Restrictive Covenants

So you just lost your job, and to add insult to injury, the company that terminated your employment “reminded” you that you agreed not to work in the industry or pursue their customers for two years. Can they do this?

The answer, as is often the case in the legal world, is that it depends.

Some restrictive covenants will be enforceable, but courts will protect an individual’s ability to earn a living and not allow any unreasonable restrictions upon it. Employers are often surprised to learn that by default, there is nothing stopping their employees from resigning, going to the competition, and immediately pursuing their best clients.

Duty of Confidentiality / Fiduciary Duties

All employees have a Duty of confidentiality / fiduciary duties, and higher level employees may have fiduciary duties which will further limit their ability to compete. The duty of confidentiality will prevent any employee from using confidential information for the benefit of themselves or third parties. For example, you cannot use your knowledge of your former employer’s pricing strategy to deliberately undercut them, or your knowledge of when contracts will expire to strategically target their former customers.

Employers can impose additional post-employment restrictions upon their employees, and the two most common forms of restrictions are non-competition covenants and non-solicitation covenants. However, just because it is in writing, that does not mean it is enforceable – even if you signed it. Courts will assess any restrictive covenant to determine if it is reasonable.

Non-Competition

Any restrictive covenant will be subject to scrutiny, as courts are reluctant to unnecessarily interfere with an individual’s ability to earn a living. It will have to be outwardly and subjectively reasonable and justifiable. By default, non-competition covenants, which preclude an individual from taking any job in the same industry, will be seen as unreasonably restrictive and therefore, unenforceable. The employer seeking to enforce such a clause will have to show that it is reasonable in the circumstances. Even if a court agrees that circumstances warrant a non-competition covenant, the specific terms will be assessed in order to determine whether they are reasonable. These include the length of time, the geographic scope, and the scope of companies that would fall within the limitation

Non-Solicitation

Courts are more willing to enforce non-solicitation covenants. These covenants allow an individual to work for any organization, but preclude them from pursuing their former employer’s customers for a specified period of time. As a result, it does not shift the individual out of their chosen industry. Again, however, the employer seeking to rely upon such a clause will have to show that the terms are reasonable. In this context, the terms in question will typically be the length of time and the scope of customers or potential customers that are included. We often see restrictions that last for two or more years; those will almost always be found to be unreasonable.

It is critical to bear mind that courts will not “fix” clauses that they deem to be unreasonable. In other words, if a court finds that a non-solicitation covenant of six months would be appropriate, but the contract says it applies two years, they will not reduce it to six months. So you may not be stuck with the harsh clause that you agreed to.

How We Can Help You With Restrictive Covenants

We will review restrictive covenants with you, either at the time you are asked to sign them or when the company seeks to enforce them. We will explain your rights and obligations, and will then represent you if necessary to fend off an attack by your former employer.

Remember that in many cases, employers know that their restrictive covenants are unenforceable, but they try to intimidate individuals into compliance. The worst thing you can do is ignore the threats, as the company might then file a lawsuit and seek an injunction.