Restrictive Covenants

Top five mistakes to avoid

Restrictive Covenants
  1. Unrealistic length of time. Though we instinctively seek to protect the business for as long as possible, this invariably leads to restrictive covenants that are too long. Employers must be realistic in terms of the length of time former employees must be restrained in their trade. Have a frank discussion about how long it will take to lock down the business or to secure the client relationships. Consider the length of sales cycles, and similar business practices. You must be proactive and realistic, and should not sit back and let the restrictive covenant do the heavy living.
  2. The global restriction. Despite the rapid growth of online businesses, tele/video-conferencing capabilities and business that operate on the global stage, a restrictive covenant that does not contain a defined geographic scope without any limitations will rarely be upheld. To limit the risk that a restrictive covenant will be overly broad, determine if a worldwide restriction is necessary to protect a legitimate proprietary interest. If it is, consider narrowing the restraint by identifying the competitors that the employee cannot work for during the term of the restrictive covenant.
  3. Absence of a “janitor clause.” Non-competition clauses are often found to be unenforceable because the employer seeks to prevent the employee from working in any capacity during the term of the restrictive covenant. If an employee can take a job as a janitor or mail room clerk, for example, and cause no harm to the employer, but the restrictive covenant prohibits this, then there is a risk the clause may be overbroad. Therefore, seek to tie the activities the employee is restricted from engaging in, post-employment, to the activities the employee engaged in during their employment.
  4. Protecting the future and the past. If your non-solicitation clause purports to prevent your former employee from soliciting “all clients,” chances are that it is overbroad. It is the rare case when an employee, in fact, works with all of your clients. Be realistic about where and with which clients your company is vulnerable. Avoid applying a restriction to “prospective” or “former” clients. Consider restricting only those clients that the employee has worked with in a defined period, such as the year prior to termination. Ask yourself, “Who does the employee have the relationship with?” These are the clients that should be protected.
  5. Choosing the wrong tool from your toolbox. A non-competition clause can preclude your former employee from accepting employment with one of your competitors and/or starting a new, competing business. But a non-competition clause is also the most restrictive in terms of restricting former employees from engaging in their trade. If your real proprietary interest is in protecting your clients, your concern may not be that your former employee works for your competitor, but rather what that employee does for your competitor. Most often a non-solicitation clause preventing solicitation of clients is sufficient.

A final word: While a client may seek a template employment agreement, restrictive covenants are not one-size-fits-all. Ask yourself, “what are they really afraid of?” to determine the type of restrictive covenant to use, the scope of restraint and to avoid some of these common mistakes.