Restrictive covenants are contract clauses that can appear in an employment agreement, offer letter or equity agreement that will obligate and restrict that employee from competing with his or her employer during the course of their employment as well as after the employment term ends.
Wendi Lazar, partner at employment law firm Outten and Golden, LLP, who co-heads the Professionals and Executives Group, spent some time with The Legal Broadcast Network discussing the ins and outs of restrictive convenants.
The person coming into the job really needs to know if the company has a protective interest in restricting them from competing. Wendi explains that certain high-level employees will have a lot of
confidential information and be exposed to a lot of secrets and intellectual property that the company may be worried about them sharing. On the other hand, a certain employee may not be exposed to confidential information and a restrictive convenant may be too broad for them and restrict them from ever getting a job in the future. Wendi emphasizes how important it is for every employee to read the fine lines when it comes to both confidentiality and restrictive convenants.
A non-compete is a type of restrictive convenant and is an obligation on the part of the employee not to compete with the employer in the workplace during employment but more so after employment ends. Wendi adds that these non-competes generally have a term and may be very specific for that industry, so one needs to know how broad and specific the non-compete is. It can also be limited in scope, time and geography. A reasonable non-compete clause is if the company has a legitimate interest in enforcing it but also if it doesn’t stop an employee from getting a job in their field.
Another restriction is a non-solicitation clause, which have two components, the first of which is restricting an employee from soliciting clients, customers or relationships from that particular company. These can generally be from three months to 18 months. The other component is after an employee leaves, for them not to solicit employees of the former company. Wendi says that courts are more likely to enforce non-solicitation provisions than non-competes because courts generally feel that clients, customers and relationships are a protected interest of the company.
A component to enforcability of a non-compete is that the employer provides a form of consideration. Every good contract must have a meeting of the minds and good consideration and consideration in the non-compete arena is during employment and is the employment itself. Salary is consideration, as one is getting paid to stay with the employer and not go somewhere else. However, Wendi adds, post-employment is very different, ie severance, which gives you a salary after termination, and that severance can be consideration for the enforcability of a non-compete.
Wendi says that it is standard practice to negotiate restrictive convenants, especially for high-level employees. She says that it’s important to note that in terms of restrictive convenants, they are enforcable depending on the state laws and that most non-compete and non-solication laws revolve around common law and what the law says in that state. More and more states are putting on state statutes that enforce non-competes, Wendi says.