The Pros and Cons of Restrictive Covenants for Employers

What Are the Four Most Commonly Used Types of Restrictive Covenants?

When an employer takes on a highly skilled worker, they do so knowing that the worker may not always be under their employ. A common concern that arises from such a situation is that the worker may then go off and bring their talents to a direct competitor. Such a scenario not only means that the competitor potentially gets stronger but that, at the same time, the employer’s position is weakened. And there exists the chance that the departing employee may bring clients or company practices and secrets with them to the new place of employment.

To prevent such a possibility, many companies have utilized restrictive covenants or non-compete agreements which prohibit former employees from taking positions with a direct competitor for a certain period after leaving the company.

There are most common types of restrictive covenants in American business include:

Anti-raiding or non-poach provisions. This restrictive covenant requires that, once an employee leaves the company, they must not ‘poach’ workers from the company or ‘raid’ the talent pool in favor of their new employers
Confidentiality agreements. Employees entrusted with company secrets, policies, customer accounts, and mechanisms can be dangerous to an employer if that employee ever works for someone else. A confidentiality agreement prevents that employee from disclosing confidential information related to their former employer
Garden leave provisions. These types of restrictive covenants are still relatively new Stateside. The recent import from Europe, a garden leave provision requires an employee to give notice of their intent to leave the company at a future date. Then, for an agreed-upon period of time, the employee will remain employed but perform few workplace duties
Non-competitions provisions. A non-compete agreement is widely considered to be the most restrictive covenant that an employee and employer can enter into. This restrictive covenant requires a former employee not to be employed by a direct competitor (based on industry and geographical area) for a set time
Non-solicitation provisions. When locked into a non-solicitation agreement (aka non-deal agreements), a former employee is prevented from soliciting the clients and customers of their former employers for a set period of time

The legal status of each restrictive covenant varies from state to state. Some agreements may appear to the employer and others to be above board, but the courts sometimes have differing views. To ensure that your restrictive covenant agreements are legally sound, please consult with experienced employment lawyers.

What Are the Pros of Restrictive Covenants for Employers?

There are several key benefits to employers considering using restrictive covenants in their hiring practices.

While restrictive covenants can be expensive, they may save money in the long run by limiting the chances of litigation. Without a restrictive covenant in place, a former employee may branch off on their own and either take your customers, your training methods, or your other talented workers with them, thus forcing your hand to consider legal action. Restrictive covenants could prevent that from happening.

Locking in your employees to non-compete agreements strengthens the future of your business. As the covenant will not allow an employee to work for a competitor, it will deter employees from leaving your company by simply limiting their job prospects. This works similarly in regards to the prospect of an employee leaving your employ to start a business for themselves. If the company is to become your direct competitor, then a non-compete clause might prevent them from opening their doors. Additionally, keeping your worker away from your competitors keeps your standing in the field strong while preventing the competition from growing stronger.

Other types of restrictive covenants have their own benefits. If you’re worried about charismatic employees poaching your talent pool when they start a new business, consider the use of anti-raiding provisions. If the secret to your success is your training practices or secret ingredients, consider requiring your employees to sign a confidentiality agreement.

What Are Various Cons of Restrictive Covenants for Employers?

You may be paying more upfront by requiring your employees to sign restrictive covenants. Employees do not like restrictive covenants included in their work contracts and could need extra incentives to take the deal. Ultimately, the only reason to eat that cost is if you genuinely believe your employees have the chance to hurt your business should they eventually depart. If the employees cannot do your business any harm after they leave, then it may not be worth the extra cost to lock them into restrictive covenants.

Add to that the concern that some restrictive covenants are not enforceable; therefore, you may be paying those extra expenses for no benefit. A restrictive covenant must be carefully drafted to stand up in court. To ensure that your documents are legal, you should consult with employment attorneys in your state.

Schedule a Case Evaluation with Experienced Employment Lawyers Today

Restrictive covenants are complex and sometimes unpopular. It’s crucial that you weigh the pros and cons before using them as an employer. You will likely avoid future litigation and legal headaches by hiring legal professionals experienced in handling employment contracts and restrictive covenants.

Diana Servos and the legal team of Illinois’ S.T. Legal Group have years of experience assisting clients with the complexities of employment law, workplace disputes, and restrictive covenants. With experience serving both employers and employees, the attorney brings a unique and multi-layered perspective to the courtroom to better serve her clients.