Controlling What Your Employees Do After They Leave: Effective Use of Restrictive Covenants in Employment Contracts
Most employers put much time and effort into both the recruitment process and onboarding of new employees, which is sensible. Hiring good people is essential in growing both new and established businesses.
Once you’ve brought on a new employee, you want them to clearly understand their responsibilities to the company. So you expend additional time and effort putting together a comprehensive employment contract setting out all these details.
But problems can arise after some employees leave, for whatever reason. Many employers neglect to define the responsibilities of ex-employees as they do for their current employees — even though an ex-employee’s actions may have significant ramifications for the business. Without proper restrictions, ex-employees can walk away with confidential business information, use it to benefit a competitor, and reveal what they choose about all aspects of your business.
Adding effective post-employment restrictive covenants to the employment agreement, such as non-competes and non-solicitation clauses, requires delicately balancing the legitimate concerns of the business against the employee’s right of mobility. Boilerplate restrictive covenants often are overly broad and of questionable enforceability. More importantly, the federal government and some states are trying to either limit or eliminate the use of non-compete clauses in employment situations.
Businesses must work closely with their employment counsel to carefully craft provisions that protect the business as rigorously as possible while not overreaching the legal boundaries for covenants. Here we’ll discuss the effectiveness and enforceability of some of the most common restrictive covenants for employment agreements.
Perhaps the most common, most challenged, and often most poorly done restrictive covenant is the non-compete. The basic principle behind non-competes is simple: You don’t want an employee to leverage what they learned from you to become your competitor. And it would seem common sense that businesses should be able to protect the investment they made in employees.
Unfortunately, non-competes are not that simple. While Ohio courts generally favor employers’ abilities to protect legitimate business interests, employees also have a protectable right to work. So non-competes must be reasonable and have boundaries that balance these competing interests.
Review your non-compete provisions with counsel and ask yourself whether they (1) extend beyond what is necessary to protect your legitimate business interests; (2) impose undue hardship on the employee; or (3) injure the public. (Raimonde v. Van Vlerah, 42 Ohio St.2d 21, 25, 325 N.E.2d 544 (1975)). If the answer to any of these is yes, you need to craft them more narrowly.
Courts look at many factors in analyzing the reasonableness of a non-compete, including:
- How long the non-compete lasts
- How far the non-compete extends geographically
- How broadly the non-compete covers the employee’s scope of work
- How much access the employee had to confidential information and customer lists, and whether other employees had similar access
- Whether the non-compete covers inherent skills and expertise or skills developed with other employers
- Whether the non-compete effectively prevents the employee from finding other work
In a nutshell, the broader a non-compete is, the less likely it is to be reasonable. Similarly, the more difficulties a non-compete creates for an employee in finding work, the less likely it is to be reasonable.
You should consider two types of non-solicitation clauses in your employment contracts: (1) non-solicitation of the business’s clients or customers; and (2) non-solicitation of other employees.
Customer non-solicitation provisions are similar in intended effect to non-competes but are much narrower. While non-solicitation clauses undergo similar analyses for reasonableness, they start from a better position than non-competes because they have more limited effect on the employee’s right to work.
Non-competes can delay an ex-employee’s ability to begin working elsewhere. Under non-solicitation clauses, employees can immediately start work so long as they don’t contact previous clients (unless the employee developed those clients before the employment relationship).
Non-solicitation of other employees adds another layer of complexity as it implicates the rights of someone that is not a party to the employment contract. Difficult situations can arise when an ex-employee advertises job openings and your current employees respond to the ad.
Confidentiality and non-disclosure agreements
Confidentiality clauses are generally simpler to craft and enforce, even if they contain relatively broad restrictions. The protectable business interests are apparent, and there is no competing balance on the employee side. Your employees should not be able to use your confidential information in their next job.
Confidentiality provisions do have their own issues. First, if your provision is so restrictive that it effectively prevents the employee from working, you may have difficulty enforcing it. You may be able to prevent your employee from joining a competitor by arguing that they will inevitably disclose your information. But the law surrounding the inevitable disclosure doctrine is murky.
Second, you must ensure that you are adequately protecting your confidential information. If you don’t, a court may find little or nothing for the confidentiality clause to protect.
Non-disparagement agreements are generally enforceable unless, for example, they preclude employees from making truthful statements about litigation between the employer and the employee. Moreover, if agreements limit an employee’s ability to state facts, they can be problematic.
What your business should know about non-disparagement agreements is that the business should never agree not to disparage a former employee. Such agreements place the business in the impossible position of monitoring and controlling the speech of everyone that works at the company, or worse yet, that of company agents.
Non-circumvention agreements are a much broader and potentially more vague way of accomplishing many of the goals of other restrictive covenants. Effectively, they require the employee not to bypass the business and cut them out of known deals or enter into business with people met through the employment relationship. In general, if you have well-crafted non-competes or non-solicitation agreements, there is little need to supplement them with a non-circumvention agreement.
Use restrictive covenants judiciously
Your business has every right to protect its interests, and you need to do so both with existing employees and in anticipation of those employees leaving. But to effectively protect yourself, you need to do more than just prevent your employees from working for competitors. Work with counsel to craft covenants that smartly balance your interests and your employees’ rights.
Gertsburg Licata is a full-service, strategic growth advisory firm focusing on business transactions and litigation, M&A and executive talent solutions for start-up and middle-market enterprises. It is also the home of CoverMySix®, a unique, anti-litigation audit developed specifically for growing and middle-market companies.
This article is for informational purposes only. It is merely intended to provide a very general overview of a certain area of the law. Nothing in this article is intended to create an attorney-client relationship or provide legal advice. You should not rely on anything in this article without first consulting with an attorney licensed to practice in your jurisdiction. If you have specific questions about your matter, please contact an attorney licensed to practice in your jurisdiction.