Don’t Sign That Employment Contract Yet! 2 Things You Need to Know First

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Restrictive Covenants in Employment

Employees who are too eager to sign contracts with restrictive covenants in employment can jeopardize their ability to earn a living going forward.

Signing an employment contract can be one of the most exciting moments in your career.  It can represent the payoff of years of education or hard work, a step up into a prestigious position you’d only dreamt about before, or an instant increase in your standard of living.

Before signing a contract, however, it’s important to have a lawyer review your contract and talk to you about what it is exactly that you’re agreeing to.  This is even more important if you’re moving into a position where you’re a key employee, upper management, or an executive.

You’d be surprised what an employer can buy when an employee signs that piece of paper.  Every day, employees agree to very serious and limiting obligations, obligations they must keep even after they’ve left the company, in exchange for their compensation.

Below, we discuss two of the more common types of “restrictive covenants” that limit what employees can do during and after their employment with a company.

Restrictive Covenant #1: Non-competition clause

A valid non-competition clause can prevent an employee from competing in the same business as the employer within certain places for a certain periods of time.

Generally, courts are hesitant to recognize non-competition clauses because of the rule that restrictive covenants must protect a legitimate interest and have the minimal amount of impact on the employee possible.  This usually means that a contract claiming to limit an employee’s ability to work in the same industry must be limited to the least amount of time and geographic space necessary to protect the employer’s legitimate interests.

Because of this, non-competition clauses are often struck down by the courts for being “overbroad.”  If this happens, the court won’t reduce the amount of time and space in which the employee cannot compete.  If the clause is overbroad, it will be as though the whole non-competition clause was deleted from the contract.

Determining whether a non-competition clause would likely be upheld by a court often requires a close analysis by a lawyer who can look at other similar cases that have been decided by the court.  That said, there’s a risk even to signing an overbroad non-competition clause that would likely get struck down by a court.  A new employer may decide to terminate its relationship with an employee once the employer receives a cease and desist letter from the former employer – even if the new employer’s been advised that the clause is unlikely to be upheld.

Restrictive Covenant #2: Non-solicitation

Non-solicitation clauses prevent the employee, often for up to one or two years after they leave the employer, from “soliciting” clients of the employer or employees of the employer.  Compared to non-competition clauses, courts are more willing to recognize these clauses as valid since they don’t prevent an employee from competing generally. Instead, these clauses limit employees’  business activities to those which don’t involve the clients and employees of the former employer.

That said, non-solicitation clauses can be considered overbroad by courts as well. This is especially true if they prevent the employee from contacting former clients with whom they had no contact, or prevent the employee from soliciting clients or employees for too long a time after the employment ends.

Some courts have also clearly indicated that “solicitation” means asking for something, and have therefore allowed employees to accept business from clients of the former employer if the employee is approached by clients of the former employer and not the other way around.  Employees, however, should consult a lawyer about their obligations under a non-solicitation agreement before dealing in any way with clients or employees of their former employer.  Employees  should know precisely what their obligations are under their employment contract, and the various ways in which they can minimize their risk if their former employer takes notice of the employee’s relationships with their former clients or staff.

DISCLAIMER: The content of this article, and this website generally, is not intended as legal advice and cannot be relied upon as legal advice.  To provide legal advice on your problem, a lawyer must first understand your specific situation.

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