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 IRS final regulations defining 'spouse' for federal tax and benefits purposes.
Updated to reflect forthcoming prohibition of noncompete agreements with low-wage workers.
Updated to include detailed information on the forthcoming state Act to Establish Pay Equity, which strengthens existing equal pay laws.
Updated to reflect state Supreme Court ruling prohibiting courts from modifying the terms of noncompete agreements.
Updated to reflect amendments to equal pay law expanding coverage to employers that employ two or more employees, effective July 20, 2016.
Updated to reflect requirements regarding the enforcement of noncompete agreements, effective July 1, 2016.
Updated to include requirements regarding post-termination physician covenants not to compete, effective July 1, 2016.
Guidance for HR on the advantages of using restrictive covenants.