Thursday, October 18, 2007

Restrictive Covenants for Your Employees to Sign?

I hear all the time that it's not worth having employees sign a noncompete or other restrictive covenant agreement because they are unenforceable. This is more of an urban myth. While restrictive covenants (namely, noncompetes, nonsolicitation and confidentiality agreements) may be challenging to enforce, they can be a valuable tool for a company to use.

Generally speaking, the law governing restrictive covenants is state-specific, so what is binding and enforceable in Ohio may not be sufficient under Georgia law. I usually tell employers that they should view restrictive covenant agreements as deterrants and not ironclad documents. Whether a restrictive covenant is enforceable can depend on the employer's industry, employee's scope of duties, regularity of contact between the employee and customers, the duration of the covenant and geographic territory in which the employer is trying to restrict the employee.

An employer should decide what it is trying to accomplish by having an employee sign a restrictive covenant agreement:
  • Are we trying to prevent the employee from taking keep personnel with them to another job if they leave?
  • Are we trying to prevent the employee from leaving and opening a competing business?
  • Is there confidential or proprietary information that the employee could misappropriate for his/her own benefit?
  • Are there customers that the employee has closely worked with that might stop using the employer's services if that person ceases employment?

A restrictive covenant should be drafted in a manner that is the least restrictive as necessary. In states like Georgia, courts will not "blue pencil", meaning they will not rewrite the agreement to make it enforceable if it is overly broad or vague; the restrictive covenant is either enforceable on its face or it fails in its entirety.

Litigating a restrictive covenant agreement can be tricky. If a court rules that it is unenforceable, then every employee who signed the same agreement will be able to claim that his/her agreement is also unenforceable. The employer then has to go back to all employees and have them sign revised agreements (presumably "new and improved"). What if an employee refuses to sign a new agreement? Is the employer prepared to terminate that person for not signing.

Challenging stuff to say the least...

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