The growth and development of a business is generally dependent upon the efforts and dedication of its key employees. Such key employees can greatly contribute to the success of a business. Conversely, upon the termination of their employment, these same employees have the potential to negatively impact the company. Depending on his or her relationships with clients, a former employee can convince your company’s clients to leave the company and be serviced by the former employee’s new employer or company. The former employee can also solicit or encourage other key employees to leave the company.
To minimize disruption to the company’s operations and client relationships, a company can be proactive and have the key employee sign an agreement agreeing to certain restrictive covenants:
Confidentiality Agreements. While an employee of your company, the employee will likely become familiar with confidential and proprietary information about the company, including its customer base, marketing strategies, supplier information and pricing of products. Confidentiality agreements require the employee to keep the business practices and operations of the company confidential both during and after the term of his or her employment. The confidentiality agreement should also require that the employee return and not remove from the company’s office, any confidential books, records, documents, lists, computer programs and other proprietary information.
Non-Compete Agreements. This covenant restricts the employee from competing against the company for a certain time period, after the employee’s employment with the company is terminated.
Non-Solicitation of Clients. This covenant prohibits the employee from soliciting any person or business who was a current or prospective client during the employee’s term of his employment with the company.
Non-Solicitation of Company Employees. This covenant prohibits the employee from soliciting any full or part-time employees of the company for purposes of inducing them to leave the employ or association with the company. In the event the departing employee intends to compete against the company, it will limit his or her ability to solicit other company employees to come work with the terminate employee.
The enforceability of restrictive covenants generally depend on the geographical scope and duration of the provision. In general, courts will only enforce restrictive covenants if they are reasonable in nature. Any restrictions on the terminated employee should be limited to only what is necessary to protect the company. For example, if the company’s clients and operations are limited to New Jersey, a court would likely scrutinize an agreement which contained prohibitions for any geographical areas outside of New Jersey, where the company does not operate.
In addition, the enforceability of the agreement will likely depend on the jurisdiction in which the agreement is being enforced. In certain states, restrictive covenants are generally unenforceable. Even when they are enforceable, they are generally disfavored by courts because they interfere with a person’s ability to earn a livelihood. In some states, if a court finds that the restrictive covenant is overly broad, some courts may modify (“blue pencil”) the agreement to make it more reasonable (e.g., reducing the term of the non-compete from three years to one year).
Provided that they are reasonable in nature, restrictive covenant agreements can be a useful tool to minimize the impact an employee can have on the company after his or her employment is terminated.