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 include information on a state supreme court ruling on arbitration agreements.
Updated to include FAQs released by the State providing guidance on nondisclosure agreements and arbitration clauses.
Updated to reflect law limiting the use of employment contracts for certain claims, effective October 1, 2018.
Updated to reflect Massachusetts noncompete law requirements, effective October 1, 2018.
Updated to include expanded notice-posting requirements under the San Francisco Fair Chance Ordinance, effective October 1, 2018.
Updated to reflect information on a state supreme court ruling concerning noncompete agreements.
Updated to include New York City notice-posting requirements, effective September 6, 2018.
Updated to reflect law limiting the use of employment contracts for certain claims, effective July 1, 2018.
Guidance for HR on the advantages of using restrictive covenants.