Restrictive Covenants: What you should know

 

There was a time when people worked for an employer from the day they left high school until the day they retired. While that might still occasionally occur, it is usually no longer the case.  These days, it is not unusual for someone to start in a job, perhaps even as a temp or a contractor, be trained in their new position and then be “laid off” after a short time; or leave the position for a better one; or even start their own company providing the same or similar services as their former employer. However, in our competitive world, it can be very problematic when a former employee takes information learned on the job with him or her to a competing employer.  

An employer may have found a way to make a better mousetrap or to cure the common cold. Now their former employee goes to work for a competitor with that information.  The former employee also may have had access to client lists as well as trade secrets, pricing and procedures that the employer has invested time and money in developing.  How does the employer protect itself from this potential poaching?

The answer is a restrictive covenant in an employment contract.  This is a clause in the contract which restricts the ability of the former employee to go to work for a competitor or start their own similar business, using the information they gained in their former position. The restrictive covenant cannot last forever and can only restrict a former employee’s post-employment activities for a limited period of time after employment ends.  Examples of a restrictive covenants are: a former employee may not work in the same industry for a certain number of years; and/or the former employee cannot work in the same industry in a certain locale (a radius of a certain number of miles from their former employer); and former employee is not permitted to contact any of the former employer’s customers; and/or a former employee may not disclose certain information learned in their former position.

It is obviously best for a society if people can and do work. Therefore, the general rule is that such restrictions on employment are against public policy.  So, most laws require a restrictive covenant to be as narrow as possible, as a business law lawyer Pottstown PA trusts. The purpose is to protect a legitimate interest of a business.  It cannot be so restrictive as to keep a person from ever working again in the same or similar business as their former employer’s business.

The reality is that if a person wants a job, they may have to sign such an agreement.  But employers cannot use a restrictive covenant that is so broad that a person cannot make a living if they leave their job for any reason.  If the restrictive covenant is too broad, it may not be enforceable at all.  An employer to carefully consider whether a less restrictive clause would still protect the employer’s interests. The test used by courts is the “reasonableness” of the restriction.

When deciding reasonableness of a covenant, courts may consider, among other things, the length of time of the restriction; the geographic area of the restriction; whether the such restrictions are usual in the type of business at issue.

The bottom line is that restrictive covenants can be useful in protecting an employer’s business interest, but it cannot be so restrictive that it prevents a former employee from making a living in the field in which they have experience and in which they have been trained.

 

Thanks to our friends and contributors from Rick Linn Attorneys at Law for their insight into restrictive covenants.