Employers invest substantial amounts of time and money in developing employee skills and knowledge. Upon employment, access to company information, including confidential information, is available. Over time, some, if not most, of your employees will learn who your customers are, what they desire, where they are located, when they want it and why. As an integral part of any employment agreement, employers have relied upon restrictive covenants of employment both to protect their valuable interests, and to prevent an employee from obtaining an unearned advantage should that person decide in the future to become a direct competitor. This article will analyze three types of restrictive covenants: (1) non-compete, (2) non-disclosure, and (3) non-solicitation.
Be forewarned, as many courts are reluctant to enforce restrictive covenants of employment on the principle that no person should be denied a right to earn a living, among other reasons. In brief, there is no judicial consensus; instead, a patch-work of decisions presently prevails. Therefore, before you begin using restrictive covenants as a condition of employment, you must confer with a lawyer with knowledge of the prevailing law of your jurisdiction.
From the perspective of format, it is recommended that you use the rifle approach as opposed to the shot-gun approach when considering the use of restrictive covenants of employment in your business. To that end, it is suggested that you conspicuously separate each and every provision so that if one covenant is found by the court to be unenforceable, the other covenants may survive. It is also recommended that any restrictive covenant of employment be part of the initial employment agreement, since this provides the employer with the argument that the compensation package that the employee had accepted included the value of the employee’s consent to signing the employment agreement containing restrictive covenants. If this is not possible, you should consider providing the employee a reasonable amount of money, such as $500 or $1,000, as consideration for signing the agreement; here again, the employer can argue that value was given in consideration of an employee’s relinquishment of certain rights.
In some instances, the employee may refuse to sign all or some of the restrictive covenants. At this juncture a business decision needs to be made; and a risks/rewards analysis may prove helpful in determining the value of the contemplated employment relationship. At a minimum, you should confer with a lawyer to determine how likely a court will enforce a particular covenant or a portion thereof. If the chances of enforcement are remote it may be wise to hire the individual without the covenant.
As a general rule, courts located in California are unwilling to enforce a non-compete covenant; however, exceptions to any general rule do occur. Numerous other jurisdictions will analyze the restriction in terms of (i) scope (what type of activities does the non-compete prevent), (ii) geography (how big is the territory claimed by the employer), and (iii) duration (how long does the covenant run). Generally speaking, the broader and longer each foregoing factor is, the less likely it will be enforced.
The restrictive covenant of non-disclosure is distinguishable from the non-compete covenant. With non-disclosure the focus is upon what information belonging to the employer did the employee reveal, and it does not matter whether or not an employment relationship still exists. To summarize, a non-disclosure covenant becomes effective the moment it has been signed by an employee, whereas a non-compete becomes effective upon termination of the employment relationship.
Non-disclosure covenants can include the names and addresses of employees, customers, business processes and records. However, if the information can be easily obtained by inexpensive means, the employee will likely argue that its disclosure is not a violation of the non-disclosure covenant. Many courts disagree, since the information was obtained during the employment relationship and not independently and outside the employment relationship. Whereas enforcement of a non-compete covenant may prevent an individual from earning a livelihood, enforcement of a non-disclosure covenant will only result in preventing unauthorized use of information belonging to the employer, both during and after the termination of the employment relationship.
Principles surrounding non-disclosure covenants are closely aligned with the principles of trade secrets, a topic discussed in a prior edition of this publication. For purposes of this article, it is important to consider that there may be instances where the improper and unwarranted disclosure of information that does rise to the level of trade secret protection will still be found by a court to be protected by a non-disclosure covenant.
The restrictive covenant of non-solicitation encompasses (1) non-solicitation of your employer’s employees, or (2) non-solicitation of the employer’s customers. Similar to non-disclosure, a non-solicitation covenant becomes effective the moment it has been signed by an employee. In brief, the employee is prevented from soliciting your other employees for purposes of having them engage in separate profit-making venture, thus depriving the employer of his employees’ full time and best efforts. To the extent that a non-solicitation covenant may include the employer’s customers it is akin to a non-compete. However, once again, whereas enforcement of a non-compete covenant may prevent an individual from earning a livelihood, enforcement of a non-disclosure covenant will only result in preventing unauthorized use of information belonging to the employer, both during and after the termination of the employment relationship.
