competition should be an essential element of a company’s business plan and operation. There is an art to drafting restrictive covenant agreements and having local knowledge of the law and the courts is critical to the proper drafting and enforcement of a restrictive covenant agreement.

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