Overview: One type of employment contract is the restrictive covenant. Employers should safeguard their trade secrets, client or customer information, employee lists or other information that may give them a competitive edge in their industry by requiring employees to sign a restrictive covenant, i.e., noncompete agreement, nonsolicitation agreement, and/or nondisclosure agreement.
Although restricting the use of this information by employees during and after their term of employment may be vital to the protection of an employer's business, an employer must ensure that the terms of the agreement protects the employer's legitimate business interests and extends no further than is reasonably necessary to protect those interests. Employers should be aware, however, that some states do not enforce restrictive covenants at all, while others place restrictions on the types of information that is confidential, the geographic scope of the covenant as well as the duration.
In addition to requiring a new employee to sign a restrictive covenant before working, employers should also ensure prior to hiring the prospective employee that he or she is not subject to a restrictive covenant with his or her former employer. One way to accomplish this is to request that the new employee sign a representation that he or she is not subject to any restriction on competition or other contractual limitation on his or her ability to do the job.
Trends: Restrictive covenants are often challenged by former employees. Employers should carefully review the terms of their restrictive covenants to ensure they don't force an employee out of the entire industry - this would be considered overbroad and the courts may refuse to enforce the agreement, thereby possibly leaving an employer's proprietary information exposed to a former employee to be used for his or her own benefit.
Author: Melissa A. Silver, JD, Legal Editor
Updated to reflect forthcoming San Francisco notice-posting requirements.
Veeva Systems, a California-based, cloud-based software provider for the life sciences industries, has filed a claim in the superior court of California against three competitors that use post-termination non-compete, confidentiality and nondisparagement clauses in employment agreements.
Restrictive covenants of all types (e.g., non-competition, customer non-solicitation and employee non-solicitation) are widely used across the country. But there is no uniform federal law governing their enforceability. Proskauer Rose employment attorneys John Barry and Guy Brenner survey the landscape and share their tips.
Updated to reflect forthcoming notice-posting requirements under the New York City Fair Work Practices ordinances.
Updated to include amendments to notice-posting requirements.
Updated to include the forthcoming Whistleblower's Protection Act.
Updated to include West Virginia law regarding covenants not to compete for physicians, effective July 1, 2017 and forthcoming Oregon law regarding restrictive covenants for home care workers.
Updated to include noncompete agreement requirements, effective June 3, 2017.
Guidance for HR on the advantages of using restrictive covenants.