Non-Compete and Non-Solicitation Agreements in Employment Law
It is common for employers to want to mitigate the risk that their employees will use or benefit from the employer’s confidential business information after employment has ended. As a result, they may require employees to agree to certain limitations on their post-employment activities. While such “restrictive covenants” may be enforceable in some circumstances, they must meet stringent requirements and should be carefully vetted by both employers and employees to ensure their respective rights are protected.
What Is a Restrictive Covenant?
Restrictive covenants are contract clauses which limit the activities of an employee after employment has ended. They may be included in employment, severance, stock option, and other agreements or in a contract for the sale of a business. Such provisions may be signed prior to or at any time during employment or upon cessation of employment. Typically, employees are prohibited from competing with the former employer, soliciting customers, or disclosing confidential information.
What Types of Restrictive Covenants Exist?
The most common types of restrictive covenants include the following:
- Non-competition. The employee agrees to not work for a competitor or start a competitive business for some period of time and within a certain geographic area after employment ceases.
- Non-solicitation. This provision prevents an employee from soliciting customers or suppliers of the former employer. The purpose is to limit the employee from using information garnered during employment to lure customers away and unfairly compete with the former employer.
- Nondisclosure or confidentiality. This restriction ensures that employees cannot use or disclose proprietary information, such as trade secrets and client lists. The provision often applies for several years after employment ends unless the information becomes public through other means.
When Is a Noncompete Unreasonable?
Noncompetition provisions are carefully scrutinized under New York law. A noncompete is only enforceable to the extent it (1) is necessary to protect the employer’s legitimate interests, (2) does not impose an undue hardship on the employee, (3) does not harm the public, and (4) is reasonable in time period and geographic scope.
New York courts use a two-part test in determining the employer’s legitimate interests. A noncompete must be necessary (1) to prevent the disclosure or use of trade secrets or confidential information, or (2) where an employee’s services are extraordinary. Both the legitimate interest and undue hardship elements require looking at the employee’s job duties and the scope of employment prohibited. A noncompete’s restrictions must be no greater than necessary to protect the legitimate interests of the employer. As a result, while courts may enforce a noncompete against a high-level employee with access to trade secrets or confidential information or who has unique skills, they will not enforce one against a lower level employee without such access or skills.
The noncompete also must be reasonable in duration and geographic scope, which depends on the circumstances. Generally, a noncompete of six months or less is reasonable, but longer ones may also be enforceable where the geographic restriction is limited, or other conditions exist. Similarly, a broad geographic restriction may be permissible where the duration of the noncompete is short.
Are There Alternatives to a Traditional Noncompete?
Although not as common, one alternative to a noncompete in an employment agreement is a garden leave provision. Garden leave is more common for high-wage earners like corporate executives and individuals working in banking and finance. Garden leave allows for employers to keep an employee on payroll during a notice period, in which they cannot work elsewhere, yet are no longer actively working for the company.
The use of garden leave provisions continues to rise as noncompete agreements face more and more judicial scrutiny. These provisions allow employers to protect their confidential information and restrict ex-employees from joining a competitor with less judicial scrutiny and pushback. This is because there is a lack of case law on the topic, as it is relatively new in the United States, and the fact that employees are less likely to fight the non-compete aspect as they continue to be paid during the notice period.
How Can the Parties Protect Their Interests?
As with any contract, the terms of a restrictive covenant are important and can have a significant impact on the rights of the parties.
Employees are not required by law to sign restrictive covenants, but employers can make them a condition of employment or receiving certain benefits. However, employees can attempt to negotiate the terms to minimize the scope of the agreement. In particular, employees should avoid liquidated damages clauses which provide for a set amount of damages for breaching a restrictive covenant. In any event, it is crucial that employees read and understand the document before signing and seek legal counsel if there are questions. Employers should discuss their provisions with an attorney to ensure they meet the tests discussed above.
Several options exist for employees to contest a restrictive covenant after the fact. If an employee feels the terms are unreasonable and unenforceable, he or she can seek an injunction or court order against the former employer to nullify the provision. Where the former employer breached the contract, the restrictive covenant cannot be enforced against the employee.
An employer who wishes to enforce a covenant can file a lawsuit in court and obtain an injunction requiring the employee to follow its terms and/or receive damages for the breach if there have been monetary losses. Employers may also threaten the employee’s new employer with a lawsuit to deter employees from moving to a competitor.
Notably, a court may invalidate all or only part of the agreement and enforce the agreement for a shorter time or in a smaller area.
Restrictive covenants have strict requirements for enforceability, but many employers successfully use them to protect their business interests. Employers and employees should consult counsel to ensure they understand the terms to avoid problems in the future.
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