As a result of the unforeseen circumstances of the COVID-19 pandemic, and the workplace-related changes resulting from the pandemic, a number of employers have been reviewing and updating their existing employment agreements. One issue that we have seen raised on a number of occasions as part of these discussions is the protection of intellectual property and business interests in contracts. This can be done by incorporating clauses called 'restrictive covenants' into employment contracts.
Two of the most frequently used restrictive covenants in employment contracts are non-competition and non-solicitation clauses. A non-competition clause restricts a current or former employee from working for a competing business. Non-solicitation clauses prevent current or former employees from soliciting other employees or from soliciting business from former clients.
Restrictive covenants are generally subject to significant scrutiny from courts. Courts have often referred to them as presumptively unenforceable on the grounds that they are contrary to the public interest of discouraging restrictions on trade and in maintaining free and open competition. In order for a restrictive covenant to be enforceable, it must be reasonable and not contrary to the public interest.
Reasonableness is generally assessed based on the entire context of the employment contract, including the nature of the duties undertaken by the employee. Courts will look to whether or not the restriction is reasonably necessary to protect a business' interests through the lens of three main features of these covenants: (1) scope, (2) the duration, and (3) geography. The broader and longer the scope of the covenant, the less likely it will be considered enforceable. Additionally, if the language in the covenant is not clear (e.g., the nature of the activity that is restricted is not clear), that may also make the covenant unenforceable.
If a restrictive covenant is properly drafted, it can be an indispensable tool in protecting an employer's interests. Restrictive covenants can help prevent a business from suffering irreparable harm by allowing the business to obtain an injunction. If a business believes that a former employee is in breach of a restrictive covenant, the employer can choose to seek an injunction from a court which orders the offending employee to cease the prohibited activity and to prevent an employee from breaching the restrictive covenant in the future.
Incorporating restrictive covenants can be an effective way of protecting your business. However, given that the enforceability of restrictive covenants can depend on a variety of factors such as the language of the restrictive covenant, it is important that these provisions are properly drafted. Neuman Thompson is happy to work with your business to incorporate restrictive covenants into your business' employment agreements. Our legal team is also happy to assist with the enforcement of existing restrictive covenants.
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The information in this update is intended as general information and should not relied on as legal advice.