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You recently established a business and have started extending employment offers. Your new hires will have to complete some paperwork, including payroll, retirement account, employee handbook review and more.
But what happens when you give your new hire a non-compete or confidentiality agreement?
It’s important for employers to understand what these types of agreements — restrictive covenants — mean for employees and employers alike; and what the recourse is if and when one is breached.
Related: 5 Situations That Require a Non-Disclosure Agreement
Restrictive covenants: An overview
Restrictive covenant agreements typically refer to agreements entered into by employees upon hiring that prohibit certain actions during and/or after employment. Restrictive covenants can also appear in agreements presented to employees in other contexts.
Separation/severance agreements often have restrictive covenants. Also, if you are acquiring a company, you may (particularly for a key employee with a significant equity stake in said company) ask sellers to sign an agreement with restrictive covenants.
The most common restrictive covenants are:
- Confidentiality: To keep employer information confidential.
- Non-solicitation: To not solicit or induce certain parties from doing business with the employer. Non-solicits can prevent employees from inducing other employees to leave their employment with the employer and can also prevent employees from inducing customers or vendors to cease doing business with the employer.
- Non-competition: To not compete with the employer; this can be limited to working for or starting a competitive business. It can also prohibit owning competitor shares.
- Non-disparagement: To not make statements (or sometimes even act in a manner) that disparage or criticize the employer. Depending on the breadth of the non-disparage agreement, an individual may also be prevented from disparaging the company’s directors, officers, employees, shareholders and other agents.
Related: Are You Using Non-Disclosure Agreements as Preventive Measures or Backup Plans?
Why ask your new hire to sign a restrictive covenant?
As an employer, there are clear reasons that you may want to impose these restrictions. If an employee has access to confidential information, you want to ensure your employee is bound to maintain that confidentiality.
Non-solicitation and non-compete agreements ensure that an employee is not at odds with your company’s interests. It wouldn’t make sense for an employee to compete with you while employed by you — or solicit customers to leave.
Non-disparagement is also understandable during employment. Morale is compromised when an employee disparages your company, and the spreading of negative information reflects poorly on both your company and the employee.
Upon termination, non-solicitation and non-compete covenants become dicier. On one hand, as an employer, you may argue that you’ve invested time and resources in training employees and facilitating relationships between your employees and vendors/customers. This becomes more challenging if the employee simply leverages the training and relationships for personal gain after they leave.
Conversely, non-competes also make it hard for an employee to carry out their chosen profession. Similarly, non-solicits can make it difficult for an employee to carry out tasks for a new employer.
For these reasons, some states (e.g. California) ban non-competes. Other states and the federal government are considering the same. Many others carefully scrutinize non-compete and non-solicits to ensure they are in effect for a reasonable duration and are of a reasonable scope. Hence, these covenants, if they survive termination, usually do so only for a year or two.
You’re a new hire and signed a restrictive covenant. Now what?
Confidentiality: The recourse depends on the context. Most confidentiality terms in employment agreements are non-controversial. However, it does become controversial if your employer uses a confidentiality provision to stop you from engaging in certain protected activities, like discussing wages and working conditions; whistleblowing; or discussing sexual harassment or discrimination. Provisions that prohibit protected activity may be void, and as an employee, you may be able to sue your employer if such a provision is imposed on you.
Non-solicits/Non-competes: In states like California, you can sue your employer if they impose a post-termination non-compete or customer non-solicit on you. In other jurisdictions, with an overbroad non-compete or non-solicit, you can litigate the issue.
Non-disparagements: This is a bit of a new frontier. Recent laws in some states limit how broad a non-disparagement can be, in that an employer cannot prohibit an employee from discussing activity in the workplace that is believed to be illegal or exposing sexual harassment or discrimination. The National Labor Relations Board has also taken a stance that would render most non-disparagement provisions for non-supervisory employees unenforceable — except in narrow circumstances.
Related: How to Draft a Non-Compete Agreement That’s Actually Enforceable
Your employee breached a restrictive covenant or won’t sign one. Now what?
As an employer, you can sue if an employee breaches a restrictive covenant. You can try to get an injunction and even seek damages. Although it can be costly to litigate such a lawsuit, it is important for employers to protect their interests.
There can be other ways for an employer to protect their rights. For example, ensuring future employers know that the employee is subject to restrictive covenants can help mitigate potential issues, as the future employer may be less willing to take a risk in being involved in a violation of contractual obligations. In an employment agreement, the employer can include a provision that requires the employee to disclose the identity of new employers for a period post-termination; and that allows the employer to disclose the restrictive covenant agreement to such future employers.
Additionally, in a separation agreement context, there can be additional protections. An employer can have severance paid out over a period of time conditioned on the employee’s compliance with restrictive covenants. In that case, if the employee breaches, the employer can cease making payments.
If an employee refuses to sign a restrictive covenant, get legal advice before retaliating against them. Depending on where the employee lives/works, you can get into even more trouble for retaliatory actions.
For example, certain states make it unlawful to impose a violative non-compete on an employee, like California, Illinois and Washington state. Additionally, in some states, it is unlawful to retaliate against an employee for complaining about unlawful activity (like trying to impose an unlawful restrictive covenant agreement). Employees might be able to sue for wrongful termination or retaliation if the employer fires, demotes or otherwise takes punitive steps against the employee for such complaints.
Moreover, there are even states where post-employment actions (cease and desist letters, lawsuits) against an employee, if brought in bad faith and in retaliation for protected activity (complaining about an unlawful restrictive covenant agreement), can give the former employee the right to sue the employer. Minnesota’s Human Rights Act, for example, can impose liability for such post-employment conduct.